Risk management has become the hot topic for general counsel these days and covers myriad subject matter, but managing the risk around executive compensation has attracted greater attention since the recession.

The economic crisis in 2008 changed the landscape for executive compensation. Some say executive pay schemes in the U.S. helped cause the economic meltdown due to incentives put in place to make short-term gains rather than looking at the long-term impact of those decisions on shareholders. Today, executive compensation packages in some sectors are changing to reflect more conservative times. But at what cost to shareholders and the growth of companies?

Others argue those same executives had large investments in their own company bank stocks and when those stocks dropped they lost fortunes as well. “The issues of executive compensation are constantly changing,” says Nadine Côté of CSuite Law and the author of Executive Compensation: A Director’s Guide. “Definitely the compensation committee’s responsibilities are increasing and there is more scrutiny of the committee and compensation plans.”

Following regulatory changes in the U.S., in July 2011 the Canadian Securities Administrators announced it would require public companies to disclose to investors whether their board of directors “adequately considered the implications of the risks associated with the company’s compensation policies and practices.

“Issues of executive compensation have always grabbed headlines, but never have companies been held under the microscope more than now. If we look back over the years there was a huge problem with stock options and back dating, then from there with the financial crisis the initial problem was retention payments,” says Côté. “Employees worldwide were protesting retention payments being made to executives when around the world people were losing their jobs and pensions were at risk. Today, experts say the goal for everyone involved is to find the right mix with a compensation package that keeps good executives engaged and rewards them but also factors in the long-term health of an organization from a financial perspective.

“There is a balance between making sure you are incenting people and making sure you are still positively reflecting where the company wants to go in the long run as opposed to just short-term cash accrual,” says Shana French of Sherrard Kuzz LLP in Toronto. “I’d say a few years ago we were being a little too heavy with the pen in terms of developing 36-month severance packages with single-trigger change of control. We were a little more generous with severance packages, with how to trigger severance, with incentive compensation plans, and now we’re seeing it go the other way. We can’t have severance packages like that anymore — it’s just not going to fly. Instead we’re looking at is there a way to characterize departure payments in a different way such as a deferred payment or a departure bonus.”

Much of the change in attitude has, of course, been driven by regulatory influences in the last couple of years, says Level Chan, a partner with Stewart McKelvey in Halifax. “There is greater scrutiny in general in the attention paid to the packages and compensation and it’s been driven largely by legislative changes and greater shareholder scrutiny as a result of disclosure and in business reporting services online,” he says.

Risk management of executive compensation is a complex matter with multiple pressures to be addressed and many different voices weighing in on how it should be handled. “Everyone wants a say in how executives are paid,” says Sandra Cohen, a compensation lawyer in Osler Hoskin & Harcourt LLP’s New York office. “I think the word bonus has become a four-letter word. I think we need a new word to describe achievement incentives.

“One emerging principle from the economic crisis is risk management and compensation, ‘Did we analyze the risk?’ Companies need to be prepared to explain themselves to shareholders as to whether appropriate measures are in place in their bonus plans. The question to consider is, ‘did my compensation plan require my company to take unnecessary risks for my business?’” Cohen says. “People ask, ‘what does risk management mean in compensation?’ It doesn’t mean taking no risk; it means finding appropriate risk and did we analyze the risk inherent in the pay package? Does it cause executives to take appropriate risks with the business and reward them for success and doesn’t reward short-term inappropriate risk-taking.”

Today compensation committees face difficult decisions on executive compensation.“They are looking to find a balance between pay that is linked to company performance and at the same time mitigating the temptation to engage in risky behaviour,” says Cohen.

Going too far away from encouraging executives to take the right risks to spur growth could end up in stunting growth, says Bassem Shakeel, vice president and secretary with Magna International Inc. “The effort to tie compensation to performance is positive, however, the closer the two get linked, the greater the inherent risk in the compensation system. This puts the pay/performance objective in conflict with the risk-management objective,” says Shakeel. As a result, he says the critical thinking going forward will be how effectively companies offset the increased risk with effective mitigation strategies. “There is a fine balance that needs to be achieved. Companies that get it wrong one way will find they have loaded their compensation system with risk, while companies that get it wrong the other way may find they have inadvertently created a culture of excessive conservatism, leading to slower growth and low returns for their shareholders. Either way the stakes are high.”

Shakeel also wonders whether with each new measure introduced to regulate compensation, public companies will have an increasingly tougher time keeping their top executives. “Like other employees, executives want some degree of certainty regarding how much they will be paid. The level of ‘at risk’ compensation that an executive is willing to accept will depend on a number of factors, including how close he or she is to retirement,” he notes. “Private companies and/or companies based in geographic markets outside of North America and the U.K. may have greater flexibility to structure an executive compensation package in a way that the executive finds more appealing.”

For a young executive in the early part of his or her career, the upside potential may be a fair trade-off against the downside risk. However, as an executive in the last stage of his or her career, does it have the same appeal? If not, a private company or a company located outside of North America or the U.K. may be more appealing, since companies elsewhere don’t face the same pressures on their compensation systems.

“It’s also important to note that compensation structures may create the incentive toward excessive risk-taking, but incentive alone does not result in risk being realized. It is the combination of incentive plus opportunity that equals risk and, typically, such opportunity arises as a result of lax controls,” he says. Lehman Brothers Holdings Inc. serves as an example — there was a failure of basic investment controls such as the excessive concentration of business in sub-prime residential mortgages.

But in the Canadian environment the obsession around risky compensation packages is more muted, says Neill May, a partner with Goodmans LLP, mostly because director responsibility is reduced, the incidence of class action is reduced, and Canada generally has a more conservative culture. “This whole dynamic, unfortunately, manifests a distrust of executives which I don’t have. Most executives I know are well intentioned.”

May says: “Our securities regulators always orient themselves by forcing disclosure as a way of guiding behaviour. It motivates boards of directors to consider compensation frameworks and to ask, ‘what does this compensation motivate our internal service providers to do? How does it work in practice? Were we right or wrong and are the motives aligned with other stakeholders in the country and are they suitably balanced between long- and short-term goals?’”

However, so far May says he isn’t seeing clawbacks or some of the other tools making up more structured compensation plans. “It’s easy to sit in a regulator’s chair and say there should be clawbacks or ability to defer. I have seen tailoring of compensation to risk but I haven’t seen people accepting compensation packages that let boards of directors take their money back or string them out. It’s just not realistic, I don’t think.”

In Canada, market demand and policies already in place to provide transparency around executive compensation are providing controls for industries such as transportation, says Alain Doré, senior director of legal services at Bombardier Inc. “We have not changed our approach to executive compensation in the last few years. We have had a constant approach of benchmarking. You can see in our disclosure document we are benchmarking with our peers on what we’re proposing to our executives and there’s no big contract termination packages awarded to any of our executives,” says Doré.

Bombardier recently hired Michele Arcamone from General Motors to be president of the company’s commercial aircraft division. “We were looking for specialized people — it’s a completely different market. We have to be competitive in what we’re offering but the competition limits what we should be offering, in a way.” Doré says in reality that is what keeps everyone honest — by comparing what everyone else is doing.

Organizations are considering some tools that make compensation plans less risky. Deferring bonus payment is one. “The executive would earn a bonus in one year but be paid in a future year after it’s clearer what the impact of the performance from the previous year really is/will be to the company,” says Cohen. “It may also mean a longer performance period, not just growth over one year but growth over multiple years.”

Côté says she is also seeing interest in clawbacks on bonuses. “Most plans being developed at this stage are including clawback provisions and existing plans are being amended to include clawbacks. Definitely some of our more higher profile Canadian public companies are amending their incentive plans to put clawbacks in place.”

The door has also been opened to question existing contracts particularly in a merger-and-acquisition situation where it’s a distress sale. “Executive severance is getting smaller — three times is rare, two times is a more comfortable pay package, and not single trigger but double trigger — it requires change and control but also a later termination of employment,” says Cohen. Retention bonuses are being paid after the deal is done and is more performance oriented rather than “pay to stay.”

Côté says when looking at change of control payments there’s always a balance between providing executives the necessary security to attract them

during periods of transition. “The concern is if the payments are too high are you motivating the executive team to take excessive risks and trigger the change of control provisions?”

But is there a real concern that executives are looking to take advantage of those factors in an employment agreement? “I don’t think most Canadian executives engage in that conduct and I don’t think there is a prevailing concern with it, but I think when you’re looking at it from a risk assessment you need to look at the amount paid out under change of control,” says Côté, pointing to the recent example involving Viterra Inc. executives including chief executive officer Mayo Schmidt following the sale of the company to a consortium headed by Glencore International PLC.

An article in The Globe and Mail stated that Schmidt’s take would be an estimated $37.5 million, a combination of the value of his stock holdings and the fully vested value of his outstanding options and incentive awards such as restricted and performance share units, and includes payments that would be triggered by the change of control of the company. In accordance with his employment contract he would receive three times his $1.05-million salary and three times the average amount he has received in short-term incentive payments in the past three years for another $2.8 million. “That’s really high,” says Côté, noting the Viterra example is out of touch with trends in the U.S. and Canada where three-times multipliers are going down and two-times multipliers are going up. Three-times cash multipliers have decreased over the period of 2008 to 2010. For CEOs, three-times multipliers have decreased to 44 per cent from 66 per cent, according to Equilar Inc., a U.S.-based company that tracks and benchmarks executive compensation. At the same time, two-times cash multipliers have increased to 35 per cent from 18 per cent. “The trend in Canada is the same,” says Côté.

An Equilar August 2011 report, “Equilar Study: Change-in-control Cash Severance Analysis,” compared change-of-control strategies in Fortune 100 companies from 2008 to 2010. The report noted that the prevalence of change-of-control arrangements has not declined, but companies were decreasing payments and restricting the triggers for payments.

To protect their interests companies need to stay on top of what has become an increasily scrutinized area by shareholders.

For large financial institutions and public companies the number crunching of compensation risk assessments are typically done by advisory firms skilled in stress-testing compensation plans. Paul Gryglewicz is managing partner with Global Governance Advisors, an independent executive compensation and advisory firm working for boards of directors, human resource departments, and compensation committees, primarily at financial institutions, resource companies, and even pension funds. The company helps those groups through the annual review of executive compensation, plan designs and levels, and board education. “Any time there’s a new design we want to go through a compensation risk review,” says Gryglewicz. “The objective is to assess the appropriateness of plans relative to the risk appetite for the organization, the business strategies, and the goals and objectives.”

That is done by looking at the policies like pay mix, plan vesting, frequency of payout, and the processes such as the board’s role in the oversight of the plan design. “We look at who is auditing it and double checking the work. Often finance might pass financial results to HR and they plug those numbers into the bonus formula and calculate the payout. We go through and define each of the roles and make sure the numbers are right and then look at governance practices such as board oversight and level of transparency in disclosure,” says Gryglewicz.

For each plan, Global Governance looks at the performance metrics put in place to fund the incentive pool and then they map it into a risk profile relative to the plan design and measure from a governance perspective the riskiness of the plan. “For instance, we look at whether it is a direct drive compensation plan where the sky is the limit for the size of the bonus pool — it may just be contingent on a couple of metrics the executive might need to achieve. Or, is it a more robust plan that uses deferred compensation in the mix? We simulate the business through stretching positive and negative results to understand whether the payouts accrue in those environments and do the payouts make sense given the state of the business we stretched it to?”

In terms of trends Gryglewicz says the Canadian economy seems ripe for M&A activity right now and there may be more cases like Vittera. “Depending on what side of the table they’re on, directors are starting to say, ‘let’s take another look at the employment agreement to potentially update them,’” he says. “They may request updates on the latest trends on common change and control provisions.”

Global Governance just went through that process with one of its mining clients to give it an idea of where its peer group was on what could be a reasonable multiplier. “Going from two to three times can be a big differential,” says Gryglewicz.

But the biggest trend he sees is boards spending more time engaging in putting some level of performance vesting conditions into the long-term incentive. “You will start to see a trend towards directors wanting to adopt up to three different long-term incentives. So performance share units, restricted share units, and stock options all being used, and when you total it the target opportunity meets the same value but what they’ve done is change the probability of attainment by adding performance vesting conditions into the plan design.”

Of course risk to the business doesn’t stop with financial results. In some sectors, executives are being measured against other factors they may find to be even harder to control from their downtown urban offices.

“The hardest one for companies

in the resource space is what is the

cost of a life if they have a death in a mine? Does it affect executive payout if financial results were still positive?” says Gryglewicz. “It’s that process

of determining which performance metrics are important and drive value for the long run that is now being implemented in pay-for-performance analysis.”

When one thinks of merger and acquisition action in Canadian business, typically it’s the resource sectors, followed by financial services as the heavy hitters with the most going on, even in tough times. According to PricewaterhouseCoopers Canada, mining has become the No. 1 targeted sector in Ontario and British Columbia. But traditional hotbeds of resource activity such as Alberta are starting to see a shift in M&A activity. Where oil and gas deals once represented 80 per cent of the acquisitions in that province, they have declined to represent

50 per cent of the province’s takeover market. By comparison, a PwC report in October noted that M&A activity in Saskatchewan was 23-per-cent higher in 2011 than in 2010. It is home to uranium, potash, and farmland, which is considered to be among the least expensive in the developed world.

Expectations are that deals in the resource sector will continue to dominate the M&A landscape, but it should be no surprise that the food, beverage, and agri-business sector — a relatively unassuming but critical market to the world’s economy — has been evolving towards a global industry with huge potential for big business in the coming years, especially so in emerging markets as the world’s food supply becomes a larger focus. In developing markets such as China and India, population increases and rising incomes are the reasons for their ever-increasing number of consumers buying branded packaged foods.

Food has always been big business here at home. According to the Conference Board of Canada, the food sector represents more than nine per cent of the country’s gross domestic product and 13 per cent of all employment in Canada. It is also the second largest employer in the manufacturing sector.

While uncertainty coming from the European debt crisis remains the biggest potential damper on the year for M&A activity, the credit crisis has taught companies over the last few years to hang on to cash and, overall, heading into 2012 Canadian companies have stronger balance sheets than they did two years ago. All of which means they can afford to be opportunistic in their pursuits. Experts point to a lot of itchy fingers holding on to private equity cash waiting for the right deal. That is definitely the case in the food industry.

Law firms and other business service sectors have been watching the food industry closely for the last few years. Blake Cassels & Graydon LLP formed its food, beverage, and agri-business practice group in 2009 because it was “seeing a lot of deals getting done,” says Michael Stevenson, a partner in Blakes’ M&A and food, beverage, and agri-business practice groups.

Stevenson says most of the parties in the deals done prior to 2009 were represented by regional law firms and the potential for national and international opportunities was identified. “Obviously, food and agri-business is a large part of the Canadian economy. One of the things we have been looking at is that there were 36 deals done in this sector in Canada in 2009, which was a drop from a high of 56 in 2008, but it was up to 45 in 2010 so the numbers are climbing back up after the economic downturn”, says Stevenson. “As a firm we are seeing transactions in this space and we expect to see a lot more in 2012.”

David Woollcombe, a partner in the business law group with McCarthy Tétrault LLP, says the U.S. food market is ripe for consolidation and that could impact Canada positively. “The key thing in that business that may drive M&A is the world is getting smaller, with shrinking distance between producer and consumer — globalization and world population shifts — think of the food business as a long continuum starting with biotech, leading to seed production, leading to crop inputs and that’s where you see some activity in Canada in fertilizer in terms of potash,” explains Woollcombe.

What follows fertilizer is crop production with private farms, the big “protein producers” including pork and beef, and commodities handling companies. From there you get into food processing with companies such as Kraft, and then retail. “We’ve certainly seen M&A in the crop input sector, commodities handling, and in the food producers,” says Woollcombe.

Agrium Inc., a Calgary-based provider of agriculture products, is a company looking to be a global player and it has been seeking out global acquisitions, says Woollcombe. “Canadian companies like Agrium compete on a global basis. They have continued to extend their international reach with deals like the acquisition of the AWB (Australian Wheat Board) in Australia in late 2010. It’s hard not to feel good about a Canadian company whose mantra is feeding a growing world.”

The company is looking for places to manufacture and sell its product at the lowest cost. “Over the last five years North America has become extremely competitive, it has the best potash in Saskatchewan and cheap natural gas which is changing our dynamic. We see as much growth potential in North America as we do outside,” says Leslie O’Donoghue, chief legal officer and senior vice president of business development at Agrium. “The world has changed for us on the manufacturing side in terms of where the next nitrogen or potash facility is going to be. We just announced a $1.5-billion project in Saskatchewan where we’re expanding our potash mine.”

Agrium began as a small nitrogen player and as it grew, it grew domestically and into the United States with some major acquisitions over the last few years on the retail side. “We still feel there is lots of room for growth in North America,” says O’Donoghue. “We’re in a fairly volatile time from a macroeconomic perspective with Europe, but when you really look at

our industry and the population increasing while arable land is decreasing, we ultimately think that over the medium term there are lots of opportunities.”

Canadians have a huge advantage in this sector equipped with good governance and strong balance sheets, says O’Donoghue. She notes Agrium is looking abroad over the long term to Asia, Brazil, China, and Indonesia. They are selling some products in those countries through distributors, but it doesn’t have boots on the ground there yet. “If you’re not keeping pace with the growth that is happening outside of North America I think the fear is you’ll be left behind.” But going internationally demands a company look at the challenges of doing business abroad.

Agrium has expanded into Argentina, they also went into Egypt four years ago. “It’s not for the faint of heart but it gets us into Europe. We’re doing it in pieces in that we’re in Western Europe looking to get into central Europe and eastern Europe.

We really feel with our Australian acquisition last year the next phase is really more expansion within that base and then you’re into the Asia-Pacific market.”

Woollcombe adds that Canadian food and agriculture companies are actually doing more business abroad than people may think. “In various industries you often hear that Canadian companies are getting gobbled up and not buying as much outside Canada to the same degree as non-Canadians are buying in Canada. I’m not sure that’s actually true. We see lots of Canadian companies looking to make acquisitions outside of Canada,” he says.

They may not grab huge headlines, but there are large food and agri-business acquisitions being made by Canadian companies. “There are things Canada is known for and it’s not just oil, gas, and mining — food would fall into that as well,” says Kristian Knibutat, Canadian deals leader with PricewaterhouseCoopers Canada in Toronto. “We’ve certainly seen some transactions in the food space that would fit into that category of areas Canada is known for.”

Knibutat has been following the sector for some time now and says there are good opportunities for Canadian companies to do business abroad in India and China, especially in the fundamental areas of assisting in the development of infrastructure for foreign markets, which could be opportunities for Canadian companies. “We believe Canada is well-developed in the agricultural space — it’s part of our heritage and what we’ve built our economy on, and food is becoming a critical issue particularly for emerging markets. It’s a good opportunity for Canadians to take the expertise we have in the agricultural sectors overseas and help those countries as they are developing their agricultural businesses,” he says. “When I was in India the key issue I saw that they have in the food sector is perishability. They have a lot of food supply but a lot of it rots before it gets to the markets it needs to be in.”

Foreign companies are also looking for opportunities to make acquisitions in Canada that will allow them to take something back to their own markets, whether that’s processes or good brands they can leverage.

But while some see Canada as a leader in food production and innovation, it also risks falling behind, according to experts who follow the sector. “I think there are terrific opportunities in the developing economies that we could be taking advantage of to get in early in the market development,” says Ken Smith, associate dean of executive programs and associate professor in the College of Management and Economics at the University of Guelph.

Smith spoke at a conference in Toronto last November called Growth in the Food Industry, hosted by Blakes. He pointed to countries such as India where distribution and logistics systems need to be developed. “We are a significant net seller of corporate assets and to me it’s a shame and a missed opportunity in this business. We have such fantastic resources to seize the opportunity and go to foreign enterprises and we’re not seeing Canadian companies take advantage of international acquisitions. It’s a trend I’d like to see reversed,” says Smith, noting that Wal-Mart is in India developing a retail business. “Given our experience with logistics over long distances and retailing it would seem there would be some opportunities for Canadian companies.”

Countries like China and India have seen a 10-per-cent increase in personal income over the last few years creating a growing desire for protein products. That demand should be fuelling Canadian investment in providing resources such as grain to fulfil those needs. “We have a high opportunity to grow the export market but we’re not doing a good job of this,” says Larry Martin, a senior research fellow with the George Morris Centre, Canada’s only independent agri-food think-tank. “What have we done to get access to the Asian market? Nothing. We don’t have access to markets where meat consumption is growing.”

In the last year, notable mergers and acquisitions in the food industry in Canada have included Canadian companies selling to foreign buyers. In December 2010, Liberté Inc. of Quebec was purchased by Paris-based Yoplait SAS, the second-largest brand of fresh dairy products in the world. Founded in 1936, Liberté offers more than 100 products, including various types of yogurt, kefir, cheese, sour cream, and tofu distributed in Canada and the northeastern United States. The company posted $175 million in sales in 2009, and had been owned by the U.S-based Swander Pace Capital private equity firm since 2003. “It ticked a lot of boxes that people were looking at in the categories of diet foods, natural foods,” says Valerie Scott, principal with Swander Pace Capital.

Knibutat disagrees that there are more acquisitions of Canadian companies happening than foreign buys being made. “There’s a notion of hollowing out whenever someone buys what is thought to be a gem, but when you consider that since 2008 the ratio of buy/sells into the U.S. has been in favour of Canadian companies buying more companies than U.S. companies have bought as it relates to volume and we’re also seeing the value of Canadian deals exceeding that of the U.S.,” he says.

Across the board, he says Canadian companies tend to acquire abroad more as opposed to other countries’ companies coming here to buy, and there have been a number of large transactions recently in the food industry to prove that. For example, in November 2011 Lunenburg, N.S.-based High Liner Foods Inc. bought Icelandic Group’s U.S. and Asian operations for US$230.6 million, making it the biggest supplier of frozen seafood to North American restaurants, hospitals, and schools. It is also acquiring a plant in China and companies that buy fish from other Asian countries. Another example is Montreal-based cheese manufacturer Saputo Inc., which also made a large acquisition in early 2011 of DCI Cheese Co. of Richfield, Wis. for US$270.5 million. Saputo sells cheese products to more than 40 countries around

the world.

“We certainly have a small share of the overall capital global market but we have large pension funds looking to do more in the area of direct investing. They are starting to go abroad more and do more acquisitions and deals,” says Knibutat, who notes there are some large Canadian players such as McCain Foods Ltd., who are not just doing direct acquisitions either — one strategy is to follow the customer. “So for McCain — one of its big customers is McDonald’s for their french fries. They’ve been in places like Russia and China as their customers have gone into those emerging markets as well.”

Even during lean times, the food industry in Canada saw five-per-cent growth last year. Scott says over the last few years, she has seen a lot of resilience within Canadian companies even in

periods of economic slowdown, but cracks are starting to appear in the sector. “The strength of the Canadian dollar is an important trend for buyers and producers in the industry. Commodity prices and how that affects the bounty and profitability of Canadian food companies is also becoming more of an issue than it has been in the past,” she says.

Looking back 10 years, says Scott, buyers were looking at Canadian companies as leaders of private label manufacturers, but what they’re looking at now is Canada as home to innovative manufacturers of premium products. “We’ve moved up the scale to more of a premium product and also seen a lot of strategic acquirers looking to buy companies that are leaders in niche markets.”

An example is Toronto-based artisan bread maker ACE Bakery, which was bought by Weston Foods (Canada) Inc., in November 2010 for $110 million. “These companies have all traded at a very high premium almost reflecting it will be the last time they will be sold because now they are in a big strategic company and no longer a smaller entrepreneurial company,” says Scott.

On the flipside, she says, there have been a number of companies over the last few years that were brought to market but not sold and are coming back again to the market. “In my mind these companies will be sold again because if they aren’t they will be viewed in the market that they are damaged goods and will put lower valuations on the industry.”

Despite the volatility in the equity markets, corporations are sitting on cash reserves looking to enhance their growth strategies, says Marco Galante, principal with the J.H. Chapman Group LLC, an investment bank in the food industry. Overall, he says M&A activity from 2010 to 2011 for Canada and the United States has increased appreciably since 2008. In 2008 and 2009, the number of transactions in the food sector in the U.S. dropped by 50 per cent. However, from 2009 to 2010 it increased by 36 per cent. In the Canadian market between 2008 and 2009 the market dropped by 36 per cent, yet from 2009 to 2010 and into 2011 the increase of activity has been as high as 25 per cent.

“The market is still fairly robust and there is cash at corporate levels and pent-up cash in the private equity area. The combination of that means there are acquirers looking at good opportunities both strategic and non-strategic. But equally, there are fewer sellers coming to market and part of the reason is the sellers are asking if it is the right time to sell today given the environment,” says Galante. While he says there was continued growth of M&A in 2011 in the food sector, one of the constraints is increasing commodity prices and the impact on gross margin and cash flow.

On the dollar side, Knibutat agrees a strong Canadian dollar does increase the costs of inputs, which can put downward pressure on profitability. “It really depends on the nature of the underlying business and where they are getting their inputs. The positive side of the Canadian dollar is it gives you more purchasing power and puts you in a fairly attractive position to be an acquirer,” says Knubitat, who adds that when the dollar goes above parity there is a strong correlation with deals that get done. “Canadian companies are doing a good job targeting, and when the dollar goes above parity it allows them to close the price gaps between buyer and seller, which allows them to close the deal.”

The Canadian Pension Plan Investment Board has also been building its interest in the food sector, demonstrating that it is seen as a strategic investment area, says Knibutat. The deregulation of the Canadian Wheat Board could also be a catalyst for deals, he adds.

The federal government has said it will move forward with a proposed deregulation of grain marketing in Canada. With a targeted implementation date of August 2012, the change would give western Canadian farmers the ability to sell their wheat and barley to whomever they choose. Currently, farmers are required to sell directly to the CWB, which, in turn, sells to the market. Last year, the CWB posted $5.1 billion in sales.

At the end of the day, all M&A activity in 2012 will ultimately depend on how buyers and sellers view the overall health of the market. “The fundamentals are there to do deals, but the risk is that the global economy is still uncertain enough and negative views are still being expressed by the central banks and various governments that it will have a depressive impact on activity for a little while. We need some more clarity and stability but the food sector will continue to be one that is interesting and attractive overall,” Knibutat says. “It will come, but right now I think it will be far more opportunistic a play for people because of the other macro factors impacting things.”