Crosbie & Company Canadian Mergers & Acquisitions Report for Q2 2016

Overview

Canadian M&A activity (which we define as all M&A deals involving a Canadian company as a material counterparty) rebounded in Q2 to the highest level in nearly two years, reversing a seven quarter downward trend.  Figures developed by Crosbie & Company using Capital IQ and other sources indicated 709 announcements in Q2, up 9% from the same quarter last year.  

The year over year increase in activity was the result of a strong recovery in the resource sectors (Metals & Mining, Precious Metals, and Energy) as well as Real Estate.  From a deal-size perspective, most of the increase in activity can be attributed to the lower middle market (under $100M) category.

However, due to a decline in mega-deal activity (transactions in excess of $1B in value), the value of announced transactions decreased 36% from the same quarter last year to $47.9B in Q2, the second lowest level observed in the last eight quarters.

Domestic M&A Transactions

Figure 2 illustrates that Canadian domestic M&A activity increased in Q2. There were 482 transactions involving Canadian targets (including both those with domestic or foreign buyers) in Q2, up 11% from 435 transactions in the same quarter last year.

Mega-Deals

There were 10 mega-deals announced in Q2, representing an aggregate value of $26.7B, the second lowest value total in the past two years and down 51% from the $54.7B in Q2 2015.
 
The largest transaction of the quarter was Canadian Imperial Bank of Commerce’s announced acquisition of PrivateBancorp, a Chicago-based middle market commercial bank, for $4.9B.  CIBC is looking to expand its US footprint and deliver additional cross-border services to its existing commercial client base.

The second largest transaction of the quarter saw Ontario Teachers’ Pension Plan divest their 50% interest in Dematic Group, a Luxembourg based provider of intralogistics and materials handling solutions in a transaction valued at $4.2B.

Another notable mega-deal featured BCE’s acquisition of Manitoba Telecom Services for $3.9B as the telecom sector experienced further consolidation.

Financial Sponsors

Financial sponsors remained active in the second quarter of 2016 on both the buy-side and sell-side with 13 transactions (in excess of $100M) valued in aggregate at $12.6B.  Four of the ten largest transactions in the quarter involved a financial sponsor, including two featuring CPPIB, which acquired a 40% stake in Glencore’s Agricultural Products Business for $3.3B and Hotelbeds Spain in partnership with Cinven Limited for $1.7B.

Industry Sector Activity

Real Estate regained the title as the most active sector with 112 deals valued at $14.2B, a 23% increase in activity from Q2 2015. The sector was also the most active by deal value, predominantly driven by a number of large deals, as four of the ten largest transactions for the quarter were Real Estate transactions. The largest deal in the sector involved Brookfield Asset Management’s $2.6B acquisition of a manufactured housing and real estate properties portfolio from NorthStar Realty Finance Group.

Metals and Mining also recorded 112 deals valued at $1.6B, an increase of 53% over the level of activity in Q2 2015. The largest transaction within the sector was the acquisition of Reservoir Minerals by Nevsun Resources for $511M .  Precious Metals also experienced a significant rise in activity, increasing 55% to 82 deals with an aggregate transaction value of $853M (compared to 53 transactions with an aggregate value of $1.1B in Q2 2015).

Energy saw an uptick in activity with 65 deals, up 23% from 53 deals in the same quarter last year.

Experiencing notable declines in activity were the Information Technology and Industrials sectors, which decreased 14% and 26% from the same period last year respectively.

Breakdown by Transaction Size

While the aggregate transaction value for the quarter was largely driven by mega-deals, the bulk of the activity is driven from transactions with deal values under $250 million.

As shown in Figure 4, the middle market continues to   account for the lion’s share of Canadian M&A transaction volume with deals under $250 million representing 90% of all the transactions with disclosed values.  This is consistent with past trends in activity.  In aggregate, the mid-market transactions were valued at $8.5B or approximately 18% of total M&A value.  

In the second quarter of 2016, transaction size was not disclosed for 50% of the transactions, consistent with 52% in 2015.  While this limits the precision of inferences we can make about the size distribution of transactions, it is reasonable to assume most of the undisclosed deals are within the middle market as we define it here.

Target by Province

As shown in Figure 5, domestic M&A activity varies considerably by province.  In Q2 2016, the provinces with the most announcements (in declining order of activity) were Ontario, British Columbia, Quebec and Alberta.  These four provinces represent 85% of activity in the quarter.  

The increase in domestic activity year over year (482 announcements in Q2 2016 vs 435 in Q2 2015), was partially attributable to a 61% increase in activity in Quebec, (79 versus 49 in Q2 2015).

The most active province by number of targets was Ontario with 158 transactions with an aggregate value of $5.5B, consistent with recent M&A activity trends. The largest transaction with an Ontario target was the acquisition of InnVest Real Estate Investment Trust by Bluesky Hotels and Resorts for $2.1B

Cross-Border Deals

As the data in Figure 6 indicates, cross-border transactions continued to account for a significant proportion of activity with 45% of all transactions involving a foreign target or buyer, demonstrating the global nature of the Canadian economy.

Canadian companies making acquisitions abroad (“outbound” transactions) outnumbered the number of foreign companies acquiring in Canada (“inbound” transactions) by a factor of 1.4 times.  Additionally, the value of outbound transactions exceeded the value of inbound transactions in Q2 by over three times.  In this quarter, we saw a continuation of the trend observed recently where Canadian firms were both more active abroad and spending more than foreigners acquiring Canadian companies.  Inbound activity increased significantly as foreign firms acquired more Canadian companies in Q2 compared to the same quarter last year (133 vs 107 in Q2 2015).  Similarly, the value of inbound transactions increased 70% compared to same quarter last year ($6.2B vs $3.6B in Q2 2015).