Mergers and acquisitions held their own in the first half of 2018 despite trade jitters, with B.C. players figuring in several multibillion-dollar transactions
With help from homegrown cannabis deals, Canadian merger and acquisition (M&A) activity remains healthy in an uncertain world. That’s one key takeaway from PwC Canada’s 2018 mid-year review and outlook report, which tracks M&A deal volume and value.
The first half of the year saw 1,546 transactions worth a combined $93 billion, down about 10 percent from $103 billion for the same period in 2017. With legalization of recreational marijuana use looming on October 17, cannabis played a big role in M&A activity, yielding 48 deals with a total disclosed value of $5.2 billion. Cannabis falls into the health-care category, where deal value and volume surged 233 percent and 48 percent, respectively. Energy and real estate also made a strong showing.
Despite volatile trade talks with the U.S. and worries about President Donald Trump’s tariffs, outbound transactions involving American companies climbed 8 percent year-over-year in the first half, to 237. Meanwhile, seeking diversification in the face of geopolitical uncertainty, Canadian businesses pursued international opportunities outside the U.S., racking up 161 such deals in the first half. As for tariffs, they affect just 3 percent of Canadian exports, PwC notes.
We asked Jim McGuigan, B.C. region managing partner and deals leader with PwC, where the province fits into the M&A picture—and how companies should approach a merger or acquisition.
Why did the Canadian M&A market do so well in the first half of 2018?
We’re in a sustained period of strong M&A activity, and it’s being fuelled mainly by the low-interest-rate environment and the abundance of capital in the hands of a number of parties. A lot of the larger public companies’ balance sheets are quite strong, and they have capability to raise additional monies at high valuations. You’ve also got an abundance of capital with private equity funds across the world and here in North America. Third, debt availability is very, very strong.
It’s been rare to see this sustained period of M&A with no major hiccups, if you will. It’s gone on for an unusually long time without any major disruption. There’s no shortage of capital. The shortage in the M&A space is good companies to buy—that’s the limitation right now.
As the population ages, many people are thinking about selling their businesses. Will that help ease the shortage?
That’s definitely a factor. Fifteen or 20 years ago, you saw a lot of articles saying, well, the demographics would suggest that there will be more and more companies available for purchase and sale. The crash in ’08 probably affected that market. Maybe for some people who were thinking about selling, there was a delay because valuations declined substantially.
For the past seven years plus, we haven’t had any of the market turbulence….There should be a number of companies coming up, because of the demographics, because of the average age of the population. So that definitely will help the supply in the years ahead.
What are some notable deals from the first half that involved B.C. companies?
The five major B.C. sectors in terms of activity were real estate, materials, technology, consumer discretionary and health care, which was mainly made up of cannabis transactions.
The biggest deal was Pure Industrial [Real Estate Trust], and the transaction value was about $3.7 billion. Pure was acquired by Blackstone [Property Partners] and Ivanhoé Cambridge.
No. 2 is called the materials category, but it’s really capturing mining effectively….[The] Galore Creek [copper-gold project] was sold to Newmont Mining for about half a billion dollars.
The third-largest sector by dollar value was technology. In B.C., there’s a lot of more activity in technology—it’s coming on. Avigilon got acquired by Motorola, a world-class company, for about $1.4 billion.
You’re starting to see cannabis activity drive the health-care numbers. Aurora [Cannabis], a company headquartered here, purchased MedReleaf for $3.2 billion.
What lies ahead for the cannabis sector, and what role can we expect B.C. to play?
There’s an abundance of capital for that sector, and you’re going to have winners and losers. And so there’s jockeying for position in terms of who is going to be dominant. There are a lot of synergistic or strategic purchases being made.
Maybe a difference between the Ontario market versus B.C. is there are some rumours that the retail distribution systems might be different. In Ontario, you’re seeing cannabis companies start to angle in on potential retail plays, whereas in B.C., it’s probably still questionable as to how they’re going to pursue the retail market.
Our perspective on that sector is that it’s been very active, especially for the first quarter, but we see continued activity as October rolls around.
What other key factors will influence M&A activity for the rest of the year?
Probably the first factor is the valuations and the amount of capital out there. My second would be the supply of targets. If the supply and the demographics continue, that will help the activity. There will probably be some larger companies in the market that re-evaluate their portfolios and consider whether they should divest of non-core components.
Then there’s a series of what you could call regulatory [issues], whether it’s NAFTA, tariffs, interest rates or taxes. For example, U.S. tax reform has probably had an impact on some companies. And maybe you’ve seen a bit of a trend, because of geopolitical factors, where recently a higher proportion of Canadian companies are investing outside the United States. Canadian companies acquiring companies abroad is showing some good growth. The markets they seem to like right now are Australia and the U.K. But there’s still going to be activity in the U.S. because you can access such a huge market there.
Can you share some best practices for companies considering a merger or acquisition?
1) Knowledge of targets. If you’re a purchaser or an acquiring company, knowledge of targets would be the potential companies you want to buy. For sellers, it means knowledge of the potential buyer audience. When you’re taking a look at the marketplace if you’re selling, there’s two distinct markets, the strategic purchasers and the private equity groups. So knowing who the logical buyers are can save you a lot of time and effort.
2) An up-to-date understanding of the market conditions. That would include trading multiples, valuations, financing available and whatnot.
3) Due diligence. If you’re on the selling side, it’s being prepared for a due diligence process. That encompasses a lot of things: it’s getting your operations ready, getting contracts up-to-date. That whole due diligence process for sellers can be quite onerous. It forces you to consider a lot of things about your company before you go down the road of a sale.
On the flip side, from a purchaser point of view, one of the key things for the best acquirers, I find, is an experienced acquisition team. That team typically consists of operational, finance and legal expertise. One thing we’re starting to see in the marketplace is a lot of purchasers implement data analytics into their analysis.
Another thing on the due diligence part is the post-acquisition or -merger integration plan. That’s important to drive maximum value out of the deal as quickly as possible.
The best companies are well organized, and when they close, they know the [acquired] company well, they know what to do with it, they know the things they’re going to pursue, and it’s not going to take them long. Those parties are getting the best value out of their acquisitions. You kind of have to right now, because the valuations are so high you need to drive these things out. Otherwise, you can make a good deal into a bad one pretty quickly.
This interview has been edited.