REFILE-Canada capital markets need nudge of confidence-BMO

Tue Dec 6, 2011 5:51pm GMT

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* Markets need absence of bad news from Europe

* Bankers see pent-up demand for M&A, equity financing

* Bankers see opportunity in retreat of European lenders

* Resources still driving deals, but diversity growing

By Pav Jordan and Euan Rocha

TORONTO, Dec 6 (Reuters) - Low interest rates and readily available capital could unleash a flood of acquisitions and new issues in Canada next year, but only if there is calm in Europe and shaky markets get their confidence back, a panel of top investment bankers from the Bank of Montreal said on Tuesday.

"The absence of negative news out of Europe is what will allow us to get down to business," said William Butt, executive managing director in charge of global investment and corporate banking at the bank's capital markets arm.

"It doesn't have to be barn-burner growth in Europe, just a greater sense of calm ... an absence of bad news."

BMO (BMO.TO) has been one of the leading Canadian bank advisors on acquisitions of Canadian companies this year, including the roughly C$3 billion ($2.96 billion) takeover announced on Tuesday of Toronto-listed Quadra FNX Mining QUX.TO by Europe's No. 2 copper producer, KGHM KGHM.WA.

The BMO panel, which included directors Andre Hidi and Peter Myers, and Darryl White, deputy head of investment banking in Canada, said mining and oil and gas will drive activity in 2012, but not to the same extent as in the past.

"There is a lot of pent-up demand, there’s still lots of cash on balance sheets, there’s lots of interest, particularly in the resource sector ... so it could well be a strong year," Hidi said. Resources have accounted for as much as 60 percent of activity in past years, but the figure has slipped to between 30 and 40 percent this year, and bankers see a similar pattern in 2012.

COMMODITIES SUPERCYCLE

Despite a commodity-price supercycle that has outlasted the expectations of many analysts, the bankers embraced diversification.

"We are great believers in the supercycle and all that but it’s anybody’s guess just how long that will be for," Hidi said. "We'd like to make sure that if and when things slow down in resources, we have the right balance in our client relationships in our business to be able to weather that."

BMO is advising Canada's largest stock market operator, TMX Group (X.TO), on what is now a friendly C$3.8 billion attempt to take it over by the Maple Group consortium of Canadian financial services firms.

It also advised on one of Canada's largest deals this year, the C$4.9 billion takeover of Consolidated Thompson in May by Cliffs Natural Resources (CLF.N).

EUROPEAN BANK PULL-BACK

The bankers were also eyeing a pullback from lending deals by embattled European banks in certain sectors and regions, but preferred not to cite specific examples.

"It is not happening in a wholesale way, but we’re seeing examples in the natural resources sector, without being too specific, where we have been asked or invited to replace other non-North American institutions in corporate lending deals for healthy, strongly performing companies," Butt said.

They said some opportunities may come in the United States, where half of BMO's capital markets staff is now located after a recent expansion effort.

"All of that is happening at the same time that competitors are exiting or having difficulties, and that is a great opportunity for us to acquire clients, acquire people, acquire businesses. We aren’t sure how it will manifest itself.”

Canada deputy head White said equity capital markets could also benefit from pent-up demand, especially in bought deal financings, or secondary stock offerings that allow companies greater agility to take advantage of financing windows.

Under the bought deal, companies can raise capital from a group of investors at a set price, eliminating the financing risk in exchange for a slight discount to the market.

White said the outlook for initial public offerings is "reasonable" across several sectors, with most in the C$50 million to C$300 million range.

The panel was reluctant to speculate on when confidence will return to markets even as the European Central Bank pressed euro zone governments to adopt tougher fiscal rules and signaled it is ready to take stronger action to fight the debt crisis if politicians agree to tighter budget controls.

"Everything seems to be accelerating," Myers said. "We seem to be getting faster to whatever endpoint resolution is out there."

($1=$1.01 Canadian)

(Reporting By Pav Jordan; Editing by Peter Galloway)

((pav.jordan@reuters.com)(416 941 8163)(Reuters Messaging: pawel.jordan.reuters.com@reuters.net)) Keywords: CANADA M&A/BMO

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