Value Unleashed

 Market Update

Forty Canadian M&A transactions were announced this past week. Year to date, M&A deal count is 15.4% higher than the comparable period in 2016. The Canadian dollar appreciated by 0.62 cents, ending the week at 75 cents. The TSX fell by 0.1% and outperformed the S&P 500 by 0.5% in U.S. dollar terms.

The new issue environment for U.S. middle market loans became tighter with average total leverage of 4.3x EBITDA and new issue clearing yields 0.54% lower than last year’s levels. U.S. government bonds strengthened this week after inflation expectations declined due to a rise in the interest rates by the Federal Reserve.

Valitas Insights: Strong Advisor Network, Investment Strategy Focus and Due Diligence – Key Differentiators for Private Equity Returns

US management consulting firm Bain & Company’s 2017 Global Private Equity Report summarizes key changes in the PE industry in 2016.  The primary finding?  PE firms are putting more emphasis on the importance of a strong advisory network, investment strategy focus and due diligence. These are factors Valitas regards as critical at a time when returns are ebbing to the downside, holding periods are lengthening, and competition for quality targets is rising, supported by high levels of available capital.

Top-ranked PE firms are citing three key strategic differences that are crucial to outperforming the competition.

1.        Having a strong network of formal and informal advisors

Having a strong team of advisors with industry-specific expertise helps PE firms uncover the right opportunities by expanding their deal sourcing capabilities and providing valuable insights. Even those PE firms in the top quartile of deal sourcing see only 26% of relevant deals,  so having advisors who know the target industry well is crucial to effective deal sourcing.

In addition, an advisor with industry expertise can identify opportunities to expand product lines, optimize revenue, or reduce costs, which can turn a mediocre investment into a great one. Advisors may also play a significant role in identifying add-on acquisitions and other growth opportunities for the portfolio company after its acquisition.

2.       Maintaining investment strategy focus

Focusing on a narrow “sweet spot” where the investment team has executed deals and possesses expertise is one means to achieving superior returns. Examples of this approach include contrarian investing (targeting industries that are out-of-favour or in a down stage of the business cycle), transformational investing (investing in firms a PE firm can transform, either through operational improvements or using it as a platform for add-on acquisitions), macro investing (investing in companies that benefit from an effect of a macro trend that the market has not yet anticipated) and cross-pollination investing (applying investment approaches that were highly successful in one geography to another one).

3.       Superior operational due diligence

Over two-thirds of portfolio companies acquired in 2011 did not achieve the EBITDA margin expansion projected by the PE firm over their holding period. PE returns have been strong, yet this is largely attributable to the significant expansion in EBITDA multiples that portfolio investments have realized in recent years. For investments made in 2010-11, PE firms assumed an average exit multiple of 8.8x EBITDA, much lower than the average realized exit multiple of 10.9x EBITDA.

Needless to say, relying on EBITDA multiple expansion to generate high returns is unsustainable. Going forward, having strong and comprehensive due diligence capabilities will be crucial to sustaining current returns as margin expansion, inevitably, becomes the main driver of PE firm returns.

What Bain & Company’s findings suggest, consistent with Valitas’ experience, is a three-pronged strategy for PE firms: working with expert advisors who add value through their networks and specialized knowledge; maintaining a disciplined and focused investment strategy; and executing superior due diligence capabilities when making acquisitions.

M&A Deal Summary

Announced Deals

Peregrine Semiconductor to Acquire Arctic Sand Technologies

Peregrine Semiconductor Corporation, an American company that provides various radio frequency integrated circuits worldwide, has agreed to acquire Arctic Sand Technologies Inc., a Northwater Capital Management Inc., Arsenal Venture Partners Inc., Energy Technology Ventures and GE Ventures backed American company that develops power conversion semiconductors. No transaction terms were released.

KKR; Caisse de dépôt et placement du Québec to Acquire USI Insurance Services

Caisse de Depot et Placement du Quebec, a privately owned investment manager, and KKR & CO. L.P. (NYSE:KKR), an American private equity and real estate investment firm specializing in direct and fund of fund investments, has agreed to acquire USI Insurance Services LLC, a American company that provides insurance brokerage and consulting services in the United States. No transaction terms were released.

Golden Leaf Holdings to Acquire JJ 206

Golden Leaf Holdings Ltd. (DB:9GL), a Canadian company that provides cannabis oils solutions in North America, has agreed to acquire JJ 206 LLC, an American company that manufactures disposable cannabis oil vaporizers. Total transaction value is estimated to be $6 million.  

Golden Leaf Holdings to Acquire Medical Marihuana Group

Golden Leaf Holdings Ltd. has also agreed to acquire Medical Marihuana Group Corporation, a Canadian company that offers cultivation of hemp, including cannabis. Total transaction value is estimated to be $15 million.    

Taro Pharmaceuticals to Acquire Thallion Pharmaceuticals

Taro Pharmaceuticals Inc., a Canadian pharmaceutical company that develops, manufactures, and markets prescription and over-the-counter pharmaceutical products, has agreed to acquire Thallion Pharmaceuticals, Inc. a Canadian biotechnology company that engages in the development of pharmaceutical products in the areas of infectious diseases and oncology. Total transaction value is estimated to be $2.7 million.

Painted Pony Petroleum to Acquire UGR Blair Creek

Painted Pony Petroleum Ltd. (TSX:PPY), a Canadian company that explores for, develops, and produces petroleum and natural gas resources in western Canada, has agreed to acquire UGR Blair Creek Ltd., a Canadian company that owns and operates petroleum and natural gas reserves. Total transaction value is estimated to be $293 million.

Borealis Infrastructure Trust; Wren House Infrastructure Management to Acquire Kemble Water Holdings

Borealis Infrastructure Trust, a Canadian investment firm specializing in investing in and facilitating the financing of infrastructure projects, and Wren House Infrastructure Management Limited, a principal investment firm specializing in infrastructure investments, has agreed to acquire Kemble Water Holdings Limited, a BT Pension Scheme, Macquarie Infrastructure and Real Assets and Fiera Infrastructure Inc. backed U.K. holding company that provides wastewater treatment and drinking water services. No transaction terms were released.

Cricket Energy Holdings to Acquire Sunwave Home Comfort

Cricket Energy Holdings Inc., a Canadian company that distributes water heaters, home heating, ventilation, HVAC, and air conditioning systems, has agreed to acquire Sunwave Home Comfort Inc., a Canadian company that currently has no business operations. Total transaction value is estimated to be $8.3 million.

Eastgate Biotech to Acquire OMNI Surgery + Anti-Aging Centre

Eastgate Biotech Corp. (OTCPK:ETBI), a Canadian development stage company that develops novel formulations of natural compounds and pharmaceutical products, has agreed to acquire OMNI Surgery + Anti-Aging Centre, a Canadian company that offers plastic, orthopedic, and general surgical procedures. No transaction terms were released.

Player One Amusement Group to Acquire Dandy Amusements International

Player One Amusement Group, a Canadian company that distributes amusement and vending equipment, has agreed to acquire Dandy Amusements International Inc., an American company that operates game machines in theatres in the United States. No transaction terms were released.    

Ontario Teachers' Pension Plan to Acquire OGF

Ontario Teachers' Pension Plan, a privately owned pension fund, has agreed to acquire OGF SA, an Ontario Teachers' Pension Plan and Pamplona Capital Management LLP backed French company that provides funeral services in France. No transaction terms were released.

Closed Deals

Unknown Buyer Acquires Country Inn & Suites by Carlson, Norman, Oklahoma

An unknown buyer has acquired Country Inn & Suites by Carlson, Norman, Oklahoma, an American hotel, from American Hotel Income Properties REIT LP, a Canadian real estate investment trust that invests in hotel properties across the United States. Total transaction value is estimated to be $6 million.

Evergreen Brands, Acquires EarthScents Natural Products

Evergreen Brands ulc, a Canadian company that manufactures, markets, and sells branded and contract filled oral care, hair and body care, and spa products, has acquired EarthScents Natural Products, an American company that provides natural cleaning products scented with essential oils. EarthScents Natural Products will operate as a subsidiary of Evergreen Brands, ulc. No transaction terms were released.      

LSC Lithium Acquires LitheA

LSC Lithium Inc., a Canadian company that mines and produces lithium, has acquired LitheA Inc., an Argentinian company that explores lithium brine projects in Argentina. No transaction terms were released.

IMAGINiT Technologies Acquires PacifiCAD

IMAGINiT Technologies Inc., a Canadian company that provides Autodesk design and engineering software solutions for multi-industry, building and architecture, facilities management, civil engineering, manufacturing, energy and utilities, geospatial, process plant, and simulation sectors, has acquired PacifiCAD Inc., an American company that provides engineering and design technology solutions. No transaction terms were released.

Campaign Monitor Pty Acquires Tagga Media

Campaign Monitor Pty Ltd, an Accel and Insight Venture Partners backed Australian company that provides email marketing software products, has acquired Tagga Media Inc., a Canadian company that operates an engagement marketing platform providing insights in real-time data. No transaction terms were released.

Fronsac Real Estate Investment Trust Acquires Odacite Ste-Sophie

Fronsac Real Estate Investment Trust (TSXV:GAZ.UN), a Canadian company that operates as an open-ended trust in Canada, has acquired Odacite Ste-Sophie, a Canadian company that owns real estate properties. Total transaction value is estimated to be $1.4 million.       

Jadestone Energy Acquires JOB Pertamina-Talisman (OK)

Jadestone Energy Inc. (TSXV:JSE), a Singapore-based company that engages in the exploration, appraisal, and development of oil and gas properties in South East Asia, has acquired JOB Pertamina-Talisman (OK) Ltd. from Repsol Oil & Gas Canada Inc., an upstream oil and gas company. Total transaction value is estimated to be $7.7 million.

Scientus Pharma Acquires CannScience Innovations

Scientus Pharma Inc., a Canadian company that produces medical marijuana, has acquired CannScience Innovations Inc., a Canadian company providing research and product development for formulations and extracts related to medical cannabis and its derivatives. No transaction terms were released.

Birch Hill Equity Partners Management Acquires Cozzini Bros

Birch Hill Equity Partners Management Inc., a Canadian private equity firm specializing in investments in middle-market buyouts, corporate carve-outs, emerging growth, mature industry consolidation, recapitalization, and growth capital investments, has acquired Cozzini Bros Inc., an American company that provides commercial knife rental, exchange, and sharpening services to restaurants, grocery stores, commercial kitchens, cafeterias, hospitals, and schools in the United States. No transaction terms were released.

Citron Hygiene Canada Acquires WorkPlace Essentials

Citron Hygiene Canada Limited, a Canadian company that provides washroom hygiene, pest control, chemical, and life safety services for commercial facilities in Canada, has acquired WorkPlace Essentials Inc., an American company that provides eco-friendly hygiene services. Place Essentials, Inc. will operate as a subsidiary of Citron Hygiene. No transaction terms were released.

WGI Westman Group Acquires Eagle Mountain Homes

WGI Westman Group Inc., a Canadian company that designs, manufactures, and sells steel solutions for customers in Canada and internationally, has acquired Eagle Mountain Homes Ltd., a Canadian company that manufactures buildings using steel structural insulated panels. No transaction terms were released.