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Canadian M&A Market Recap: Week Ended Sept 9, 2016

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

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Capital Markets Update

Major U.S. and Canadian indices fell on Friday, as the Fed weighs its decision on interest rates. Volatility was remarkably high as evidenced by a greater than 50% surge in the VIX this past week. The Bank of Canada announced on Wednesday that they will be holding overnight rates at 0.5%, due to weaker exports, unemployment rate instability, and weaker oil output. According to the Canadian Association of Oilwell Drilling Contractors, 2016 will close as the worst year for the oil and gas industry since recordkeeping began in 1977. Thus far, only 140 rigs have been put to work during 2016 in Canada.

Meanwhile, credit markets remain sluggish.

Mid-market M&A Indicator: July 2016 – Strong Second Half Ahead?

Consistent with the June reading, the July M&A Conditions Index (MACI) composite signals an expansionary environment and leading indicators are strong. Leads remain firmly in expansionary territory, while LOI volume climbed for the third consecutive month, entering expansionary levels. The strength of these leading indicators should lead to a robust M&A environment in the second half of 2016.

Mergers & Acquisitions Magazine has been publishing the M&A Conditions Index (MACI) since the fall of 2013 to gauge general M&A market conditions. For more information on the various indicators and the methodology, click here.

Valitas Insights: Canadian Private Business Landscape Series – Debt Availability

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 fifth instalment of the series, our team has added an additional layer of analysis by assessing the third key factor, capital availability. The aim of this analysis is to further enhance our assessment of which industries have the greatest consolidation. Our progression of tests and analyses is summarized below:

To answer the third stage of analysis, Valitas has developed a Leverage Capacity Score (LCS) to quantify the extent to which debt capital is available to fuel consolidation. The LCS is based on the median 10-year debt/total enterprise value (TEV) ratio for each industry.  The rationale for such a long-term median is to present mid-cycle conditions. If an industry as a whole has greater leverage, it likely has greater ongoing access to debt capital. The converse is also true, where the LCS is low, accessing debt is comparatively difficult.

We ranked the industries from one to 115 based on their LCS.  The higher the rank, the greater the leverage capacity.  The charts below illustrate the top and bottom ranked industries for leverage capacity and the leverage statistics for Canada’s largest industries.  We also included the Consolidation Spectrum Score (CSS) described in the prior instalment of this series.  Click here to view.

 

If an industry has strong consolidation fundamentals – clear benefits to scale plus ample opportunity to consolidate – and there is easy access to debt capital, then that industry is a prime candidate for consolidation. In the chart below, the bubble size represents the relative leverage capacity. The blue bubbles represent the 15 industries with the highest Consolidation Spectrum Scores, while the grey bubbles represent the rest. The ranking of the 15 industries with the greatest leverage capacity are shown in the chart.

It is no surprise that each industry in the top 15 is relatively capital intensive. More useful insights are revealed once we layer this analysis onto the CSS, which we discussed in last week’s article.  For instance, our publishing industry universe is relatively fragmented with approximately 118 businesses and the industry clearly benefits from economies of scale. In addition, it has the 12th highest Leverage Capacity Score. This combination of factors suggests that there is an opportunity for a leading consolidator with a strong balance sheet and stable cash flows to consolidate this industry. 

As outlined at the outset of this article, there are two distinct driving forces, each with two levers:

  1. Economic Fundamentals: The combination of both (a) benefits of scale, and (b) consolidation opportunities in a given industry, and
  2. Capital Markets Context: The combination of both (a) ample capital available to fund consolidation, and (b) multiple arbitrage in the capital markets such that larger companies receive higher valuation multiples than smaller ones.

Our indicator of economic fundamentals for consolidation is the CSS. The Capital Markets Context score (CMC), allows us to draw conclusions on both the financial capacity to consolidate and the value recognized in the capital markets for such consolidation.  In other words, is there leverage capacity to execute a rigorous acquisition program, and how will the capital markets react? It is the combination of the CSS and the CMC that will allow us to truly gauge which industries have the greatest consolidation potential.

The LCS alone is a poor indicator of consolidation potential if the economic fundamentals are absent. For instance, the Multi-Utilities industry has the second highest LCS and a very low CSS because of its concentration. The access to debt capital for this industry will certainly drive consolidation, but consolidation of this industry has run its course for the most part – there’s not much left to be done.

The other constituent of the CMC score will be discussed next week.  We will assess the extent to which the capital markets generally reward or punish companies within certain industries relative to their peers due to their size. In some industries more than others, size has a significant impact on both valuations and cost of capital.  The CMC will combine this factor with the LCS. Once we have completed the capital markets picture with the CMS, we will compile both the economic fundamentals (CSS) and capital markets factors (CMC) to create a composite consolidation score. We will then dive deeper into specific industries.

Stay tuned…

Weekly Canadian Private Market M&A Report

Announced Deals

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 Powerband Industries Limited, a leading Indian manufacturer of BOPP Packaging Tapes and Cast LLDPE Stretch Films. Transaction value is estimated to be $55 million.

Intel to Acquire Movidius

Intel Corporation (NasdaqGS:INTC), a U.S. company that designs, manufactures, and sells integrated digital technology platforms worldwide, has agreed to acquire Movidius, Inc., an Arch Venture Partners, Esprit Capital Partners, Celtic House Venture Partners, Dublin Business Innovation Centre, Investment Arm, Emertec Gestion, Enterprise Ireland, Investment Arm, Enterprise Equity, Western Investment Fund, Atlantic Bridge Capital, Capital-E NV, Robert Bosch Venture Capital, WestSummit Capital, and Summit Bridge Capital backed business that develops and markets vision processing solutions. No transaction terms were released.

Asmodée Editions to Acquire F2Z Entertainment

Asmodée Editions, a Eurazeo backed business that publishes and distributes games and collectable card games in France, has agreed to acquire F2Z Entertainment Incorporated, a Canadian company that owns games brands including Filosofia, Z-Man Games, and Pretzel Games. No transaction terms were released.

Tuangru to Acquire No Limits Software

Tuangru incorporated, a Canadian company that owns and operates an online marketplace to source new and disruptive hardware and software products, has agreed to acquire No Limits Software, Incorporated, a U.S. based business that develops and offers data center management solutions, including asset management, capacity planning, and power and environmental monitoring. No transaction terms were released.

Winston Gold Mining to Acquire Goldridge

Winston Gold Mining Corporation (CNSX:WGC), an exploration stage company that engages in the acquisition, exploration, development, and operation of mineral properties, has agreed to acquire Goldridge Holdings Limited, a British Columbia based company that owns active gold mines. Transaction value is estimated to be $8.5 million.

H.I.G. Capital to Acquire Dominion Colour

H.I.G. Capital, LLC, a U.S. private equity and venture capital firm, has agreed to acquire Dominion Colour Corporation, a Canadian company that develops, manufactures, and supplies inorganic and organic colour pigments, pigment preparations, and dispersions to customers in plastics, coatings, printing ink, and paper industries worldwide. No transaction terms were released.

Clairvest Group and MAG Aerospace to Acquire Discovery Air Fire Service

Clairvest Group Incorporated (TSX:CVG), a Canadian private equity firm, and MAG Aerospace Corporation, a U.S. company that provides airborne intelligence, surveillance, and reconnaissance services for federal, global, commercial, and law enforcement customers around the world, have agreed to acquire Discovery Air Fire Services Incorporated, a Canadian company that provides forest fire detection, aerial infrared detection, birddog, and aerial transportation services for the Ontario Ministry of Natural Resources. Transaction value is estimated to be $15 million.

MTY Food Group to Acquire Bf Acquisition Holdings

MTY Food Group Incorporated (TSX:MTY), a Canadian company that franchises and operates quick-service restaurants (QSR) in Canada, has agreed to acquire Bf Acquisition Holdings, Llc, a U.S. company that specializes in Mexican food. Transaction value is estimated to be $35 million.

Closed Deals

Nexom Acquires Blue Water Technologies

Nexom Incorporated, an XPV Water Partners backed Canadian manufacturer of waste water treatment technologies for consulting engineers, municipalities, and industrial clients, has acquired Blue Water Technologies, Incorporated, a U.S. company that develops and manufactures water treatment technologies. No transaction terms were released.

Doctor's Associates Inc. (d.b.a. SUBWAY) Acquires Avanti Commerce

Doctor's Associates Incorporated, which does business as SUBWAY and owns and operates a chain of sandwich restaurants in the United States and internationally, has acquired Avanti Commerce Incorporated, a Canadian company that provides online ordering solutions for restaurants. No transaction terms were released.

Computershare Canada Acquires RicePoint Administration

Computershare Canada Incorporated, which provides stock transfer services, has acquired RicePoint Administration Incorporated, a Canadian company that provides legal settlement services. No transaction terms were released.

McKinsey & Company Acquires PriceMetrix

McKinsey & Company, Incorporated, which provides management consulting services to businesses, governments, non-governmental organizations, and not-for-profits in the United States and internationally, has acquired PriceMetrix, Incorporated, a Canadian company that develops software products for retail wealth management firms in North America. No transaction terms were released.

Ross Video Acquires Abekas

Ross Video Limited, which designs, manufactures, markets, and supports products that are used in broadcast, distribution, live event, and production applications in Canada and internationally, has acquired Abekas, Incorporated, a California-headquartered manufacturer of production servers, delay machines, effects systems and editing kits. No transaction terms were released

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