Value Unleashed

Market Update

Thirty-nine Canadian M&A transactions were announced this past week. Year to date, M&A deal count is 8.7% higher than the comparable period in 2016. The Canadian dollar appreciated by 0.13 cents, ending the week at 76 cents. The TSX fell by 1.9% and underperformed the S&P 500 by 2.5% in U.S. dollar terms.

Average total leverage of 4.9x EBITDA, while new issue clearing yields are 0.54% lower than last year’s levels. Total institutional leveraged loan new issuances hit US$149.5 billion on February 15^th, marking the fifth highest amount on record YTD. The highest amount on record was in the first quarter of 2013, with US$199 billion in total institutional leveraged loan new issuances. The new issue environment for U.S. middle market loans remains robust.

Insight Article:  Creating Value in the Current Environment:  Still a (Challenging) Possibility

The abundance of private equity “dry powder” persists as a recurrent theme in 2017.  As we note in this week’s blog, there is approximately US$749 billion in North America.  That’s a lot of dry powder!  And if we factor in leverage, with median debt financing running at 50.5% of U.S. M&A deals in 2016, buying power doubles to about US$1.5 trillion.  But rather than simply reporting on the level of available capital, we’d like to dig below the surface and consider the causes and implications, if any, for private equity investors.

A recent McKinsey Private Markets report provides some useful insights[1].  According to the authors, factors that are driving the sustained higher levels of capital include:

1. An increasing number of participants (investors)
2. Healthy, sustained fundraising

So there is more “powder” …but why is so much of it still “dry”? 

Increase in Competition

In the past, we’ve pointed our finger at strategic buyers as an increasing source of competition for M&A targets. While this continues to be the case, there are other factors at play:

1. Limited Partners (LP’s) are expressing a greater interest in certain segments of the private markets, specifically in Private Equity (PE) and infrastructure investment.  The McKinsey authors suggest that in the face of anxiety about future public market returns, LP’s are looking to private markets to invest their capital[2].  In addition, high net-worth individuals are demonstrating increased interest in private market investing, with the result that PE funds are launching new products tailored to that demographic.  A further significant factor contributing to competitive pressure is the likely increase in private equity allocations by both U.S. pension funds and Sovereign Wealth Funds;

2. Fundraising in private equity increased in 2016 over already high levels. North American private equity fundraising increased 6% from 2015; and

3. Somewhat related to (i) and (ii), the number of PE firms continues to increase.

The heightened competition for potential acquirers has, not surprisingly, driven up multiples to ten year highs, with the U.S. median TEV:EBITDA increasing from 10X in 2015 to a 2016 level of 10.9X.

As we’ve discussed in previous articles, higher valuations have inhibited deal activity, with U.S. private equity deal volume and value decreasing 14% and 12% respectively in 2016. 

And now we’re back to the dry powder.  In an environment with more suitors looking to create value through their acquisitions, from a pool of highly priced potential targets, it is no surprise that the powder is still dry. 

As the fundamentals that have created this environment are still at play, we expect these conditions to be sustained through 2017.  So what is a PE investor to do?

A Couple of Suggestions to Consider

1. Last week, we wrote about the importance of post-merger integration (PMI) to value creation.  “Extraordinary acquirers” – that is, firms that deliver shareholder value independent of industry, specific senior management or target – engage effectively and consistently in PMI.

2. An “add-on” strategy can also increase the probability of value creation in the current environment.   In pursuing add-ons to an existing platform, PE’s can take a strategic buyer perspective.  The platform company already has infrastructure and management in place, and there is the potential benefit of cost-side and distribution synergies and multiple arbitrage.  In addition, there is a clear relationship between valuation and size of target.  With valuations reaching lofty new heights, the pursuit of smaller, add-on acquisitions at lower multiples is an effective gateway to value.

Our optimistic but pragmatic conclusion:  while valuations remain high, PE investors that adapt their strategies and approaches effectively can invest some of that dry powder and continue to create value in this competitive market.

M&A Deal Summary

Announced Deals

Namaste Technologies to Acquire Australian Vaporizers

Namaste Technologies Inc. (OTCPK:NXTT.F), a Canadian manufacturer and worldwide distributor of vaporizers and accessories for aromatherapy purposes, has agreed to acquire Australian Vaporizers Ltd., an e-commerce company that specializes in aromatherapy and naturopathy devices.  No transaction terms were released.

Alberta Investment Management Corp. and AES to Acquire Sustainable Power Group

The Alberta Investment Management Corporation (AIMCO), a Canadian institutional investment fund manager, and The AES Corporation (NYSE:AES), an international power company, have agreed to acquire Sustainable Power Group, LLC, a Fir Tree Partners backed, U.S. company that owns and operates utility and commercial distributed electrical generation systems across the U.S.. Total transaction value is estimated to be $2.1 billion.

Madison Dearborn Partners to Acquire BlueCat Networks

Madison Dearborn Partners, LLC, a U.S.-based private equity firm, has agreed to acquire BlueCat Networks Inc., a Trident Capital Inc., Bridgescale Partners, and Northleaf Capital Partners backed, Canadian company that provides IP address management (IPAM), domain name system (DNS), and DHCP solutions for organizations internationally. No transaction terms were released.

Perisson Petroleum to Acquire Flushing Energy

Perisson Petroleum Corporation (TSXV:POG), a Canadian company that engages in the exploration, development, and production of oil and natural gas assets internationally, has agreed to acquire Flushing Energy Corp., a Canadian company focused on the exploration and production of oil and gas properties in Saskatchewan and Manitoba. No transaction terms were released.

Vinergy Resources to Acquire Biolennia Laboratories

Vinergy Resources Ltd., a Canadian company that focuses on the acquisition, exploration, and development of oil and natural gas properties in Canada, has agreed to acquire Biolennia Laboratories Inc., a Canadian company that offers drug testing services. No transaction terms were released.

Kitrinor Metals to Acquire Scythian Biosciences

Kitrinor Metals Inc. (TSXV:KIT), a Canadian exploration-stage mining company with properties in Canada, has agreed to acquire Scythian Biosciences Inc., a Canadian company that produces and sells medical marijuana in Canada. No transaction terms were released.

Maple Leaf Foods to Acquire Lightlife Foods

Maple Leaf Foods Inc. (TSX:MFI), a Canadian manufacturer and distributor of packaged meat products, has agreed to acquire Lightlife Foods, Inc., a Brynwood Partners backed, U.S. company that produces vegetarian food. Total transaction value is estimated to be $184 million, implying a 3.5x revenue multiple.

The Bridge Direct to Acquire Tech 4 Kids

The Bridge Direct, Inc., an Oaktree Capital Management, L.P.backed, U.S.-based company that develops, manufactures, and markets toys in the U.S., has agreed to acquire Tech 4 Kids Inc., a Canadian company that manufactures toys and games for children. No transaction terms were released.

Hootsuite Media to Acquire LiftMetrix

Hootsuite Media Inc., an Accel Partners, Blumberg Partners, Cloud Apps Capital Partners, Difference Capital Financial Inc., Fidelity Investments, Hearst Ventures, Insight Venture Partners, Wellington Ventures, Millennium Technology Value Partners, Eden Ventures Ltd., Dan Rosen & Associates, Texas Atlantic Capital Partners, and OMERS Ventures backed, Canadian social media management platform, has agreed to acquire LiftMetrix Inc., a [212]Media, Blue Cloud Ventures, Elevate Innovation Partners, Empire Angels, Residence Ventures, and Vaidya Capital Partners backed, U.S.-based company that provides social media analytics for enterprises. No transaction terms were released.

Closed Deals

Petrolera Patagonia has Acquired Argentinian assets from Zenith Energy

Petrolera Patagonia SRL, an Argentinian company that produces crude oil, has agreed to acquire assets from Zenith Energy Ltd. (TSXV: ZEE), a Canadian company that produces oil and natural gas internationally. No transaction terms were released.

Marapharm Ventures has Acquired Moringa Cooperative

Marapharm Ventures Inc., a Canadian company focused on the development of medical and recreational marijuana in Canada and the U.S., has acquired Moringa Cooperative, Inc., a U.S.-based company that operates a fleet of vehicles to provide cannabis product delivery services. Total transaction value is estimated to be $3.9 million.

BrainWorks Marketing Services has Acquired Razor Communications

BrainWorks Marketing Services Inc., a Canadian company that offers marketing services, has acquired Razor Communications Inc., a Canadian company that offers branding and advertising services. No transaction terms were released.

Secova Metals has Acquired 1095252 B.C. Ltd.

Secova Metals Corp. (TSXV:SEK), a Canadian company that engages in the acquisition, exploration, and evaluation of mineral properties in Canada, has acquired 1095252 B.C. Ltd., a private Canadian company that owns mining properties in Cobalt Bay, Quebec. Total transaction value is estimated to be $540 thousand.

Secova Metals has Acquired 1106632 B.C. Ltd.

In a separate transaction, Secova Metals Corp. had also agreed to acquire 1106632 B.C. Ltd., a private Canadian company that owns a gold exploration property in Canada. Total transaction value is estimated to be $500 thousand.                   

Give and Go Prepared Foods Acquires Uncle Wally’s Bake Shoppe

Give and Go Prepared Foods Corp., a Thomas H. Lee Partners backed, Canadian market leader in value-added, branded and private label baked goods, has acquired United Baking Co., Inc., and its subsidiaries Uncle Wally’s LLC and Vision Enterprises, LLC (collectively, “Uncle Wally’s”), which collectively operate as premium muffin manufactures. No transaction terms were released.