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Canadian Private Market Recap: July 8

  • Posted By: Louis Goldberg and Paris Aden

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Market Update

Stocks edged higher for the second week straight, regaining all post-Brexit losses. The S&P 500 closed Friday just below its all-time high. The U.S. Fed meeting this week eluded to gradually raising short-term interest rates. Friday’s U.S. jobs report exceeded expectations, creating 287,000 jobs in June. Unemployment rate, however, rose to 4.9% as more people entered the workforce.

Canada’s job market weakened in June as employment numbers sharply missed expectations. Canadian payrolls for the quarter were the worst in two years. As the smoke settles in Fort McMurray, insurers are estimating that the losses incurred will be the costliest in Canadian history, at $3.58 billion.

Middle market new credit issuance has decelerated over the past month, as increased scrutiny over lending terms has reached the mid-market. The data received by the bank books of syndicated deals had less than three total deals over a 30-day rolling period; middle market new credit issuance was essentially inactive over this time period.

Liquidity underpinning future M&A activity remains rampant, as corporate cash balances for the equity index constituents as of the end of June were approximately $7.5 trillion, a slight decrease from the $7.6 trillion one year earlier.

Valitas Insights: Mid-Market Shareholder Liquidity Options Continue to Expand

It’s not news to most M&A market observers that there is more than US$2 trillion of liquidity available to acquire privately-owned businesses:

a) More than US$500 billion of committed private equity buyout capital, most of which has a time limit within which it must either be deployed or returned to investors;

b) While credit markets have slowed significantly, particularly over the last few weeks, private equity buyouts are typically funded with 50-60% debt.  This brings total private equity purchasing power to more than US$1 trillion; and

c) There is approximately $1.5 trillion in cash on balance sheets of non-financial corporations.

These dollar values have been very high for several years now.  However, increasing competition for private companies at reasonable valuations combined with an explosion of private equity investment talent has driven a proliferation of mid-market private equity funds that have pursued several angles to compete in an ever more crowded market.  The most common strategies include:

  1. Focused on smaller companies;
  2. Narrowing domain focus in industry niches where the funds can deliver unique skills, relationships and strategic insights; and
  3. Deal structuring innovations and situational expertise to address varying shareholder situations and provide a continuum of liquidity options to private company shareholders.

We would like to expand further on #3 above.

While mezzanine financing is not new to the mid-market, particularly in the U.S., until recently there were limited options available to Canadian mid-sized companies seeking junior capital or minority equity investors.  This is changing quickly.  Some notable developments include:

a) New Heritage has developed “The Private IPO®” and other structured equity alternatives, which are geared to situations where a minority equity recapitalization or other non-control equity is an attractive solution;

b) Alaris Royalty Corp. moved into the “small cap” market about 9 months ago when they hired Gregg Delcourt to lead an effort to invest in companies with as little as $2 million cash flow, versus their previous threshold of approximately $10 million.  Since its inception, Alaris has invested approximately $850 million of non-control equity in more than 20 North American companies; and

c) Huron Capital Partners has recently launched its “Flex Equity Strategy” that focuses on non-control equity for the middle market.

This is by no means an exhaustive list.  For business owners that are seeking liquidity alternatives beyond (a) going to the bank to leverage their balance sheet to pay a dividend, or (b) selling control of the business to a buyout fund, there are a wide array of options available. 

No doubt, it is a great time to be a business owner seeking liquidity.

Announced Deals

Gran Tierra Energy to Acquire PetroLatina Energy

Gran Tierra Energy, an independent international energy company focused on oil and natural gas exploration and production in Colombia, has agreed to acquire PetroLatina Energy, a U.K.-based exploration and production company with assets in Colombia. The transaction was valued at $525 million USD. Gary Guidry, Gran Tierra’s President and CEO stated: “The combination of Gran Tierra’s strong, positive cash-flowing asset base and PetroLatina’s attractive portfolio of development opportunities will create a premier Colombia-focused exploration and production company.”

Thomas Bravo to Acquire Trader Corporation

Thomas Bravo, a U.S.-based private equity firm, has agreed to acquire Trader Corporation, an owner of online automobile marketplaces, including autoTRADER.com, and digital advertising tool provider to automotive dealers. The transaction value was approximately $1.57 billion. The deal is expected to close in the fourth quarter.

Foundation Building Materials to Acquire Superior Plus Corporation’s CPD Business

Foundation Building Materials, a leading North American distributor of building materials, has agreed to acquire Superior Plus Corporation’s Construction Products Distribution business, a speciality construction product distributor. The transaction value is excepted to be $420 million, which implies an 8x EBITDA multiple. Luc Desjardins, President and CEO of Superior Plus stated: “With a strong balance sheet we will pursue accretive acquisitions, expansions of existing footprints as well as organic growth while maintaining our continuing focus on best in class operations and customer service.

Closed Deals

GFL Environmental Inc. Acquires Envirotec Services

GFL Environmental Inc., a diversified environmental services company based in Vaughan, Ontario, has acquired Envirotec Services Inc, a provider of waste management services in Saskatchewan. No financial terms of the transaction were disclosed. GFL’s Founder and CEO Patrick Dovigi stated: “GFL expects to leverage Envirotec’s highly skilled workforce and strong management team across its liquid waste operations.”

Arlon Group Acquires Idaho Pacific Corporation

Arlon Group, a U.S. food and agriculture investment firm has acquired Idago Pacific Corporation, a Novacap portfolio company, specializing in dehydrated potato products. Financial terms were not disclosed. Antoine Casimir, Vice-President at Novacap stated: “The transaction with Arlon will allow IPH to take its business to the next level in the North-American market.”

Convergint Technologies Acquires TACanada

Convergint Technologies, a company that designs, installs and services integrated building systems has acquired Thermo Automation Canada, a producer of integrated heating, cooling, access control, ventilation, security and lighting systems. No financial terms of the transactions were released. Executive Chairman and Co-Founder of Convergint Technologies stated: “The acquisition of TACanada is key to reinforcing our customer service capabilities for integrated buildings systems in Ontario and across Canada.”

Firethorn Acquires Canadian Heating Products and Montigo Del Ray Corporation

Firethorn Capital Partners, a CAI fund serving accredited individual investors, family officer and smaller institutional investors in Canada and the US has acquired Canadian Heating Products Inc. and Montigo Del Ray Corp, a manufacturer of residential and commercial gas fireplaces. No financial terms of the transaction were disclosed. Curtis Johannson, Partner at Firethorn stated: “We are excited for the opportunity to work with […] the CHP team to continue the growth of the business across North America.”

Yellow Point Equity Partners Acquires Foley’s Candies

Yellow Point Equity Partners, a Canadian PE firm investing in outstanding management teams of later-stage growth companies based primarily in Western Canada, has acquired Foley’s Candies Ltd., a Vancouver-based maker of fine quality chocolate and confectionary products. No financial terms were released. Managing Partner of Yellow Point, Brian Begert stated: “Foley’s is an excellent fit as the second investment in Yellow Point’s fourth fund, which had its final close in late 2015. We are continuing to seek companies which have solid market positions, strong management teams and interesting growth prospects.”

 

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