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Canadian M&A Market Recap: Week Ended Sept 2, 2016

  • Posted By: Louis Goldberg, Miranda Li, Michael Mazza and Paris Aden

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Weekly Canadian M&A Report – Week ended September 2nd, 2016

Capital Markets Update

US stocks rose this week amid a neutral US employment report that will likely keep the Fed on the cautious side when they meet later this month. Canada reported its worst quarterly performance since the global financial crisis as Real GDP fell at an annualized rate of 1.6% during the second quarter. Real GDP declined due to weak export levels and the Alberta wildfires while uncertainty remains regarding exports and an expected downturn in household spending.

10-year treasury yields decreased from the impact of the US employment report. New credit issuances remain low, with less than three syndicated deals observed last week.

Canadian M&A activity seems to have declined slightly, along with a similar slowdown in the US. M&A activity in terms of total deal count compared to one year ago rose significantly in Canada. Across the M&A market, particularly in the US, acquirers have become increasingly selective in deal making in response to decreasing deal quality. Most of the high quality companies went to market during the robust 2014 and 2015 periods. Average deal sizes in Canada and the U.S. diverged when compared to the prior year period, as Canadian dollar volume fell significantly.

Valitas Insights: Canadian Private Business Landscape –Consolidation Spectrum Score

The Valitas Canadian Private Business Landscape series is focused on presenting a concise summary of the Canadian business landscape. We focus primarily on the top 25 industries in Canada based on the number of companies with EBITDA greater than $3 million. This series presents various metrics, fragmentation analyses, economies of scale insights, and a discussion of which industries are the best candidates for ongoing consolidation.

In this fourth installment of the series, our team has conducted further analysis to determine those industries for that have the greatest potential for consolidation when the extent to which economies of scale and fragmentation are present.  In assessing consolidation potential, we applied a progression of tests, summarized below:

Valitas has developed a Consolidation Spectrum Score (CSS) based on the economies of scale and fragmentation scores described in our second and third installments, respectively.  Collectively, our scoring for economies of scale (EoSS) and fragmentation (FS) answer two fundamental questions regarding consolidation:

  1. Benefit: Does a company in a given industry gain an advantage from getting larger?
  2. Opportunity: Is there sufficient fragmentation to present a consolidation opportunity?

The CSS combines both of these factors in a single metric.  It is derived by multiplying the EoSS and FS together to determine the level of consolidation potential in each industry that met our sample size threshold. This outcome was then normalized and scaled from 0 to 100 with 0 representing the least consolidation potential and 100 representing the greatest consolidation potential.

The scatter plot below shows the EoSS versus the FS for the 113 industries studied and also shows the ranking of the top 15 industries by their CSS.  It is important to note that the EoSS and FS, and by extension the CSS, are relative scores so conclusions can only be made in relation to other industries and not absolutely. The scatter plot is shown in log scale and further segmented into quadrants. The quadrants are divided by the median value across all industries for fragmentation and economies of scale respectively.

The diagram below further describes the characteristics each quadrant represents. The top left, blue-shaded quadrant represents industries where economies of scale matter and consolidation has run its course. The bottom left, blue-green-shaded quadrant contains concentrated industries where economies of scale don’t matter.  Not only are these industries the least desirable for consolidation purposes, fragmentation is most likely their natural state. The bottom right, green-shaded quadrant represents fragmented industries that have run their course because economies of scale don’t matter and fragmentation is their natural state.  The top right, non-shaded, quadrant shows those fragmented industries where economies of scale matter. These are the industries where consolidation remains in the early stages, presenting the greatest value creation opportunity for consolidators.

When economies of scale are prevalent, the effect will “pull” industries towards consolidation creating more concentrated industries. When economies of scale are minimal, the effect will “pull” industries towards fragmentation. These separate pull effects can be seen in the diagram below and emphasize how important economies of scale are towards consolidation potential.  To further emphasize this point:

  • For industries that lack scale benefits: only four are concentrated, versus approximately 25 that are fragmented; and
  • For industries that have significant scale benefits: the disparity is less pronounced, with 28 remaining relatively fragmented, versus 25 that are relatively concentrated.

This analysis demonstrates that the majority of industries have run their course, whether toward consolidation or fragmentation.  In other words, they are either in the bottom right or top left quadrant. Where the greatest disruption can be expected is in those industries that have the highest and lowest CSS. For example, significant scale benefits suggest that Oil and Gas Exploration and Production, as well as Diversified Metals and Mining would be highly concentrated. These are two of the largest industries in Canada and both have obvious consolidation potential. Conversely, we also found some unexpectedly high-CSS industries such as Research and Consulting Services and Investment Banking and Brokerage. These industries at first glance probably wouldn’t strike many as having high consolidation potential, however upon reflection, both industries are dominated by a few large firms with many smaller boutique or middle market players filling in the rest.

Not surprisingly, many (ten) of the 25 largest industries in Canada are in the top 15 CSS ranking, including Oil and Gas Exploration and Production, Specialized Finance and Application Software. For the most part, industries that typically made it into the top 15 scored well on both economies of scale and fragmentation to create a balanced CSS score. An interesting exception to this is Biotechnology which shows the highest EoSS with relatively low fragmentation.

The bottom 15 CSS industries have either very low EoSS, FS, or both.  With the exception of Oil and Gas Refining and Marketing, and Steel, most of the industries at the bottom of the list are highly concentrated.

There certainly are CSS outliers among the largest industries. Construction and Engineering has the largest sample of companies in Canada. However, our analysis suggests that there is not a significant consolidation “pull” in this industry due to low economies of scale. The same is true for the Automotive Retail, Building Products, Trucking and Forest Products industries.

Assessing both fragmentation and economies of scale together, we have a more comprehensive tool to assess consolidation potential in Canada.  However, as we suggested earlier in this article, this is still not the complete picture.  In the coming weeks, we will expand upon the CSS to consider the impacts of both capital availability and the potential for valuation multiple arbitrage. These additional elements will provide even deeper insights into consolidation potential.

Stay tuned…

Weekly Canadian Private Market M&A Report

Announced Deals

Sun Life Assurance to Acquire PVI Sun Life Insurance

Sun Life Assurance Company of Canada, a diversified Canadian financial services company that provides savings, retirement and pension, and insurance products to individuals and groups in North America, the United Kingdom, and Asia, has agreed to acquire PVI Sun Life Insurance Company Limited, a company that offers life insurance, health insurance, wealth management, and pension products in Vietnam. No transaction terms were released.

Ritchie Bros to Acquire IronPlanet

Ritchie Bros. Auctioneers Incorporated (NYSE:RBA), the world's largest industrial auctioneer and a leading equipment distributor, has agreed to acquire IronPlanet, Incorporated, an Accel Partners, Kleiner Perkins Caufield & Byers, MAC Investment Business Unit, and Cross Creek Advisors backed business that provides online auction services in the United States and internationally. The total transaction value of the deal is estimated to be $988 million. This valuation reflects a 13x adjusted EBITDA multiple.

CanWel Building Materials to Acquire Total Forest Industries

CanWel Building Materials Group Limited (TSX:CWX), a Canadian-based distributor of building materials and home renovation products in Canada and the Western United States, has agreed to acquire Total Forest Industries Limited, a Canadian company that manufactures and supplies pressure treated wood to independent lumber dealers. No transaction terms were released.

IsoEnergy to Acquire AireSurf Networks

IsoEnergy Limited, a Canadian uranium exploration services provider, has agreed to acquire AireSurf Networks Holdings Incorporated, a Canadian development stage company that develops wireless network booster products. No transaction terms were released.

Makena Resources to Acquire Bachman Lithium

Makena Resources Incorporated (TSXV:MKN), an exploration stage company that engages in the acquisition and exploration of mineral properties in Canada, has agreed to acquire Bachman Lithium Corporation, a Canadian company that owns and operates lithium reserves. The total transaction value of the deal is estimated to be $0.1 million.

Mission Ready Services to Acquire Wild Things

Mission Ready Services Incorporated (TSXV:MRS), a Canadian company that provide cleaning, logistics, maintenance, program management, consulting, and client representation solutions worldwide, has agreed to acquire Wild Things, LLC, a Blue Chip Venture Company and Consumer Growth Partners backed company that designs and manufactures technical outerwear and gear in the United States. The total transaction value of the deal is estimated to be $6 million.

Pocket Nurse Enterprises to Acquire Eriter Creations

Pocket Nurse Enterprises, Incorporated, a U.S. based company that distributes medical supplies and equipment for education and simulation worldwide, has agreed to acquire Eriter Creations, Incorporated, a Canadian company that manufactures products for simulation for healthcare education. No transaction terms were released.

CCL Industries to Acquire Labelone

CCL Industries Incorporated (TSX:CCL.B), a Canadian specialty packaging company that manufactures and sells labels, containers, and consumer printable media products, has agreed to acquire Labelone Limited, a UK company that is engaged in designing and manufacturing bespoke labeling solutions for clinical trial, pharmaceutical, and Healthcare markets. The total transaction value of the deal is estimated to be $23 million. This valuation reflects a 5.9x adjusted EBITDA multiple.

Cara Operations to Acquire Original Joe's

Cara Operations Limited (TSX:CAO), an Ontario-based company that operates and franchises full service restaurants, has agreed to acquire a majority stake in Calgary-based Original Joe's Franchise Group Incorporated, which has 99 corporate, franchise and joint-venture restaurants. The total transaction value of the deal is estimated to be $93 million.

Intertape Polymer to Acquire Powerband Industries

Intertape Polymer Group Incorporated (TSX:ITP), a Canadian company that operates in the specialty packaging industry in North America, has agreed to acquire India-based Powerband Industries Pvt Limited, a leading manufacturer of BOPP Packaging Tapes & Cast LLDPE Stretch Films. The total transaction value of the deal is estimated to be $55 million.

Closed Deals

Supremex Acquires Bowers Envelope

Supremex Incorporated (TSX:SXP), a Canadian company that manufactures and sells envelopes and related products in North America, has acquired Bowers Envelope Company Incorporated, a U.S. based envelope producer. No transaction terms were released.

Vericlaim Canada Acquires RGM Claims Services

Vericlaim Canada Incorporated, which provides property, liability, auto, and specialty claims and adjusting services, has acquired RGM Claims Services Incorporated, a Canadian-based company that provides insurance claims settlement services. No transaction terms were released.

Crescita Therapeutics Acquires Woodland, O'Brien & Scott

Crescita Therapeutics Incorporated (TSX:CTX), a Canadian drug development company that owns topical products for treating medical conditions in dermatology and pain, has acquired INTEGA Skin Sciences Incorporated, a Canadian-based company that manufactures pharmaceuticals for the treatment and care of skin diseases and their symptoms. No transaction terms were released.

Petro Welt Technologies Acquires Trican Well Service

Petro Welt Technologies AG (XTRA:O2C), an Austrian company that provides oil field services in the Russian Federation and Kazakhstan, has acquired Trican Well Service Kazakhstan Limited, which provides oil and gas wells fracturing services. No transaction terms were released.

Paysafe Group Acquires Income Access Group

Paysafe Group Plc (LSE:PAYS), a UK based company that provides online and mobile-first payment solutions to businesses and consumers in Europe, North America, and internationally, has acquired Income Access Group, a Canadian company that develops marketing software. The total transaction value of the deal is estimated to be $40 million.

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