Value Unleashed

Market Update

Major North American equity indices rose last week as global central banks appeased investor fears about the possible end to accommodative monetary policy. The OECD recently lowered its global growth forecast by 0.1 point for both this year and next to 2.9% and 3.2% respectively. The report also slashed its growth estimates for the Canadian economy to 1.2% and 2.1% for 2016 and 2017, respectively. Alternative lenders in Canada have doubled their share of the residential mortgage market in the past decade, increasing housing sector risks since they operate with limited federal government oversight. The Bank for International Settlements has stated that Canada has one of the highest credit-to-GDP ratios in the developed world and that the higher levels pose a risk to Canada’s banking system.

Valitas Insights: Canadian Private Business Landscape Series – Multiple Arbitrage

The Valitas Canadian Private Business Landscape series is a comprehensive analysis of M&A potential in 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, capital markets factors, and a discussion of which industries are the best candidates for ongoing consolidation.

In this sixth instalment of the series, our team has added an additional layer of analysis by assessing the fourth key factor, multiple arbitrage. The aim of this analysis is to further enhance our assessment of which industries have the greatest consolidation potential. Our progression of tests and analyses is summarized below:

To address the fourth factor noted above, Valitas has developed a Multiple Arbitrage Score (MAS) to quantify the extent to which larger companies receive higher valuation multiples compared to smaller companies. The MAS for each industry is the percentage difference in revenue multiples between the top half of companies by revenue versus the bottom half.

The sample used in performing this analysis is all North American public companies with EBITDA greater than zero, as well as all M&A transactions where the target’s headquarters are in North America where revenue multiples are disclosed.  The size of the sample was limited because of the lack of information available on private market M&A transactions.  While EBITDA multiples are more useful than revenue multiples, we based our analysis on revenue multiples because the sample size is much larger. Approximately 2% disclose EBITDA multiples and 5% disclose revenue multiples. This resulted in a total sample size of over 7,800 companies (an average of about 50 per industry) with revenue multiples versus only about 5,000 with EBITDA multiples.

The conventional wisdom in corporate finance is that larger companies generally enjoy a lower cost of capital and hence attain higher multiples in both the M&A and public equity markets.  While our analysis supports this conclusion, there are some notable variations between industries, including many industries where the opposite may hold true.  We ranked the industries from one to 115 based on their MAS and summarized our findings in the tables below. The higher the rank, the greater the prevalence of multiple arbitrage.  We also included the Leverage Capacity Score (LCS) described in the prior instalment of this series.  Click here to view.

The fundamental purpose of the above analysis is to assess the extent to which the capital markets generally reward or punish companies for their relative size within certain industries. In some industries more than others, size has a significant impact on valuations. The greater the premium that large companies within an industry attain, the greater the opportunity for multiple arbitrage. This arbitrage opportunity is realized through larger companies acquiring smaller companies, resulting in value-accretive deals.

For instance, we estimate that the Canadian Construction Materials industry has 156 companies with over $3 million EBITDA. The typical valuation premium for the top half of this industry is greater than 150% versus the bottom half. Given the number of potential targets, there could be a compelling value creation opportunity for a larger consolidator to buy smaller companies at about 1 times revenue, while the “market” gives the larger consolidator a valuation of greater than 2.5 times on average, or a bump of about 150% on the valuation paid.

Having analyzed each capital markets factor (MAS – as described herein, and LCS – Leverage Capacity Score) individually, we will examine their combined effects in our next installment. To complete the analysis, these capital markets factors will be re-examined in the context of the economic fundamentals analysis performed in our prior installments. We expect this comprehensive multi-factor analysis will reveal some unique insights on where the greatest consolidation potential exists in Canada. We will then dig deeper into specific industries.

Stay tuned…

Weekly Canadian Private Market M&A Report

Announced Deals

Unilever to Acquire Seventh Generation

Unilever PLC (LSE:ULVR), a UK-based company that operates in the fast-moving consumer goods market internationally, through personal care, foods, refreshment, and home care segments, has agreed to acquire Seventh Generation Incorporated, a Schooner Capital, NB Alternatives Advisers, Catamount Ventures Management, Renewal Partners, Generation Investment Management, Mindfull Investors, ACE & Company SA, Palomino Capital Corporation, Kapor Capital and Renewal2 Management Company backed business that manufactures plant-based solutions for homes and families in the United States and internationally. No transaction terms were released.

Carl Data Solutions to Acquire Stratocom Solutions

Carl Data Solutions Incorporated (DB:7C5), a Canadian company that offers big-data-as-a-service-based enterprise applications for collection, storage, and analytics for data centric companies, has agreed to acquire Stratocom Solutions Corporation, a Canadian company that provides an automated airborne data collection system to read and process data from utility meters. Transaction value is estimated to be $2 million.

DLA Piper to Acquire Dimock Stratton

DLA Piper (Canada) LLP, which offers legal advisory services, has agreed to acquire Dimock Stratton LLP, a Canadian intellectual property firm. No transaction terms were released.

Kontrol Energy to Acquire Log-One

Kontrol Energy Corporation (CNSX:KNR), a Canadian company that provides energy saving technologies, has agreed to acquire Log-One Limited, which designs, manufactures, and markets green thermostats/energy management systems for building owners and property managers. Transaction value is estimated to be $1 million.

Cannabis Care to Acquire Mettrum

Cannabis Care Canada Incorporated, which produces cannabis marijuana, has agreed to acquire Mettrum (Bennett North) Limited, a Canadian company that produces dried cannabis and cannabis extracts for medical purposes. Transaction value is estimated to be $7 million.

Aikins MacAulay & Thorvaldson to Acquire MacPherson Leslie & Tyerman

Aikins MacAulay & Thorvaldson LLP, a Canadian company that provides legal services, has agreed to acquire MacPherson Leslie & Tyerman LLP, a Canadian legal advisor. No transaction terms were released.

Cineplex Starburst to Acquire Tricorp Amusements

Cineplex Starburst Incorporated, a Canadian company that distributes amusement and vending equipment, has agreed to acquire Tricorp Amusements, Incorporated, which operates as an amusement game operator in the U.S.. No transaction terms were released.

Energtek to Acquire HOP Energy

Energtek, Incorporated (OTCPK:EGTK), which provides natural gas delivery solutions based on mobile pipe-less technologies and products, has agreed to acquire HOP Energy, LLC, a Longroad Asset Management backed U.S. full-service energy company that provides residential and commercial energy services throughout the Northeast. Transaction value is estimated to be $86 million.

Morumbi Resources to Acquire American Pacific Honduras

Morumbi Resources Incorporated (TSXV:MOC), a Canadian company that explores for and evaluates mineral properties in Papua New Guinea, has agreed to acquire American Pacific Honduras S.A. de C.V., which owns and operates zinc, lead and silver mines. Transaction value is estimated to be $0.65 million.

Centric Health Corporation to Acquire CareRx Enterprises

Centric Health Corporation (TSX:CHH), which provides healthcare services to its patients and customers in Canada, has agreed to acquire CareRx Enterprises Limited, which provides pharmacy services for care facilities and retirement homes, as well as home nursing in British Columbia. Transaction value is estimated to be $12 million.

HeadsUp Entertainment to Acquire Fanlogic

HeadsUp Entertainment International Incorporated (OTCPK:HDUP), which offers the development, production, marketing, and licensing of televised programming based on poker and other entertainment themes, has agreed to acquire Fanlogic LLC, a Daily Fantasy Sports and Social Gamification company. No transaction terms were released.

Closed Deals

A.R. Medicom Acquires Ocean Pacific Med Tec

A.R. Medicom, Incorporated, which manufactures and distributes infection control products, has acquired Ocean Pacific Med Tec Limited, a Canadian company that manufactures and sells medical examination gloves for health care and scientific professionals. No transaction terms were released.

Livingston Group Acquires Affiliated Agents En Douanes Limitée

Livingston Group, which provides customs brokerage, freight forwarding, and trade compliance services internationally, has acquired Affiliated Agents En Douanes Limitée, which operates as freight forwarders and brokers in Canada. No transaction terms were released.

Caisse de dépôt et placement du Québec and NAMAKOR Holdings Acquire GGI International

Caisse de dépôt et placement du Québec, a privately owned investment manager, and NAMAKOR Holdings which provide funding solution to SME owners and managers, have acquired GGI International, Incorporated, which designs, engineers, and manufactures custom human machine interface technologies. No transaction terms were released.

Seven Generations Energy Acquires Steelhead LNG

Seven Generations Energy Limited (TSX:VII), an independent petroleum company that focuses on the acquisition, exploration, development, and production of oil and natural gas properties in western Canada, has acquired Steelhead LNG Corporation, a Azimuth Capital Management backed energy company that focuses on the development of liquefied natural gas projects in British Columbia. No transaction terms were released.

Groupe Deschênes Acquires Ideal Supply

Groupe Deschênes Incorporated, which operates as a distributor-wholesaler of heating, ventilation, air conditioning, and refrigeration (HVAC & R) products and accessories, has acquired Ideal Supply Company Limited, a Canadian company that distributes auto parts, electrical and industrial products, safety supplies, and clean energy products. No transaction terms were released.

Pulsus Group Acquires Open Access Journals

Pulsus Group Incorporated, which publishes peer-reviewed medical journals for associations, societies, and universities, has acquired Open Access Journals, a UK company that develops a platform that provides free access to scientific literature for dissemination of scientific updates, and offers source of reference and retrieval to scientists, researchers, academics and students. No transaction terms were released.

Eleven Biotherapeutics Acquires Viventia Bio 

Eleven Biotherapeutics, Incorporated (NasdaqGM:EBIO), a biopharmaceutical company that engages in the discovery and development of protein therapeutics to treat eye diseases primarily in the United States, has acquired Viventia Bio Incorporated, which designs, develops, engineers, and commercializes protein therapeutic technology to identify and address patients with cancers. Transaction value is estimated to be $66 million.

The Boyd Group Acquires Dumores Collision

The Boyd Group, Incorporated, a Boyd Group Income Fund backed business that owns and operates collision repair centers, has acquired Dumores Collision Limited, which provides collision repair services in the Burnaby and New Westminster area. No transaction terms were released.