Canadian M&A Market Recap: Week Ended January 27th

  • Posted By: Karen Fisman, Louis Goldberg, Miranda Li, Michael Mazza, Minh Cao, and Paris Aden

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Market Update

Forty-one Canadian M&A transactions were announced this past week. The Canadian dollar appreciated relative to the U.S. dollar by 1.29 cents, ending the week at 76 cents. The TSX outperformed the S&P 500 by 0.8% in U.S. dollar terms, reflecting the effect of a rising Canadian dollar.

The new issue environment for U.S. middle market loans remains robust, with average total leverage at 4.9x EBITDA, an increase of 0.1x from last week. New issue clearing yields over the past week were 6.9%, representing a 0.55% increase over the same period last year.    

Valitas Insights: The Middle Market - Full Steam Ahead in 2017

U.S. middle market companies are killing it.  In a good way. 

This week, the National Center for the Middle Market (NCMM) reported the results of its Q4 2016 survey.  The findings:  on several key indicators, U.S. middle market companies are outpacing their larger and smaller counterparts, and private equity (PE) owned middle market firms continue to lead the pack.

The NCMM surveyed 1,000 middle market executives on key performance indicators, economic confidence, and perceived business challenges.  Responses were gathered during the first two weeks of December - after U.S. election results were known, but before the inauguration and rapid fire of executive orders.  We expect that in the intervening period, given the surge in U.S. investor confidence, economic confidence expectations have likely remained unchanged or are shifting upwards.

Revenue Growth:  Ahead of 5-year average, with PE-owned firms outpacing the pack

Revenue growth for 2016 was 6.9%, somewhat higher than the five-year average of 6.5%, and considerably outpacing the S&P 500’s revenue growth of 4.4%.  The strongest growth came from the construction sector at 12.6%.  With the new administration’s commitment to rebuilding U.S. infrastructure, we expect this to be sustained in 2017.

PE-owned middle market companies continued to outperform their peers, with revenue growth of 10%.  As we’ve noted previously, explanations for PE firms’ strong showing include:

  1. Selection bias:  PE firms select acquisition targets with the best prospects;
  1. Portfolio leverage:  Acquired companies may yield economies of scale/synergies as PE firms target add-ons to existing platforms;
  1. Infusion of outside capital:  Viable projects that could not be funded pre-acquisition are now being funded.   To quote the presenter of a previous NCMM report: “Pour water on the desert and bingo, the desert starts to bloom”; and
  1. Professionalization of management: Add-on acquisitions benefit from management expertise at the platform level.  Additionally, post-acquisition, management issues are addressed and interests aligned with business goals.

Revenue growth projections for the next twelve months were lower, at 5.5% (and 7.5% for PE-owned firms). Over the five years that the NCMM has been conducting this survey, however, revenue growth projections have typically been 1-1.5% shy of actual results.  

Employment Growth:  Debunking the myth that PE acquisitions result in net job loss

Middle market companies reported 2016 employment growth of 5.4% and have been adding jobs at an accelerating rate over the past two years relative to their peers. Once again, PE-owned firms were well ahead of the pack, with employment growth of 8.1%.  Over the same period, employment growth for S&P 500 firms and small business was considerably lower at, respectively, 2.4% and 1.4%. 

We can expect further employment growth in 2017, with 33% of respondents expecting to add jobs in the coming year.  In fact, talent acquisition was regarded as one of the biggest constraints to growth for middle market companies; almost 40% claimed that if they could find the talent, they could grow faster.

Soaring confidence and stronger expectations for M&A

Middle market confidence levels in the global, national, and local economies reached the highest levels ever recorded in the NCMM survey.  Sentiment was most positive amongst firms reporting the highest growth rates, which leaves us wondering if these respondents are extrapolating from past success to guide their economic outlook. Only time will tell whether, and to what extent, this is the case.

Companies also reported on their plans to drive growth in 2017.  Organic growth drivers included the introduction of new products or services, and expansion into new markets at higher levels than 2016.  In addition, respondents expressed heightened intentions to engage in deal activity, with 39% stating that some sort of M&A activity was extremely or very likely in the next twelve months.

New regime, different challenges? 

Prospects appear to be rosy for the U.S. middle market.  However, as the author of the NCMM report observes: “[F]or the last five years, the U.S. has enjoyed steady and moderate growth, low interest rates…negligible inflation, and little pressure from materials or wages.” Shifts in these conditions will impact the challenges faced by middle market companies and we’re certainly faced with changing times.  It’s not clear yet what the long-term picture will be, but for now, it’s full steam ahead. 


Weekly M&A Deal Summary  


Easton Pharmaceuticals to Acquire iBliss

Easton Pharmaceuticals Inc. (OTCPK:EAPH), a Canadian specialty pharmaceutical company, has agreed to acquire iBliss Inc., a fast-growing Canadian vaporizer and e-liquids manufacturer. No transaction terms were released.

Chan Zuckerberg Initiative to Acquire Meta

Chan Zuckerberg Initiative, owned by Facebook CEO Zuckerberg and his wife Dr. Chan, has agreed to acquire Meta, an iGan Partners, Rho Capital Partners, Western Technology Investment, BDC Venture Capital, Horizons Ventures, Growlab Ventures, and Everline Investments backed, Canadian artificial intelligence (AI) start-up. No transaction terms were released.

C&C Cosmeceuticals to be Acquired

C&C Cosmeceuticals Corp., a Canadian manufacturer and marketer of nutraceutical and cosmeceutical personal healthcare products and services, is to merge with an undisclosed company. C&C is a wholly owned subsidiary of EVITRADE Health Systems. No transaction terms were released.

Public Sector Pension Investment Board to Acquire Cerba HealthCare

Public Sector Pension Investment Board, a Canadian government owned pension fund, has agreed to acquire Cerba HealthCare SAS, a PAI Partners and Mithras Capital Partners backed, French operator of clinical pathology laboratories. Total transaction value is estimated to be $2.6 million.

OCLC Online Computer Library Center to Acquire Relais International

OCLC Online Computer Library Center, Inc., a U.S.-based, non-profit, global library cooperative, has agreed to acquire Relais International, Inc., a Canadian interlibrary loan solution provider. No transaction terms were released.



Amax Medical Dental Supply Acquires MARS Dental Supply

Amax Medical Dental Supply Limited, a leading distributor of medical and dental products in Calgary, has acquired MARS Dental Supply, a Canadian dental supply company. No transaction terms were released.

Amax Medical Dental Supply Acquires Denesco Dentaires

Amax Medical Dental Supply Limited has also acquired Denesco Dentaires, a dental supply company in Quebec. No transaction terms were released.

Collins Barrow Victoria Merges with Osborn Watts & Co

Collins Barrow Victoria Ltd., the British Columbia office of Collins Barrow, one of Canada’s largest associations of chartered accounting firms, has merged with Osborn Watts & Co., a Canadian accounting service provider. No transaction terms were released.

Diamante Minerals Acquires Mineracao Batovi

Diamante Minerals, Inc. (OTCPK:DIMN), a Canadian natural resources company, has acquired Mineracao Batovi Ltda, a Brazilian company, through which Diamante will develop the Mineracao Batovi project. Total transaction value is estimated to be $300 thousand.

National Technical Systems Acquires Laboratoire d’Essais Fiarex

National Technical Systems Inc., an Aurora Capital Group backed, leading provider of qualification testing, inspection, and certification solutions in North America, has acquired Laboratoire d’Essais Fiarex Inc., a Quebec-based company specializing in dynamic and environmental testing. No transaction terms were released.

Medisys Health Group Acquires Tri Fit

Medisys Health Group Inc., a Canadian national provider of preventive and executive health services, has acquired Tri Fit Inc., a Canadian corporate fitness solutions provider. No transaction terms were released.

Fiera Infrastructure Acquires Cedar Point II

Fiera Infrastructure Inc., an Aquila Infrastructure Management backed, leading infrastructure management firm, has acquired Cedar Point II LP, a wind power generation company. Cedar Point II was a subsidiary of Suncor Energy. No transaction terms were released.

Liberty Security Systems Acquires North Star Security Systems

Liberty Security Systems, Inc., one of Canada's largest independent security providers, has acquired North Star Security Systems Inc., a Canadian home and business security systems provider. No transaction terms were released.

Kik Interactive Acquires Rounds Entertainment

Kik Interactive, Inc., a Foundation Capital, RRE Ventures, Millennium Technology Value Partners, iNovia Capital, Union Square Ventures, Spark Capital Partners, Valiant Capital Partners, SV Angel, Tencent Holdings Investment Arm, MicroVentures, and Laconia Ventures backed, Canadian smartphone messaging app developer, has acquired Rounds Entertainment, Inc., an Israeli video chat company. No transaction terms were released.

RIBA Enterprises Acquires Digicon Information

RIBA Enterprises Limited, a wholly-owned knowledge management subsidiary of the Royal Institute of British Architects, has acquired Digicon Information, a Canadian publication and consulting company. No transaction terms were released.

CaféX Communications Acquires Chime Spaces

CaféX Communications Inc., an Intel Capital and Illuminate Ventures backed, supplier of real-time digital engagement solutions, has acquired Vayyoo, rebranded as Chime Spaces, a Canadian mobile-first virtual meeting room technology provider for enterprises. No transaction terms were released.

Apogee IT Services Acquires DSM Computing Solutions

Apogee IT Services, a Brook Venture Partners and Blue Heron Capital backed, managed IT services company headquartered in Pittsburgh, has acquired DSM Computing Solutions Inc., an IT services provider based in Toronto. No transaction terms were released.

MITY Enterprises Acquires Holsag

MITY Enterprises, Inc. a U.S.-based furniture designer and manufacturer, has acquired Holsag Canada, a chairs and case goods manufacturer. No transaction terms were released.

Information Services Corporation Acquires Enterprise Registry Solutions

Information Services Corporation (TSX:ISV), a Canadian provider of registry and information management services for public data and records, has acquired Enterprise Registry Solutions Limited, a global leader in the development and implementation of registry technology. Total transaction value is estimated to be $21.1 million.

Telecorp Acquires SOFTSMART 2.0

Telecorp, Inc. (OTCPK:TLNU.F), a global professional services company, has acquired SOFTSMART 2.0, a Los Angeles-based strategy, design, technology and product management agency. No transaction terms were released.

The Riverside Invests in NuStef Foods

The Riverside Company, a global private equity firm, has invested in NuStef Foods Limited, a Canadian waffle cookies and crackers manufacturer. No transaction terms were released.

Qode Media Acquires Nerd Platoon

Qode Media Inc., an accredited Google Partner digital marketing agency in Toronto, has acquired Nerd Platoon, a Canadian mobile app developer. No transaction terms were released.

Tucows Acquires eNom

Tucows Inc. (NasdaqCM:TCX), a Canadian provider of network access, domain names, and other Internet services, has acquired eNom Inc., a U.S.-based wholesale domain name registrar. eNom was a subsidiary of Rightside Group, Ltd.. Total transaction value is estimated to be $111.4 million.

Newlook Capital Invests in Direct Elevator Services

Newlook Capital Inc., a Canadian private equity firm, has invested in Direct Elevator Services Ltd, a Toronto-based provider of elevator maintenance and modernization services. No transaction terms were released.

CRC Research Acquires Research House

CRC Research Inc., an international medical and consumer marketing research services provider, has acquired Research House, Inc., a Toronto-based market research company specializing in focus group services and target audience recruiting. Research House was a subsidiary of Environics Research Group. No transaction terms were released.

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