Crosbie & Company Canadian Mergers & Acquisitions Report for Q2 2017

Overview

Canadian M&A activity (which we define as all M&A deals involving a Canadian company as a material counterparty) showed continued strength in the second quarter of 2017, coming off the 5 year high observed in the prior quarter.  Figures developed by Crosbie & Company using Capital IQ and other sources indicated 724 announcements in Q2, up 2% from the same quarter last year and representing the third most active quarter in the last three years.  The quarter also marks the fifth consecutive quarter where activity increased year-over-year.

The total value of announced transactions for the quarter at $64B was somewhat lacklustre due to a lower contribution from mega-deals (transactions in excess of $1B in value)  offset to some extent by a higher than average $25B contribution from transactions under $1B in value.

The strength in M&A activity during the quarter was spread across the industry spectrum, with 8 of the 14 sectors experiencing an increase in activity relative to Q2 2016. While the majority of the increase in activity came from the Consumer Discretionary sector, the increase was offset by declines in recently active sectors, Metals and Mining and Real Estate.   From a deal-size perspective, most of the increase in activity can be attributed to transactions for which the value was not disclosed.

Domestic Versus Foreign M&A

Figure 2 indicates a shift in Canadian M&A activity from domestic targets to foreign targets. In Q2, there were 468 transactions involving Canadian targets (including both those with domestic or foreign buyers), down 3% from the same quarter last year.  Conversely, there were 256 transactions involving foreign targets, representing an increase of 13% relative to the same quarter last year.

Mega-Deals

There were 12 mega-deals announced in Q2, representing an aggregate value of $39B and 61% of the total value of M&A activity for the quarter.  While the value of mega-deal activity increased 44% over Q2 2016, mega-deal activity during the quarter was below the average level observed over the last three years, both in terms of the number and value of announced transactions.

The largest announced transaction was the $11.9B acquisition of a 50.4% interest in the Australian electric utility, Endeavor Energy, by a Macquarie Group led consortium that included BC Investment Management Corporation.

The second largest transaction of the quarter featured Pembina Pipeline Corporation acquiring Veresen Inc. for $7.8B. The transaction marks the continuation of the consolidation trend within the energy infrastructure space, as companies look to diversify their assets and gain scale and financial strength. The Pembina/Veresen transaction follows similar consolidation moves in the sector including the AltaGas/WGL Holdings transaction last quarter and the Enbridge/Spectra Energy and TransCanada/Columbia Pipeline transactions last year.  

Financial Sponsors

Financial sponsors remained active in the second quarter of 2017 on both the buy-side and sell-side with 13 transactions (in excess of $100M) valued in aggregate at $23B.  Five of the ten largest transactions in the quarter involved a financial sponsor, including pension funds and private equity groups. In efforts to match their plan obligations, these funds continue to seek assets that can provide long term inflation-protected returns, such as infrastructure assets and real estate related investments. 

CPPIB was particularly active in the quarter announcing the $2.5B acquisition of Parkway Inc., a US-based publicly-traded office REIT as well as its partnership with Baring Private Equity Asia in the $1.6B acquisition of Nord Anglia Education, Inc., a Hong Kong-based operator of international schools.   CPPIB also announced that it would partner with Houston-based Encino Energy LLP to invest up to $1.3B in oil and gas producing assets in the United States.

Industry Sector Activity

Notwithstanding an 11% decrease in activity from Q2 2016, Metals and Mining remained the most active sector by number of announced transactions with 100 deals valued at $2.3B.  The sector’s largest transaction involved Osisko Gold Royalties acquisition of a royalty portfolio on diamond, gold and silver assets from Orion Mine Finance Group, a US based private equity firm, for $1.1M.

Real Estate, historically one of the most active sectors, also declined 19% from Q2 2016 to 91 transactions worth $8.5B. The largest deal in the sector was the aforementioned Parkway Inc. transaction.
 
The Consumer Discretionary sector showed the largest increase in activity during the second quarter, increasing 35% to 74 announced transactions worth $4.6B (compared to 55 announcements valued at $2.8B in Q2 2016). Information Technology and Industrials also experienced increases in activity during the quarter, with both sectors increasing 9% over the same quarter last year.

The most active sector by deal value was Energy with 57 deals valued at $13.9B, largely due to the Veresen Inc. transaction mentioned above.  Another key transaction in the sector was Parkland Fuel Corporation’s $1.7B acquisition of Chevron Canada’s refining, retail, commercial and wholesale fuel business.

Breakdown by Transaction Size

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

As shown in Figure 4, the middle market continues represent the lion’s share of Canadian M&A transaction volume with deals under $250 million representing 89% of all the transactions with disclosed values.  This is consistent with past trends in activity.  In aggregate, the mid-market transactions were valued at $9.7B or approximately 15% of total M&A value.  

In the second quarter of 2017, transaction value was not disclosed for 51% of the transactions, consistent with 50% in 2016.  While this limits the precision of inferences we can make about the size distribution of transactions, it is reasonab le to assume most of the undisclosed deals are within the middle market as we define it here.

Target by Province

In terms of activity by province, Ontario, British Columbia, Quebec and Alberta continue to lead the way, accounting for 86% of activity in the quarter.  

The decline in domestic activity year over year (468 announcements in Q2 2017 vs 482 in Q2 2016), was primarily attributable to a decrease in activity in Alberta and Saskatchewan. In Alberta, M&A activity decreased 22% (59 versus 76 in Q2 2016); and Saskatchewan decreased 57% to 10 transactions.

Cross-Border Deals

As the data in Figure 6 indicates, cross-border transactions continued to account for a significant proportion of activity with 48% of all transactions involving a foreign target or buyer, demonstrating the global nature of the Canadian economy.

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.  Canadian companies making acquisitions abroad (“outbound” transactions) outnumbered foreign companies acquiring in Canada (“inbound” transactions) by a factor of 1.5 times.  Additionally, the value of outbound transactions exceeded the value of inbound transactions in Q2 by more than four times.  

Canadian companies remained active buyers south of the border, buying more US companies (136) for a higher value ($11.5B) than US acquisitions of Canadian companies (69 deals for $5.1B).