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Canadian M&A Market Recap: Week Ended Sept 30, 2016

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

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Capital Markets Update

U.S. stocks rose this week, posting the best quarter of the year after the banking sector has started to recover. Investor confidence has risen despite lingering concerns over the Fed rate, Deutsche Bank fines, the Wells Fargo sales scandal and sluggish earnings. OPEC agreed to cut its oil output for the first time since 2008 by nearly one million barrels per day, spurring a rally in energy stocks. Canada’s fiscal leeway is shrinking as demands for spending continue to mount and government revenue estimates fall.

10-year treasury yields rose as lower than original estimates of Deutsche Bank’s fine were reported. New credit issuances remain low, with less than three syndicated deals observed last week.

Valitas Insights: Canadian Private Business Landscape – Capital Markets Score

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 seventh instalment of the series, our team has synthesized the combined impact of capital availability and multiple arbitrage to score each industry on capital markets factors. 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 capital markets factors above, Valitas has developed a Capital Markets Score (CMS) to quantify the combined effects of leverage availability and multiple arbitrage described in our prior two installments. Collectively, our scoring for multiple arbitrage (MAS, see prior article here) and leverage capacity (LCS, see prior article here) answers two fundamental questions regarding consolidation potential:

  1. Benefit: Do the capital markets reward a consolidator in a given industry through multiple arbitrage?
  2. Opportunity: To what extent can companies within an industry access debt capital to finance acquisitions?

The CMS combines both of these factors into a single metric to determine the extent to which capital markets support consolidation in a given industry. It is derived by multiplying the MAS and LCS together and scaling the product from 0 to 100, with 0 representing the least consolidation potential and 100 representing the greatest consolidation potential.

The scatter plot below shows the MAS versus the LCS for the 113 industries studied.  It also shows the ranking of the top 15 industries by their CMS.  It is important to note that the MAS and LCS, and by extension the CMS, are relative scores so conclusions can only be made in relation to other industries. The scatter plot is shown in log scale and further segmented into quadrants. The quadrants are divided between the top and bottom halves by industry count for multiple arbitrage and leverage capacity respectively.

The diagram below further characterizes each quadrant.

  1. The top left, blue-shaded quadrant represents industries where multiple arbitrage occurs but has limited access to debt financing.
  2. The bottom left, blue-green-shaded quadrant contains industries with minimal (or negative) multiple arbitrage and access to debt financing.
  3. The bottom right, green-shaded quadrant represents industries that have minimal (or negative) multiple arbitrage but considerable leverage capacity. 
  4. Finally, the top right, non-shaded, quadrant shows industries with both significant multiple arbitrage and considerable access to debt financing. These are the industries where the capital markets factors are the most favorable for consolidation.

The tables below summarize the highest and lowest ranking industries by CMS.  They also break out the constituent leverage capacity (LCS) and multiple arbitrage (MAS) scores for context.  Based on the CMS, one would expect that those industries that score high would be concentrated, while those that have low CMS scores would be fragmented.  There are a few surprises…

Three industries that should be highly concentrated: Oil and Gas Exploration and Production, Diversified Metals and Mining and Application Software, have greater than Canadian 200 companies. However, many of the other top-ranking industries are concentrated as you would expect. For the most part, industries that typically made it into the top 15 scored well on both multiple arbitrage and leverage capacity to create a balanced CMS score. An interesting exception to this is Brewers which shows a high MAS with relatively low LCS.

The number of companies within industries in the bottom 15 varies dramatically. One would expect that industries on this list would be highly fragmented.  While this is generally true, there are some notable exceptions, each with less than 25 companies in Canada. These include Homebuilding, Independent Power Producers and Energy Traders, Electronic Manufacturing Services.  However, when the average size of these companies and the role of these industries in the economy are considered, these low company counts make sense.

There is wide dispersion in the CMS for Canada’s 25 largest industries. It is not surprising that industries such as Oil and Gas Exploration and Production as well as Diversified Metals and Mining have high CMS rankings as these two industries have consistently been within the top industries for consolidation potential in all analyses done thus far.  What is surprising is how fragmented these industries remain.

Having synthesized the capital markets factors into the CMS, we will integrate this analysis into previous analysis on economic fundamentals to determine those industries with the greatest overall consolidation potential in our next installment. 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

GROWMARK to Acquire UPI Energy

GROWMARK, Incorporated, an agricultural cooperative that engages in the wholesale and retail supply of agricultural products primarily in the Northeastern and Midwestern United States, and the Province of Ontario, has agreed to acquire UPI Energy LP, which retails energy and lubricant products for commercial, industrial, agricultural, and residential customers in rural Ontario. No transaction terms were released.

Mag One Products to Acquire Magnesium Technologies Recycles

Mag One Products Incorporated (DB:304), which engages in the research and development of technology and manufacturing facilities for the production of magnesium and magnesium compounds, has agreed to acquire Magnesium Technologies Recycles Incorporated, a Canadian company that recycles magnesium. No transaction terms were released.

THC Biomed Intl to Acquire Clone Shipper

THC Biomed Intl Limited (CNSX:THC), which engages in the cultivation of medical marijuana in Canada, has agreed to acquire Clone Shipper LLC, a U.S. company that manufactures plant shipping containers and components. Transaction value is estimated to be $1 million.

Magna Closures to Acquire BÖCO

Magna Closures Incorporated, a Canadian company that manufactures and supplies electro-mechanical systems and electronic components for the automotive industry worldwide, has agreed to acquire BÖCO Böddecker & Co. GmbH & Co. KG, a German company that develops and manufactures latching and closing systems for automobile manufacturers worldwide. No transaction terms were released.

Pacific Quorum Properties to Acquire Touchstone Property Management

Pacific Quorum Properties Incorporated, which offers property management services, has agreed to acquire Touchstone Property Management Limited, a Canadian property management services company. No transaction terms were released.

Rogers to Acquire Tillsonburg Broadcasting Company

Rogers Media Incorporated, a media company that engages in television and radio broadcasting, publishing, digital, and sports entertainment, has agreed to acquire Tillsonburg Broadcasting Company Limited, a Canadian-based company that operates radio broadcasting stations, including CJDL-FM 107.3 and CKOT-FM 101.3. No transaction terms were released.

Prime Meridian Resources to Acquire African Projects and Ventures

Prime Meridian Resources Corporation (DB:DYD1), a Canadian company that engages in the acquisition, exploration, and evaluation of mineral property interests in North America, has agreed to acquire African Projects and Ventures (Pty) Limited, which produces and trades guar beans in South Africa. No transaction terms were released.

Closed Deals

Pfaff Automotive Partners Acquires Harley-Davidson

Pfaff Automotive Partners, a leading Canadian retailer of premium automotive brands, has acquired Davies Harley-Davidson, a Harley-Davidson dealer located in Richmond Hill, Ontario. No transaction terms were released.

Travelodge Barrie on Bayfield Acquired

Travelodge Barrie on Bayfield, a Canadian hotel that offers boarding and lodging services, was sold for $8.7 million. No buyer details were released.

Lussier Dale Parizeau Acquires Riverin Girard & Associés

Lussier Dale Parizeau Incorporated, which provides insurance brokerage services to individuals, businesses, and professional groups, has acquired Riverin Girard & Associés Incorporated, which offers insurance brokerage services. No transaction terms were released.

791 Technologies Acquires Tillchecker

791 Technologies Limited, a Canadian company that develops platforms, utilities, and applications, has acquired Tillchecker, LLC, which operates a communal grocery price comparison website. No transaction terms were released.

Peugeot and MacKinnon, Bennett & Company Acquire Communauto

Peugeot S.A. (ENXTPA:UG), a French company that manufactures and sells cars internationally, and MacKinnon, Bennett & Company Incorporated, Investment Arm, an investment firm specializing in renewable energy, infrastructure, enabling technology, and energy efficiency sectors, have acquired Communauto incorporated, which provides self-service car sharing services in North America. No transaction terms were released.

Roark Capital Group Acquires American Dental Group

Roark Capital Group, a private equity firm, has acquired American Dental Group, Incorporated, which provides dental care services in the United States. No transaction terms were released.

VelocityEHS Acquires e3 Solutions

VelocityEHS, a U.S. company that provides cloud-based chemical and safety data sheet management tools, has acquired e3 Solutions Incorporated, a Canadian company that designs and implements enterprise carbon management software for organizations to measure, monitor, verify, and report their greenhouse gas emissions. No transaction terms were released.

Ole Media Management Acquires Compact Media Group

Ole Media Management, L.P., a Canadian company that provides music publishing services, has acquired Compact Media Group, a UK-based company that provides audio-visual IP rights management and administration services to production and distribution companies. No transaction terms were released.

Four Seasons Toronto Site Acquired

Four Seasons Hotels Limited, Toronto, Canada, which owns and operates a luxury hotel, was acquired for $225 million. No buyer details were released.

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