To the stealthy go the spoils

Transaction values in 2017 hit a three-year high, with private equity coming up big in our annual M&A year in review. Yet more than a few deals went by quietly
By Jim Middlemiss

Canada’s mergers and acquisitions market in 2017 can best be described as stealth-like. On the surface, it didn’t seem like it was an exceptional year. Sure there were some notable deals, such as Cenovus Energy Inc.’s (TSX:CVE) $17.7-billion purchase of oil and gas assets from ConocoPhillips, and Canadian Natural Resources Ltd. (TSX:CNQ) US$8.5-billion asset buy from Royal Dutch Shell plc, which altered the face of the oilsands industry in Canada.

But when it came to billion-dollar M&A deals, the headline activity in 2017 seemed dull at best, compared to past years.

However, if you peer a little deeper into the activity, what you see is that it was one of the most diverse and busiest M&A markets to hit Canada in recent years.

The Cenovus and Canadian Natural deals marked the first of many themes that emerged in 2017—the withdrawal by foreign energy giants from Canada’s oil patch, creating in its wake a couple of homegrown oilsands giants.

“It was a lot more positive than a year ago,” Chris Nixon, a partner in the capital markets and mergers and acquisitions group at Stikeman Elliott in Calgary, says of M&A activity in the oil patch.

Driving activity, he says, “were a number of foreign departures from Canada.”

It wasn’t a total retreat for global players, though, as Canadian Natural Resources issued Shell almost 98 million shares, or 9% of the company, as part of its deal. At the same time, Canadian Natural Resources and Shell also scooped up Marathon Oil’s 20% interest in the Athabasca Oil Sands Project for US$2.5 billion.

Other notable divestitures included Chevron’s $1.46-billion sale of its gas station and B.C. refinery to Parkland Fuel Corp. (TSX:PKI). As well, Norway’s Statoil sold its oilsands assets to Athabasca Oil Corp. (TSX:ATH) for $832 million. And Houston-based Apache Corp. sold its Alberta and B.C. assets to Paramount Resources Ltd. (TSX:POU) for $460 million.

Top 10 M&A deals in 2017: Click to enlarge

However, oil and gas was only a small part of the 2017 story. A number of other themes emerged throughout the year. They include the resurrection of a moribund IPO market, diversity in the deal pipeline, a continued buying spree by Canadian entities of foreign businesses, led by pension funds, and a heightened interest in Canada’s technology companies by U.S. firms. (See tables, adjacent and below, for our ranking of the year’s top 10 deals and top dealmakers.)

“Deals are really happening over a more diversified range of sectors,” notes John Emanoilidis, co-head of the M&A practice at Torys LLP in Toronto.

By the end October, Canadian companies were involved in more than 426 deals worth $68 billion, a three-year high, according to M&A analytics firm Mergermarket, and there was still more than a month left to go at press time.

Helping fuel that activity across the board? Private equity. Cameron Belsher, leader of the mergers and acquisitions group at McCarthy Tétrault in Toronto, says this is the “most robust it’s been since 2006 and 2007,” noting that much of the M&A activity is “not necessarily in the public domain,” but has been dominated by private equity firms. “They have raised so much money and have so much dry powder.”

Melanie Shishler, a partner at Davies Ward Phillips & Vineberg LLP in Toronto, agrees, noting “I haven’t worked on any deal where there haven’t been both pension funds and private equity crawling all over them.”

Emmanuel Pressman, chair of the corporate department at Osler, Hoskin & Harcourt LLP in Toronto, says, “It’s a seller’s market. There is so much capital chasing the same deals.” And “there is very little that does not involve private equity.” By the same token, he says, private equity firms face stiff competition from strategic buyers and a growing number of other financing options, including pension funds, family offices, sovereign wealth funds and special purpose acquisition corporations (SPACs).

Top 10 dealmaker rankings in 2017: Click to enlarge

The result is that valuations are hitting highs as more parties elbow their way into the deal party. Mergermarket notes in its Q1-Q3 Trend Report that deal values for private equity buyouts reached a six-year high in the third quarter, at US$7.5 billion. Also, the 45 exits it tracked are the highest ever in a Q1-Q3 period. Moreover, the average EBITDA exit multiple was 12.1x, compared to 8.6x last year.

One of the bigger private equity deals, Belsher notes, was Vista Equity Partners’ $4.8-billion take-private acquisition of DH Corp., which provides a range of lending and treasury services to financial institutions, including cheque printing. Reuters reported at the time of the March deal that it was the largest takeover of a Canadian company by a foreign firm since 2015, when Spanish-based Repsol agreed to buy Talisman energy.

Private equity firms were also busy using IPOs as a partial or full exit strategy.

Pressman notes that private equity sponsors that exited via an IPO include Bain Capital (clothier Canada Goose Holdings Inc. (TSX:GOOS): $390 million), Searchlight Capital Partners LP (clothier Roots Corp. (TSX:ROOT): $200 million), CCMP Capital Advisors (vitamin maker Jamieson Wellness Inc. (TSX:JWEL): $300 million) and ARC Financial (fracker STEP Energy Services Ltd. (TSX:STEP): $100 million, half of what was initially sought). Those deals alone surpassed the number of IPOs in 2016.

Private equity firms also played a role in a number of take-private, leveraged and management buyouts and sponsor-to-sponsor deals, including Alinda Capital Partners selling water, heating and air conditioning provider Reliance Home Comfort to the wealthy Li family of Hong Kong in a $2.8-billion deal. The Washington Cos., a Boise, Idaho private firm, agreed to buy Dominion Diamond for $US1.2 billion, one of the biggest foreign mining acquisitions in Canada since Falconbridge, notes Shishler.

Canadian private equity firms were particularly active in the consumer sector, with Mergermarket reporting that Canadian private equity firms accounted for 67% of consumer deals by Q3 compared with 40% in 2014, as part of what it calls “a flight of capital to non-traditional sectors.”

A combination of a high Canadian dollar and high valuations also helped spur activity and led to competitive auctions. “We’ve seen a lot of very hot auction processes,” notes Torys’ Emanoilidis. “There’s a great deal of money competing for deals.”

It also led to numerous dual-track sales processes, where sellers tested both the IPO market and auctions to see where the best deal could be had.

“Everybody wants to run a dual-track. They want their cake and eat it too,” observes McCarthy’s Belsher.

The diversity of deals was also a theme that jumped out in 2017.

Shlomi Feiner, a partner at Blake, Cassels & Graydon in Toronto, says what is interesting about the current M&A market is that “it’s not strictly commodity and oil and gas focused. It’s a nice change.”

Everything from real estate to retail, tech, energy and mining has been active. “It’s been pretty vibrant,” agrees Shishler, adding “people are being very strategic and very disciplined.”

Bill Gilliland, an M&A lawyer at Dentons LLP in Toronto, says energy infrastructure, including pipelines, utilities and power generation, has “been a busy sector.” Deals like Hydro One’s $6.7-billion purchase of Avista Corp. and Pembina Pipeline Corp.’s (TSX:PPL) $9.4-billion acquisition of Veresen Inc. highlight the appetite for energy and power infrastructure deals and Gilliland expects it will only get more competitive.

“Private equity and pension fund money is becoming increasingly powerful in that space.” Pension funds, with their need to have “long-life contracted assets” are “serious, competitive bidders against strategic companies,” Gilliland observes.

Even the mining sector is stirring to life. “There are large mining companies that are now willing to explore M&A,” says Feiner. “The last round of acquisitions took a while [for mining firms] to digest and assess what they did right and what they did wrong.”

Shishler notes that mining is undergoing “a bit of a consolidation” with a focus on size and scale. For example, in May, Eldorado Gold (TSX:ELD) bought Integra Gold Corp. for $590 million.

As well, joint ventures are becoming the name of the game.

Barrick Gold Corp. (TSX:ABX), Goldcorp Inc. (TSX:G) and Kinross Gold Corp. (TSX:K) struck a complex three-way deal in March involving Chilean assets. The end result is that Barrick and Goldcorp now have a 50-50 joint venture to develop properties in the Maricunga gold belt in Chile.

Also in the spring, Barrick struck a partnership with China’s Shangdon Gold Group Co. Ltd., selling Shangdon a 50% interest in its Veladaro mine in Argentina for $960 million. As well, they agreed to form a working group to explore the joint development of the trouble-plagued Pascua-Lama deposit in Chile and will “evaluate additional investment opportunities” near the border of Argentina and Chile.

Shishler says those deals bring the major gold miners “back on the scene in an important way.”

She says joint ventures will allow the companies to learn from one another and share the risk. “Mining is becoming much more technological.”

Pressman notes that retail has been particularly active, especially in the IPO space, as part of a rise in interest in the consumer sector.

Mergermarket states that in Q3, consumer deals actually outpaced energy and more than 18% of the deal load in Q3 involved a consumer company, the highest on record since 2001. On a yearly basis, consumer deals were tracking at 12% of the total Canadian M&A count.

One area that Pressman describes as “white hot” is technology, as U.S. sponsors and strategic buyers compete to snap up Canadian tech firms.

Adds Shishler: “I see real innovations coming out of Canada.” In fact, she says, the technology sector is emerging as one of Canada’s top four sectors for deals, joining energy, mining and real estate.

In January, Microsoft Corp. bought Montreal-based artificial intelligence firm Maluuba for an undisclosed amount. In June, Stryker Corp. bought imaging firm Novodaq Technologies Inc. for US$701 million. Other deals of note include Airbnb’s purchase of Montreal’s Luxury Retreats worth a purported $300 million, Vector Capital and Saba Software’s $293-million purchase of Halogen Software and Francisco Partners $562-million acquisition of Sandvine Corp.

In terms of outbound activity, Canadian pension funds were again busy. Ontario Teachers’ Pension Plan made its first direct investment in Italy, buying a 20% stake in private equity firm Intercos S.p.A. In October, it also paid $1 billion to buy Constellation Brands Inc.’s Canadian wine business (New York-based Constellation opted for this deal after previously considering an IPO for its Canadian operations earlier in 2017).

The Canada Pension Plan Investment Board was busy acquiring everything from real estate to power, oil and gas, and future royalties in a cancer drug, Venetoclax, while the Caisse de dépôt et placement du Québec joined forces with Suez to buy General Electric Co.’s water and process technologies business for US$3.4 billion.

But it wasn’t just pension funds that tested the foreign waters, Emanoilidis notes. “You had some very significant transactions involving Canadian companies acquiring foreign targets,” he says. Some of the deals include: SNC-Lavalin Group Inc.’s (TSX:SNC) transformative $4.1-billion purchase of WS Atkins plc, and CIBC’s (TSX:CM) US$5-billion purchase of PrivateBank.

Belsher noted that one of the missing elements in 2017, compared to past years, was Chinese state-owned enterprises. “It slowed down immensely,” he says, but he expects that will change following the Communist Party’s recent Congress and the release of its statement on where it wants to see outbound foreign investment. Areas cited included infrastructure, high technology and advanced manufacturing, agriculture and commerce and trading.

Almost on cue, in late October, Canadian engineering firm Aecon Group Inc. agreed to be acquired by Beijing-based China Communications Construction Co. Ltd. for $1.45 billion. Before that deal closes, however, it must survive a federal review under the terms of the Investment Canada Act.

Of course, no discussion about Canada’s M&A markets in 2017 would be complete without a reference to the boom in marijuana financings and IPOs. The pending legalization of pot has spawned a gold rush of companies looking to go public and capitalize on the opportunity.

Denton’s Gilliland says companies are “developing size, heft and brand” as a new industry emerges. “The financing in that space is an evolving one,” he notes, adding that “different financial institutions are taking different approaches to their involvement in the industry. There are a lot of creative thoughts in that space for sure.”

That creativity isn’t restricted to Canada. At the end of October, Constellation Brands (the New York-based alcohol giant cited above) struck a deal to acquire a 9.9% stake in Canopy Growth Corp. (TSX:WEED), of Smiths Falls, Ont., for $245 million.

As for the coming year, Emanoilidis, for one, remains optimistic about M&A, despite storm fronts such as NAFTA and BREXIT looming on the horizon. “We are certainly optimistic about the rest of the year and 2018, based on deals in the pipeline yet to be announced.”

Photography (story and slider) by Shutterstock.

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