Some will remember 2018 as a year of rising interest rates, protectionist fears, and increasing political and economic uncertainty. However, recent reports – including reports from Duff & Phelps and PricewaterhouseCoopers – indicate that 2018 was another strong year for mergers and acquisitions activity in Canada facilitated by abundant capital, a growing economy, and low unemployment.
The PricewaterhouseCoopers report concludes by stating that despite the turbulence of trade negotiations and market uncertainty in the final months of the year, Canada was a strong market for mergers and acquisitions in 2018. A few key industries and sectors saw significant increases: healthcare and life sciences (driven by the legalization of recreational cannabis), financial services, and technology [1]. 2018 deals valued at over $1billion increased year on year, a reflection of both domestic and outbound transactions involving Canadian pension funds in areas such as real estate and infrastructure [2].
“2018 was certainly a year for sellers. As deal values remained high, principally due to the high levels of capital to be deployed, sellers took advantage of the market conditions and businesses traded hands” – Ben Gibbons, National Private Equity Leader, RSM.
“M&A deal activity and multiples have been on an unprecedented 10+ year run. This has been fueled by a confluence of capital markets factors and strategic factors. As private equity funds have grown in number and size the available private equity available for investment has grown enormously while the number of potential “homes” [investments] for the capital has not kept pace. The result is a combined North American and European capital overhang of over $1.6 trillion and a willingness to pay higher multiples and accept lower returns” – Paul Hamam, Managing Director, Deloitte Corporate Finance.
Mr. Hamam further notes that “M&A activity has also been spurred on by the accelerating change in technology and consumer trends. As large organizations are faced with a rapidly changing environment they have a choice to adapt organically or acquire the solution. Many are turning to M&A as a faster and less risky alternative to doing it organically – driving more competition for buyers of solid assets and therefore valuation multiples.”
Here are a few more highlights on key trends that emerged in the Canadian M&A market during 2018, and how these trends will play out in 2019.
Canadian M&A Statistics
In 2018, Canadian M&A activity reached a seven-year high by deal count and a three-year high by implied enterprise value. During the course of the year, 1,874 Canadian companies were bought and sold, with combined (disclosed) enterprise value totaling $119 billion. This represents a 20% and 35% increase over 2017 deal count and disclosed enterprise value respectively [3].
The number of transactions with an implied enterprise value of $500 million or more remained consistent with 2017, but the average enterprise value increased to $3.6 billion (compared to $2.9 billion in 2017). Interestingly, the increase in overall transactions in 2018 saw the median deal value fall from $10 million in 2017 to $8 million [4].
Public vs Private (Canada and US)
Similar to 2017, private company transactions accounted for the majority of M&A transactions in North America, representing 91.0% of total Canadian deal flow and 97.7% of all US deal flow. The number of public companies sold in Canada increased from 144 in 2017 to 168 in 2018, while the number of US public companies sold decreased from 350 in 2017 to 317 in 2018 [5].
For the third year in a row, median takeover premiums of Canadian and US public companies declined and in fact dipped below their 10-year averages, with Canadian premiums falling in line with those in the US (Canadian 25%, US 26%), a shift from previous (two) years when Canadian premiums were about 10% higher. [6]
Cross-Border Transactions
Acquisitions of Canadian companies continued to be largely a domestic affair, with 72% of such transactions being completed by a Canadian buyer. Of the remaining 527 transactions, 273 (52%) were with US-based buyers (a 26% increase over 2017). The number of Canadian buyers of US based companies remained steady with 2017 [7]. Interestingly, both Canadian buyers and sellers saw a drop in deal count with their Asian counterparts, falling 12% and 17%, respectively [8]. Overall, inbound Canadian M&A increased 7% despite lower interest from Asia and other regions, offset by increased investment from the US [9].
Looking Ahead to 2019
The continued volatility in public markets, debt capital tightening, trade war anxiety, and rising interest rates, could have a downward impact on global market activity and valuations in 2019. However, some commentators remain optimistic that the Canadian M&A market will remain strong, particularly because of the ongoing abundant investment capital from private equity and strategic purchasers. These buyers are more eager for growth opportunities now that economic indicators predict a slowdown in economic growth (2019 and 2020 GDP growth is forecast at 1.7% and 1.8% respectively) [10]. Such optimism is also bolstered by the demand and supply dynamics, buyers will likely continue to outnumber sellers – which may also potentially fuel further increases in valuations.
“While it is widely expected that valuation multiples will recede at some point, 2019 is expected to be a good year for sellers, given the unprecedented amounts of capital available among both corporate buyers and private equity firms” – Howard E. Johnson, Managing Director (Mergers & Acquisitions), Duff & Phelps.
“Despite a potential slowdown in economic growth, we expect the abundance of capital accessible to companies and investors to continue to support M&A activity throughout 2019”– Michael Black, Director (Deals Strategy & Value Creation), PricewaterhouseCoopers.
Further, according to PricewaterhouseCoopers’ recent Global CEO Survey, Canadian CEOs are less optimistic about the global economy and their prospects for growth, largely due to growing concerns around protectionism and trade. At the same time, interest in M&A is also on the rise, with 59% of Canadian CEOs planning on new M&A initiatives to drive their revenue growth in the next 12 months (up from 44% in 2018) [11].
Finally, despite the abundance of capital in the market, Ben Gibbons cautions that as 2019 evolves “sellers will have to be mindful of evolving market conditions and creative deal structures may be more apparent if we are to see the deal volume and multiples of 2018 continue.”
To receive further information, resources or advice on doing business in Canada, please email me at andrae.marrocco@mcmillan.ca. Stay tuned for our next post in the Doing Business in Canada Series.
This post is published to inform clients and contacts of important developments in the field of franchise and distribution law. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a McMillan lawyer if you have specific questions or concerns relating to any of the topics covered here.
[1] PwC Canada, “M&A Year in Review and 2019 Outlook”, https://www.pwc.com/ca/en/services/deals/2019-outlook.html.
[2] Ibid.
[3] Duff & Phelps, “Canadian M&A Insights – Winter 2019”, https://www.duffandphelps.com/insights/publications/m-and-a/canadian-m-and-a-insights-winter-2019.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] Ibid.
[11] PwC, “CEO’s curbed confidence spells caution – 22nd Annual Global CEO Survey”, https://www.pwc.com/gx/en/ceo-agenda/ceosurvey/2019/ca.html.