Shopping for Strategic Acquisitions

B.C. Strategy Acquisitions | BCBusiness

With lacklustre revenue prospects, companies are bulking up with acquisitions (Return to B.C.’s Top 100 of 2013)

The economic recovery may be developing momentum across North America, but it’s hardly evident in the marginal growth of revenues among B.C.’s top companies. In response, B.C. companies in search of growth opportunities have gone shopping.

The past year saw expansion-minded purchases by companies ranging from top-listed Telus Corp., which boosted its presence in the health sector through the acquisitions of Wolf Medical Systems Corp. and Kinlogix Medical Inc. (and earlier this year, MD Practice Software LP), to poultry producer Sunrise Farms Ltd.’s acquisition of an Ontario processor.

Other companies have acquired properties and assets integral to their business, adding sales opportunities rather than counting on existing business to boost cash flow.

Most companies have maxed out structural efficiencies for boosting performance, explains Ian Smith, who leads Ernst & Young’s mergers and acquisitions practice in B.C. This has made purchasing growth opportunities—rather than waiting for growth to happen—appealing. It’s also a safer bet than trying to enter new markets in an economic environment where caution remains prevalent.

“You’ve got to displace the incumbent players in order to build your business, and that takes a long, long period of time,” he explains. “It can be very expensive to do, with no guarantees that you’re actually going to get to a profitable material size of business. Whereas with an acquisition, you’re buying customers, product categories, new markets.”

But companies are being discriminating when it comes to scouting acquisition opportunities. The deals are not seeking growth for growth’s sake; rather, companies are pursuing opportunities within their existing range of operations. “There’s less integration risk, there’s less HR risk [and] product knowledge is the same,” Smith says.

Telus, for example, having established a healthcare division in 2008, found opportunities to acquire existing companies over the past year that allowed it to move forward with its established expansion plans.

Similarly, Western-One Inc., through its modular structures subsidiary Britco Group, added Alberta Modulars Inc. to its holdings in 2012 through a $2.8-million deal. The acquisition capitalized on the Alberta company’s established presence serving oil and gas exploration companies while allowing WesternOne to grow Britco’s business.

Sunrise Farms added to its revenues—up 19.2 per cent in 2012 over 2011—through the purchase of an Ontario processing plant that broadened its operations in a familiar line of business.

And most recently, Premium Brands Holdings Corp. struck a deal to acquire meat processor Freybe Gourmet Foods Ltd. for $55 million. That deal gives Premium Brands a company with annual sales of approximately $78 million, an addition that will lift its own revenues to more than $1 billion and sandwich it between electricity vendor Powerex and Catalyst Paper Corp. on this year’s Top 100 list.

The Freybe acquisition reflects the trend toward consolidation among food and beverage companies, Smith notes. Critically, Premium Brands and Freybe also worked out an integration plan before the acquisition closed to ensure a smooth consolidation of operations. Freybe’s management team joined Premium Brands, while Freybe’s state-of-the-art processing plant in Langley will replace an older plant Premium Brands planned to close later this year.

Whether or not acquisitions remain the route to corporate growth in 2013 is another question, however. A number of macroeconomic factors are working against M&A activity in Canada, including B.C., says Lee Davis, a managing director with PricewaterhouseCoopers Corporate Finance Inc. in Vancouver. Davis expects the Bank of Canada to refrain from raising interest rates until 2015, keeping debt cheap and encouraging prospective buyers to continue seeking acquisition targets.

Nevertheless, M&A activity is off, from $60 billion nationally in the last quarter of 2012 to $24 billion in the first quarter of 2013. “That’s a very slow start to 2013,” Davis says, adding, “our commodity prices are down, and that means a lot of our companies are going to be a lot quieter in the next 12 months or so.”

But with economic activity generally muted, rest isn’t necessarily a prescription for health. “The sustained caution that B.C. or Canadian companies have has quite often looked like a good thing,” Smith says. “But going forward, if Canadian companies remain as cautious as they’ve been, that could be a bad thing because larger competitors are going to be coming into the market and they’ll be caught flat-footed if we’re not taking a close look at acquisition opportunities to build global scale.”