Troubles in Canada's energy industry have taken the shine off its economy, but this has done little to deter the host of international outfits eager to tap into the market. With firms such as Dentons and Norton Rose Fulbright already active there, James Boxell asks what attracted them to the country, and whether their 'one-stop shops' can take on the dominant seven sisters

With a rise in joblessness in December, a weaker loonie (the local nickname for the Canadian dollar) and emerging fears about a housing market bubble, Canada's economy has lost some of its post-Lehman lustre in recent months.

As Brock Gibson, chairman of Blake Cassels & Graydon, points out: "Canada is attractive because we didn't blow up our financial institutions and we have mining and oil and gas, which has a global importance."

But falling commodity prices, caused by lower Chinese demand for raw materials, have hurt the country's mining sector of late, while previously flourishing oil and gas producers are dealing with the impact of the US shale boom, which means its southern neighbour may have less need for Canadian oil and gas.

Nevertheless, Gibson and his fellow law firm leaders say they remain chipper about their prospects in 2014 in spite of the slightly gloomy run of economic news. "2013 has been very good," Gibson says, "and we are confident and enthusiastic about 2014 being even better."

That view is shared by Sharon Geraghty, a senior corporate partner at Torys in Toronto. "2013 turned out to be extremely busy for us, particularly in M&A," she says. "The number of deals in the pipeline suggests this will continue. The debt market is quite strong for acquisitions now. There is money to do deals. Corporate finance has been more active as well, and I think that area will continue to improve in 2014."

Those comments need to be set alongside the fact that even though Torys was involved in some hefty blue-chip deals such as advising Loblaw, Canada's biggest food retailer, on its C$12.4bn (£6.9bn) purchase of Shoppers Drug Mart, the overall value of Canadian M&A fell in 2013.

Beyond the so-called 'seven sisters' – the elite band of Canadian law firms including Blakes and Torys, which often head the country's rankings of financial and corporate advisers – the message is slightly more mixed, although it's far from despondent.

"There have been proportionately fewer mining and energy deals," says Chris Pinnington, chief executive of Dentons Canada. "But there has been significant legal activity in other sectors… The overall forecast or outlook is not overly optimistic but neither is it unduly pessimistic."

Beyond natural resources

The worries about the economy do, however, prompt the question: what is it about Canada – beyond its abundant natural resources – that has attracted Dentons and its fellow international firm Norton Rose Fulbright, which both sealed big mergers in the country in recent years?

For their part, the two firms argue that there is far more to their Canada practices than mining and oil and gas, saying that they also benefit from being part of global organisations that offer 'one-stop shopping' on international legal work with a Canadian dimension.

"There are challenges in the Canadian economy but that is really just down to the fact that some of the bloom is off the rose in the energy industry," says Joe Andrew, Dentons' global chairman. "There are many other portions of the economy that remain very strong, in particular law firms like ours, which have cross-border transaction opportunities, see it as a tremendously dynamic market."

As evidence of what its one-stop shop approach can deliver, Dentons highlights its role in the US$2.6bn (£1.6bn) merger of Patheon and DSM's pharmaceutical products business, which involved Dentons Canada as well as the life sciences and competition teams from Dentons Europe.

Indeed, the problems in the mining and energy sectors have in fact generated opportunities on deals and infrastructure projects, and Canada's leading law firms insist there is still a good flow of corporate work in the country. This includes: real estate work, as highlighted by the fears of a debt-fuelled Toronto property bubble and the fashion for real estate investment trusts (REITs); retail transactions such as the Loblaw/Shoppers deal; burgeoning interest in the agricultural sector and farmland, including from Qatar and elsewhere in the Middle East; fast-growing technology clusters in cities such as Vancouver; opportunities in telecoms and pharmaceuticals; regulatory work; and advice related to activist investors.

There is also the belief that the recovery in the US is certain to be good for Canada, despite the possibly negative impact of the shale gas boom. "Because of the nature of our historic relationship with the US, the surge in the US economy bodes well for the Canadian economy," says Pinnington.

His comments are echoed by Norm Steinberg, global co-chairman of Norton Rose Fulbright and chairman of Norton Rose Fulbright Canada, who points out: "Canada has a privileged position on cross-border securities with the US because of mutual recognition. It's similar with the litigation side. In many respects it's really one economy."

The financial services industry is another reason why "Canada is a draw" for big international firms looking to win cross-border work, Steinberg says. "We were one of the few countries to come out unscathed from the global financial crisis. Today, from a global perspective, Canadian banks are very strong and active around the world. Take the Royal Bank, which is very active from London and Europe to Asia. Take Scotia Bank, which is huge in Latin America. Bank of Montreal was one of the earliest licensees in China. So Canadian banks are solid and active."

Perhaps the biggest reason for the continued appeal of Canada to international law firms, beyond the resources sector, is the power of its huge pension funds, which have emerged as highly aggressive competitors in buy-outs around the world. "Canada has just over 35 million people, but our pension funds are very significant," says Steinberg. "If you take the 25 lead sovereign wealth funds we probably have at least five or six."

Meanwhile, the mining and energy sectors cannot be discounted despite their travails. Large pipeline, refinery and liquefied natural gas projects are planned, in part to lessen the country's reliance on oil and gas exports to the US.

"There is a reshuffling of the oil and gas market dynamics in the North American energy sector and that has driven a lot of investment in infrastructure," says Gibson. "For example, we are working on many pipeline and other energy infrastructure projects. Canada is looking to get oil and gas to international markets so there are several mega-projects that require long-term legal work on regulation, first nations, commercial, financial and other areas."

And while the mining sector is suffering from lower commodity prices, lawyers say this opens up opportunities as large operators try to sell non-core assets to raise money to invest in their most important projects.

Optimism about the proceeds from asset sales has improved because of the increasing appetite of private equity firms, notably from the US, to participate in auctions, according to Geraghty.

"Operators and industry buyers… are coming up against private equity players who are also knowledgeable about the specific sector, and who have done acquisitions in the same sector so may be able to generate synergies as well," she says. "But those private equity firms also bring a portfolio approach to acquisitions, so they can be quite aggressive in bidding because they are typically private entities (so under less short-term pressure and public market scrutiny) and can spread the risks of any particular acquisition across multiple deals. This puts targets in a great position because they can play those two types of buyers against each other."

It is a phenomenon also seen by Steinberg at Norton Rose Fulbright, who notes: "A lot of former industry executives have allied themselves with private equity and are looking to be on the buy side for non-core assets. Major mining companies have announced cuts to capital spending and that they want to reduce their asset base. We were involved quietly in several auctions, and I think we are going to see more of this in 2014."

Seven sisters v one-stop shops

All of this adds up to a belief, at least at Norton Rose Fulbright and Dentons, that more international combinations are inevitable in the Canadian legal market, particularly because of the country's close links with the US. "Canada and the US are the two largest trading partners in the world with arguably the most porous borders," says Andrew. "By most measures they are the two most united economies in the world. So it is an artifice that they are even perceived as separate legal markets. It is shocking to me that there are not more US-Canada tie-ups similar to ours and Norton Rose Fulbright's."

DLA Piper has spoken about an interest in pursuing a Canada tie-up, while one senior law firm partner speculates about interest from US firms such as K&L Gates and Jones Day. "If you go from number 20 to 50 on the AmLaw 100 list (of top US law firms) – basically by stripping out the big New York outfits – it is hard to find a firm that is not talking to somebody, either to steal a team to open their own office or to talk to one of the smaller Canadian players," the partner says.

On the Canadian side speculation tends to centre on firms that are not part of the seven sisters, such as Borden Ladner Gervais, Fasken Martineau and Gowling Lafleur Henderson. However, a senior partner at a rival firm claims that even McCarthy Tetrault, a seven sisters stalwart, could be open to an approach.

The reason market gossips usually exclude the seven sisters from merger talk is the fact that they are already very profitable and tend to rely on lucrative referral agreements with big Wall Street firms for blue-chip corporate work. "Two very good firms, for example, have 25% of their gross revenue coming from referrals," says Steinberg.

Members of the seven sisters say they would have little to gain by joining a large international firm. "When our large cap Canadian mining and oil and gas players need capital beyond Canada they tend to go to the US and have well-established relationships with leading US firms," says Blakes' Gibson.

"They tend not to go to London. Plus most of the large international mining, oil and gas or financial clients have been doing business in Canada for a while and already have established relations with firms like ours. So although people look at Canada from afar and see a stable financial, resource-based economy next to the US, when you look at it closely it is already a very well-lawyered and well-serviced market."

Geraghty concedes that "clients really appreciate the capability" of "providing a seamless service, as we do in New York". But she adds: "I'm not sure the big one-stop shop firms have accomplished the seamlessness yet and you are only ever as good as the firms you merge with. I think the Canadian legal market is still a place where most top-tier firms are not part of large international groups. We don't take any of that for granted but our clients are very sophisticated; they work all over the world and my experience is that they go to the best in each jurisdiction."

Unsurprisingly, the people at Norton Rose Fulbright and Dentons see things differently. "Perhaps referral relationships are not a sticky as they once were," says Pinnington. "We work with a sophisticated GC community, many of whom have come from private practice and are better informed and more able to make independent decisions on hiring counsel in other jurisdictions.

"In addition, there is a clear trend towards convergence: the reduction and consolidation of the number of external service providers. So we have not been convinced that the historical pattern of referral relationships is going to continue as before – though it is a debate."

Andrew (pictured) says that debate is part of the broader global argument over whether New York's 'white shoe' elite, the seven sisters and independent European practices such as London's Slaughter and May can continue to exercise a stranglehold over the best M&A and banking work. He points to statistics in the American Lawyer magazine, which show that the 19 elite US firms did 67% of corporate M&A work worth more than $1bn (£611.9m) in 2005, but just 37% last year.

Steinberg goes as far as to say that the notion of the seven sisters is a historic anomaly in the newly globalised legal market. "I think when we [legacy Ogilvy Renault] first opened in Toronto in 1996 we aspired to break into that so-called club," he concludes. "But now we believe that concept is irrelevant because we are a truly international firm and our impact is so significant globally that in Canada we think we have gone well beyond the concept of regional firms that are supposedly part of that club of seven."

Gibson provides a neat riposte from the other side: "We like our strategy and it serves us exceptionally well."

Click here to view the top announced deals targeting Canadian companies in 2013.

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