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Canadian Private Market Recap: Aug 12

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

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Market Update

The S&P 500, TSX Composite, and Russell 2000, each closed the week at or marginally below their respective 52-week highs, underpinning the robust economic outlook in the U.S. and Canada, including the small-cap market. Coinciding with these strong returns, the VIX hit a 52-week low this week, suggesting that investors are comfortable with these levels of growth.

According to a TransUnion report, credit card delinquency rates in Canadian oil-dependent provinces have risen nearly 15% compared to the prior year. Rising delinquency rates are typically an economic indicator that consumers may be overextending their debt levels, which could impact future GDP growth. The Canadian dollar strengthened alongside WTI Crude Oil, each hitting respective three-week highs.

Debt Markets Update

For the past several weeks, we have been publishing in the Total Debt/EBITDA row of the chart a consistent ‘n/a’. At first glance, one might skim over the lack of data and determine that there is no significance. However, as per the footnote, ‘n/a’ is recorded when there are fewer than three syndicated deal observations in the rolling 30-day bank books. Our intuitions and conversations with other experts told us that this was in large because banks have increased scrutiny before issuing loans, thus reducing the weekly syndicated deal observations.

The BMO Transaction Trends report published earlier this month provides some empirical data to support this view. The report described three very interesting data points, verbatim below, which combine to paint a picture that there has certainly been a decline in credit quality:

  1. According to Standard & Poor’s, April and May reached five-year highs for the number of amendments in the larger institutional market, totaling almost 30 in each month compared to less than 10 per month from September 2015 to March 2016. 
  2. Par amount of loans in payment default or bankruptcy has grown from $8 billion in 2013 (1.2 percent of all loans) to $40 billion in June 2016 (4.5 percent), the highest mark since 2009’s total of $57 billion.
  3. 2016 marks the first time since 2009 that distressed loans (loans trading under 80) have constituted more than 10 percent of the market.

We believe that the banks have slowed weekly leveraged loan issuances through increased scrutiny and concerns over quality.

To view the full report, click this link

Valitas Insights: Canadian Private Business Landscape

When Valitas was founded in early 2015, our team pondered some of the key strategic questions on creating an M&A advisory firm. Questions such as:

- What is Valitas' addressable target market?

- How do we determine which companies fit these parameters?

- Is this data available?

were at the forefront of each discussion.

This work surfaced a number of insights on the Canadian market that are worth sharing and discussing.

Over the coming weeks, the Valitas Insights segment will be focused on presenting a concise summary of the Canadian private business landscape. We will focus primarily on the top 25 primary industries based on the number of companies with EBITDA greater than $3 million based on our estimates. Our insights will include presenting various relevant metrics, fragmentation analysis, economies of scale insights, and which industries are the best candidates for ongoing consolidation.

Part 1: Top 25 Industries – Average EBITDA/Employee

Determining the top 25 industries in Canada by total number of companies may be a simple feat, however, does not provide truly meaningful insights. What we sought out to do, was segment the number of companies in each primary industry into three buckets by EBITDA: $3-$8 million, $8-$15 million, and greater than $15 million. The problem is that because the vast majority of Canadian companies are private, their financials are not disclosed. However, the vast majority of private companies have disclosed their employee count at one point in time.

Top 25 Primary Industries by Number of Companies > $3 million EBITDA

You may find some of the industries that made it into the top 25 quite surprising. Industries such as commodity chemicals, research and consulting services, and application software were among the greatest surprises. It is noteworthy to mention that industries such as Education Services and Healthcare Facilities include some government-owned and funded businesses. A number of the EBITDA/Employee figures too are quite striking, as they act as a proxy for profitability. The industries with the highest EBITDA/Employee figures are very capital intensive, and thus the are quite high in average profitability. Service industries are much less capital intensive and thus much lower. This might explain the clear juxtaposition between top 2 industries in terms of profitability. As you might expect, Canada has a heavy influence on resource extraction, as well as a heavy knowledge-based service economy, i.e. healthcare and education.

For the means of estimating the reference point for average EBITDA/Employee for each industry, we compiled the global public average LTM EBITDA/Employee for each primary industry. We used this as a proxy for Canadian private companies and determined the EBITDA of each private company though multiplying by employee counts accordingly, allowing us to segment as desired initially. Below are our findings:

As we worked further with this data, we gained greater insights, including the breakdown in each industry of company types i.e. public, private, operating, subsidiary, and sponsor-backed. This allowed us to calculate a fragmentation score for each industry. As we thought through the potential for consolidation in each industry, we developed a scoring system for economies of scale for each industry as well as an economies of scale scoring for each industry. We will also be looking to update the figures and discuss trends, as the chart about was created using data from the Summer of 2015. These will be discussed over the coming weeks. Stay tuned.

Announced Deals

Stantec to Acquire Edwards & Zuck

Stantec Inc. (TSX:STN), a Canadian company that provides professional consulting services in the area of infrastructure and facilities for clients in the public and private sectors globally, has agreed to acquire Edwards & Zuck, a U.S. based  engineering firm that provides engineering services, specializing in consulting. No terms of the transaction were released.

Poydras Gaming Finance to Acquire Aurora A&W Enterprises

Poydras Gaming Finance Corp. (TSXV:PYD), a slot route operator providing capital and gaming machines to casino operators primarily in Oklahoma and Texas, has agreed to acquire Aurora A&W Enterprises, LLC, an American firm that operates within the gaming industry. The total transaction value of the deal is estimated to be $4 million.

ONCAP to Acquire Tecta America

ONCAP, a Canadian private equity firm, has agreed to acquire Tecta America Corp., an Oaktree Capital Management backed business that operates as a commercial roofing contractor in the United States. The total transaction value of the deal is estimated to be $410 million.

AcuityAds Holdings to Acquire Bubble Fusion Labs

AcuityAds Holdings Inc. (TSXV:AT), a Canadian company that provides digital media solutions, has agreed to acquire Bubble Fusion Labs, Incorporated, an SV Angel, BlueRun Ventures, and The Founders Fund backed American business that provides blended interest graph technology solutions that interpret data from various public social accounts. The total transaction value of the deal is estimated to be $26 million.

Premier Diversified Holdings to Acquire Sequant Re Holdings

Premier Diversified Holdings Inc., a business that engages in the operation of medical diagnostic imaging centers in Canada and China, has agreed to acquire Sequant Re Holdings Limited, a Bermuda based reinsurer that offers reinsurance and advisory services. The total transaction value of the deal is estimated to be $0.4 million.

Ontario Steel Investment to Acquire Essar Steel Algoma

Ontario Steel Investment Limited, a Canadian company that participates in investing, rebuilding, and supporting of the steel industries in Ontario, has agreed to acquire Essar Steel Algoma Inc., a Canadian manufacturer that produces and sells steel sheet and plate products globally. The total transaction value of the deal is estimated to be $1.2 billion.

Skeena Resources to Acquire Mount Rainey Silver

Skeena Resources Limited (TSXV:SKE), a Canadian junior mining exploration company that engages in the acquisition, exploration, and development of base and precious metal properties, has agreed to acquire Mount Rainey Silver Inc., a Canadian company that operates silver mines. The total transaction value of the deal is estimated to be $4.5 million.

Caisse de dépôt et placement du Québec to Acquire Plenary Group

Caisse de dépôt et placement du Québec, a privately owned investment manager, has agreed to acquire Plenary Group Pty Limited, an Australian company that invests, sponsors, and operates public infrastructure projects in the Americas and the Asia-Pacific region. No terms of the transaction were released.

BCE to Acquire Remaining 65% Stake in Q9 Networks

Bell Canada Enterprises Inc. (TSX:BCE), a Canadian provider of wireless, wireline, Internet, and TV services to residential, business, and wholesale customers in Canada, has agreed to acquire the remaining 65% share of Q9 Networks Inc. BCE previously held a 35% stake, with the remaining 65% split among Madison Dearborn Partners, Providence Equity Partners and Ontario Teachers' Pension Plan. Q9 Networks provides outsourced data center services for supporting business-critical computing operations. The total transaction value of the deal is estimated to be $675 million.

Thunderstruck Resources to Acquire Aljen Pacific

Thunderstruck Resources Limited (TSXV:AWE), a Canadian business that acquires and explores mineral properties on the main island of Viti Levu, Fiji, has agreed to acquire Aljen Pacific Limited, a Fiji mining company that offers mineral exploration services. The total transaction value of the deal is estimated to be $0.4 million.

Closed Deals

Cascades Acquires Longhorn Paper Converting

Cascades Inc. (TSX:CAS), a Canadian manufacturer that produces, converts, and markets packaging and tissue products globally, has acquired Longhorn Paper Converting, an American manufacturer of sanitary paper products, specializing in towels, napkins or tissue paper products. No terms of the transaction were released.

Granite Partners Acquires Ecom Food Industries

Granite Partners, a Canadian mid-market private equity firm, has acquired Ecom Food Industries Corporation, a primary producer of extracts, flavors, natural antioxidants and flavor enhancers and supplies their products to multinational food and beverage companies. No terms of the transaction were released.

General Assembly Space Inc. Acquires Bitmaker Labs Inc.

General Assembly Space, Inc., a Maveron LLC, Institutional Venture, Western Technology Investment, Mousse Partners, Wellington Capital Management, Bezos Expeditions, Learn Capital, DST Global, GSV Asset Management, Raptor Holdco GP, VTF Capital, Rethink Education, and Fresco Capital backed business that provides education services in the areas of technology, business, and design through its campuses in the United States and internationally, has acquired Bitmaker Labs Inc., a Russell Square Partners Inc. Canadian tech and design career accelerator. No terms of the transaction were released.

Rodan Energy Solutions Acquires Sygration

Rodan Energy Solutions Inc., an energy services company that delivers integrated energy solutions to large consumers, businesses, utilities, distributors, and power producers in Canada, has acquired Sygration Inc., a business that provides web-based solutions and data services for the de-regulated electricity market with a specialized focus on the Ontario electricity market. No terms of the transaction were released.

Taxelco Acquires Diamond Taxicab Association of Montreal

Taxelco Inc., a XPND Capital backed business that consolidates the interests of the taxi industry in Montreal, has acquired Diamond Taxicab Association of Montreal , a taxicab service provider. No terms of the transaction were released.

GCP Applied Technologies Acquires SensoCrete

GCP Applied Technologies Inc. (NYSE:GCP), an American company that engages in the production and sale of specialty construction chemicals, specialty building materials, and packaging sealants and coatings globally, has acquired SensoCrete, Inc., a Canadian business that develops electromagnetic sensors and related software solutions for controlling and measuring the concrete manufacturing process. No terms of the transaction were released.

Provincial Aerospace Acquires CarteNav Solutions

Provincial Aerospace Limited, a Canadian aerospace service company that provides airborne maritime surveillance solutions to customers globally, has acquired CarteNav Solutions Inc., a Canadian company that develops and deploys situational awareness solutions for operational missions of military, government, and commercial customers globally. The total transaction value of the deal is estimated to be $17 million.

Tip Trailer Services Acquires Train Trailer Rentals

Tip Trailer Services Netherland B.V., a global transportation and logistics service company, has acquired Train Trailer Rentals Limited, a Canadian company that engages in renting, leasing, selling, and servicing of vans, trailers, and container chassis for the for-hire trucking and private motor carrier industry in Canada. No terms of the transaction were released.

PowerSchool Group Acquires SRB Education Solutions

PowerSchool Group LLC, a Vista Equity Partners backed business that provides online solutions, including student information systems, registration and school choice, assessment and analytics solutions, has acquired SRB Education Solutions Inc., a former Landmark Global Financial Corporation sponsored Canadian education company that provides software solutions for K-12 administration. No terms of the transaction were released.

Bizerba SE & Co. Acquires Tekno label

Bizerba SE & Co, a diversified German company that produces products and solutions related to slicing, processing, weighing, cashing, checking, commissioning and labeling, has acquired Tekno label Inc., a Canadian printing and coating company that prints pressure sensitive labels for various applications. No terms of the transaction were released.

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