Value Unleashed

 Market Update

Thirty-six Canadian M&A transactions were announced this past week. The TSX rose by 1.4% this past week, with average TEV/EBITDA multiples remaining at 10.2x EBITDA. The Canadian dollar appreciated by 0.6 cents relative to the U.S. dollar.

The spread to treasury for U.S. middle market new issue loans decreased this week by 24 basis points, aligning it within one basis point of the spread from last year.

Valitas Insights

Platform or Add-on:  How is US buyout activity shaping up for 2016? 

What trends are surfacing in an environment characterized by lofty valuations, slow organic earnings growth and ample corporate cash balances and investor “dry powder”?

Pitchbook’s recent report, US PE Breakdown 3Q 2016 reveals 2016 YTD results that do not surprise.  Investors are reaching down-market, targeting smaller, less expensive add-ons to mitigate the inflated valuations of larger, platform acquisitions.  Add-ons represented a whopping 64% of buyout activity for the first 9 months of 2016, the highest level recorded in a decade.

*to Sept 30, 2016

In addition, 46% of deals done in the first nine months of the year were less than $25 million, the highest level seen since 2009.

*to Sept 30, 2016

This private equity (PE) activity makes sense to us for several reasons.  We previously discussed the value of making frequent, smaller acquisitions as part of a “programmatic” M&A strategy.  Evidence suggests this strategy is agnostic as it relates to economic environment – that is, programmatic acquirers create relative value in good times and bad.  While the move towards add-on acquisitions doesn’t necessarily define current PE investor activity as programmatic, it is an important value-creating element of that strategy.

In addition, this add-on activity makes sense in today’s environment where PE’s compete against strategic buyers for a shrinking pool of targets, with strategics typically better positioned to justify higher valuations for large acquisitions.[i]  In pursuing add-ons to an existing platform, PE’s can take a strategic buyer perspective.  The platform company already has infrastructure and management in place, and there is the potential benefit of cost-side and distribution synergies and multiple arbitrage. Thus, PE’s are better able to compete with strategic buyers at the add-on level.

Finally, there is a clear relationship between valuation and size of target.  With valuations reaching lofty new heights, the pursuit of smaller, add-on acquisitions at lower multiples is an effective gateway to value creation.

Weekly M&A Summary

Announced

Invictus MD Strategies to Acquire AB Laboratories and AB Farms

Invictus MD Strategies Corp. (OTCPK:IVIT.F), a Canadian manufacturer and distributor of lighting solutions for the hydroponic and indoor growing industries in North America and Europe, has agreed to acquire AB Laboratories Inc. and AB Farms Inc., cannabis producers for medicinal purposes. Total transaction value is estimated to be $9.7 million and $7.5 million respectively.

SkyNet Group to Acquire Engineering Services

SkyNet Group Limited (SEHK:8176), an investment holding company that sells beauty products and provides therapy services in China, has agreed to acquire Engineering Services Inc., a developer and manufacturer of robotics and automation systems. Total transaction value is estimated to be $17.4 million.

Mag One Products to Acquire MagPower Systems

Mag One Products Inc. (DB:304), a developer of technology and manufacturing facilities to produce magnesium compounds, has agreed to acquire MagPower Systems Inc., a developer of power products for industrial, commercial, and retail markets. No transaction terms were released.

Caisse de dépôt et placement du Québec and Clearspring Capital Partners to Invest in Demers

Caisse de dépôt et placement du Québec, a privately owned investment manager, and Clearspring Capital Partners, a private equity firm, have agreed to invest in Demers, Manufacturier d'Ambulances Inc., a Westerkirk Capital and Ironbridge Equity Partners backed company that designs, manufactures, and distributes ambulances. No transaction terms were released.

VMS Rehab Systems to Acquire Interactive Health System

VMS Rehab Systems, Inc. (OTCPK:VRSY.F), a distributor of orthopedic seat cushions for relieving seating discomfort caused by a range of lower body disabilities, has agreed to acquire Interactive Health System Inc., a U.S. based company that operates in the electronic health (E-Health) segment of the health services industry. No transaction terms were released.

St Georges Platinum and Base Metals to Acquire Iceland Resources

St Georges Platinum and Base Metals Ltd. (CSE: SX), which explores and evaluates mineral properties in Canada, has agreed to acquire Iceland Resources ehf, a provider of precious metals exploration services. Total transaction value is estimated to be $0.5 million.

True Leaf Pet to Acquire OregaPet

True Leaf Pet Inc., a manufacturer and distributor of hemp-based functional dog chews, has agreed to acquire OregaPet, which manufactures medicinal products for pets. No transaction terms were released.

WPP, DISH Network, and AT&T AdWorks to Acquire INVIDI Technologies

WPP plc (LSE:WPP), a worldwide communications services provider, DISH Network L.L.C., which operates satellite television programming and technology services in the United States, and AT&T AdWorks LLC, a division of AT&T Inc. focusing on digital media, have agreed to acquire INVIDI Technologies Corporation, an  EnerTech Capital, InterWest Partners, Menlo Ventures, BDC Venture Capital, WPP Digital, Verizon Communications Inc., Asset Management Arm, GV, Verizon Ventures, and Motorola Mobility Ventures backed media solutions company, which provides television advertising and marketing solutions for cable, satellite, and IPTV service providers. No transaction terms were released.

Closed

Medicure Acquires Apicore

Medicure Inc. (TSX VENTURE:MPH), a specialty pharmaceutical company, has acquired a majority equity interest in Apicore, a pharmaceutical manufacturing business,  for $33.25 million, funded by a loan from Crown Capital Partners.

Lundin Mining Sells Tenke Fungurume to a Chinese PE frim

Lundin Mining Corporation (TSX:LUN), a Canadian mining company, has agreed to sell its indirect interest in TF Holdings Limited, a Bermuda holding company that owns an 80 percent interest in Tenke Fungurume Mining S.A., to an affiliate of BHR Partners, a Chinese private equity firm, for $1.136 billion in cash and contingent consideration of up to $51.4 million.

Olymel Acquires Pinnacle Farms

Olymel L.P., a Canadian company that slaughters, processes, and distributes pork and poultry products to retail, food service, and industrial markets internationally, has acquired Pinnacle Farms Inc., a Canadian hog producer. No transaction terms were released.

Ingeniería y Construcción Sigdo Koppers Acquires Dessau Chile Ingenieria

Ingeniería y Construcción Sigdo Koppers S.A., which provides large-scale industrial construction and erection services in South America, has acquired Dessau Chile Ingenieria S.A, a construction and engineering services provider. No transaction terms were released.

PiiComm Acquires Sibyl Groupe Conseil

PiiComm Inc., an enterprises mobility software solutions developer, has acquired Sibyl Groupe Conseil Inc., a Canadian company that offers IT consulting and software development services. No transaction terms were released.

Train Trailer Rentals Acquires Load King Trailer Rentals

Train Trailer Rentals Ltd., which provides transport equipment leasing, rental, and service solutions in Canada, has acquired Load King Trailer Rentals Ltd., a Canadian trailer rental company. No transaction terms were released.

Petrogulf Ghana Acquires Eco Atlantic (Ghana)

Petrogulf Ghana Limited, a petroleum exploration services provider, has acquired Eco Atlantic (Ghana) Limited, which offers petroleum production and exploration services. No transaction terms were released.

Angelo Investments Invests in Transpod

Angelo Investments, an Italian high-tech holding group, has invested in Transpod Inc., a Canadian developer of high speed ground transportation solutions. No transaction terms were released.

True Temper Sports Acquires VH Footwear

True Temper Sports, Inc., a Lincolnshire Management and PNC Mezzanine Capital backed U.S. manufacturer of steel and iron golf shafts, has acquired VH Footwear Inc., a Canadian producer of custom made speed and hockey boots. No transaction terms were released.

Industrial Alliance Acquires Groupe PPP

Industrial Alliance Insurance and Financial Services Inc. (TSX:IAG), a Canadian life and health insurance provider, has acquired Le Groupe Ppp Ltee, which designs, develops, and provides warranty and insurance products for all types of vehicles. No transaction terms were released.

Russell Food Equipment Merged with Hendrix

Russell Food Equipment Ltd, a Blue Point Capital Partners backed Canadian provider of food service equipment and supplies, has merged with Hendrix Hotel & Restaurant Equipment & Supplies Ltd, an Ontario-based company that operates in the same industry.

Brunswick Acquires Paynes Marine Supply

Brunswick Corporation (NYSE:BC), a U.S. company that designs, manufactures, and markets recreation products worldwide, has acquired Paynes Marine Supply Inc., which distributes and wholesales marine equipment in Canada. No transaction terms were released.