Value Unleashed

Weekly Canadian M&A Report – Week ended November 4^th, 2016

Market Update

Thirty Canadian M&A transactions were announced this past week. The TSX 300 and S&P 500 fell, while the TSX slightly underperformed the S&P 500 by 0.1% on a USD basis. The Canadian dollar depreciated relative to the U.S. dollar by 0.14 cents.

New issue clearing yields for loans less than $50 million in value have been rising for the past several weeks, indicating strengthening returns for debt issuers. In addition, the growing spread to Treasury implies greater risk premiums for new issue loans.

Valitas Insights:  Large deals, high valuations…Are current M&A transactions creating value? 

“Larger corporate acquisitions buttress deal value”.  This is the headline in PitchBook’s recently released Global Q3 2016 M&A Report.  While the report notes that deal count dropped off considerably in the third quarter, average deal value continued to increase (up 42% over Q1) as acquirers, armed with excess cash and highly valued stock currency, bid up valuations on a decreasing pool of quality targets.

So does this acquisition activity translate into value?  A study by S&P Global, reported in a recent Association for Corporate Growth webinar, provides some answers for acquirers and investors.  Study authors compared M&A transaction attributes to shareholder returns, and acquirers against their industry peers.  Our takeaway: we have good reason to be pessimistic, as the authors identified factors relating to poor acquisition outcomes similar to what we are witnessing in the current environment.

These include:

1) large acquisition size relative to acquirer market capitalization (larger targets related to worse outcomes)

2) % of stock consideration paid (higher percentage stock consideration related to worse outcomes)

3) excess cash on balance sheet

In addition, acquirers expecting “synergies” to justify high valuations were typically disappointed, as those synergistic cost savings often proved elusive. 

These findings do not bode well for the current M&A environment.  Assuming a more positive lens, however, the authors identified that successful acquirers were most often serial acquirers that gained deal and integration experience doing frequent transactions rather than one-off, large acquisitions.  This is consistent with McKinsey’s findings in its article, “Taking a Longer-Term Look at M&A Value Creation”.

The McKinsey article concluded that companies engaging in a “programmatic approach” to M&A generated excess returns relative to their peers, including those focused on organic growth.  In contrast, those companies engaging in a large deal (and by necessity, less frequent) approach to M&A generated negative excess returns. 

The programmatic strategy consists of making ongoing acquisitions that, in aggregate, comprise a material level of investment for the company. While this type of high-volume growth strategy requires management capability, evidence supports the value of creating an infrastructure to manage a focused “programmatic” or serial acquisition approach to M&A. 

Weekly M&A Deal Summary

Announced

Harvest One Capital to acquire United Greeneries Holdings and Satipharm AG

Harvest One Capital Incorporated, a Canadian capital pool company, has agreed to acquire United Greeneries Holdings Limited and Satipharm AG, which are subsidiaries of medical cannabis company MMJ PhytoTech Limited (ASX:MMJ). No transaction terms were released.

NAPEC to Acquire PCT Contracting

NAPEC Incorporated (TSX:NPC), which through its subsidiaries, builds and maintains electrical transmission and distribution lines, power houses, and substations for the public utility and heavy industrial markets in North America, has agreed to acquire PCT Contracting LLC, a U.S. based company that provides installation, maintenance, and repair services to natural gas utilities. Total transaction value is estimated to be $44.2 million, reflecting a 5 times EBITDA multiple.

Ainsworth to Acquire Airtron Canada

Ainsworth, Incorporated, which provides electrical, HVAC, information technology, mechanical, technical, and maintenance services worldwide, has agreed to acquire Airtron Canada, a national provider of HVAC, Building Automation Systems and Energy Services for Canadian businesses.  Total transaction value is estimated to be $19.5 million.

CI Financial to Acquire Grant Samuel Funds Management

CI Financial Corporation (TSX:CIX), a publicly owned asset management holding company, has agreed to acquire Grant Samuel Funds Management Pty Limited, an Australian asset management company. No transaction terms were released.

Tamarack Valley Energy to Acquire Spur Resources

Tamarack Valley Energy Limited (TSX:TVE), which engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the Western Canadian sedimentary basin, has agreed to acquire Spur Resources Limited, a PFM Capital, Longbow Capital, 32 Degrees Capital , and Priviti Capital backed business that produces oil and natural gas in Western Canada. Total transaction value is estimated to be $388.4 million.

Founders Advantage Capital to Acquire CLUB16

Founders Advantage Capital Corporation (TSXV:FCF), a Canadian company that makes structured investments in private companies, has agreed to acquire CLUB16 LP, which operates fitness centers under Club 16 Trevor Linden Fitness Clubs and She's FIT! Health Clubs brands. Total transaction value is estimated to be $20 million, reflecting a 6.5x EBITDA multiple.

Liberty Leaf Holdings to Acquire Cannabis Botanical Group

Liberty Leaf Holdings Limited (CNSX:WER), which focuses on the medicinal and recreational cannabis business, has agreed to acquire Cannabis Botanical Group, a U.S. based company that produces medicinal and recreational cannabis. No transaction terms were released.

Bedrock Industries Group to Acquire U.S. Steel Canada

Bedrock Industries Group LLC, a U.S. based private equity firm specializing in investments in the metals and mining sector, has agreed to acquire U.S. Steel Canada Incorporated, a manufacturer of steel products. No transaction terms were released.

Vital Images to Acquire Karos Health

Vital Images, Incorporated, which provides visualization and image analysis solutions for use by medical professionals in clinical analysis and therapy planning in the United States and internationally, has agreed to acquire Karos Health Incorporated, an Ontario Centres of Excellence and MaRs Discovery District backed business that provides standards-based clinical imaging exchange and cross-enterprise workflow and diagnostic imaging solutions. No transaction terms were released.

Nobelium Tech to Acquire VIZIYA

Nobelium Tech Corporation (TSXV:NBL.P), a Canadian capital pool company, has agreed to acquire VIZIYA Corporation, a developer of enterprise asset management (EAM) software solutions to enhance enterprise resource planning (ERP) based asset maintenance systems. Total transaction value is estimated to be $45.6 million.

NextEra Energy to Acquire Texas Transmission

NextEra Energy, Incorporated (NYSE:NEE), a generator, transmitter, and distributor electric energy in the United States and Canada, has agreed to acquire Texas Transmission Holdings Corporation, a U.S. based holding company. Total transaction value is estimated to be $3.2 billion.

Satcom Direct to Acquire TrueNorth Avionics

Satcom Direct, Incorporated, which provides global communications services, support, and technology to business and general aviation, military, government, emergency response, media, and other industries, has agreed to acquire TrueNorth Avionics, Incorporated, which designs, develops, and manufactures satellite communication solutions for business jets and VIP defense aircrafts. No transaction terms were released.

HollyFrontier to Acquire Petro-Canada Lubricants

HollyFrontier Corporation, a U.S. oil refiner, has agreed to acquire Petro-Canada Lubricants Incorporated, which develops, produces, and sells lubricants, specialty fluids, and greases in Canada and internationally. Total transaction value is estimated to be $1.1 billion.

Closed Deals

Sierra Wireless Acquires Blue Creation

Sierra Wireless Incorporated (TSX:SW), which with its subsidiaries, engages in building the Internet of Things (IoT) with intelligent wireless solutions in North America, Europe, and the Asia Pacific, has acquired Blue Creation, which helps clients build innovative devices integrating wireless technologies.  Total transaction value is estimated to be $9.4 million.

Union Electric Steel Acquires ASW Steel

Union Electric Steel Corporation, a U.S. based company that produces and supplies forged hardened steel, cast iron, and cast steel back up rolls, has acquired ASW Steel Incorporated, which manufactures and supplies carbon, stainless, and other specialty steel products. Total transaction value is estimated to be $17.6 million.

Black Diamond Group Acquires MPA Systems

Black Diamond Group Limited (TSX:BDI), which rents and sells portable workforce accommodation and space rental solutions to business customers in Canada, the United States, and Australia, has acquired MPA Systems, Incorporated, a U.S. based company that leases and sells new and used high-security modular buildings for temporary or permanent use for financial institutions, utilities, municipalities, pharmacies, cashier offices, or similar applications. Total transaction value is estimated to be $4.2 million.

Canopy Growth Acquires Vert Medical - Green Medical and Groupe H.E.M.P.CA

Canopy Growth Corporation (TSX:CGC), a producer and distributor of medical marijuana in Canada, has acquired Vert Medical - Green Medical Incorporated, a Canadian company that produces medical marijuana; and Groupe H.E.M.P.CA Incorporated, which grows, processes, markets, and distributes hemp health products worldwide. Total transaction value is estimated to be $2.4 million and $2.3 million respectively.

Urbana Corporation Acquires Real Matters

Urbana Corporation (TSX:URB), an investment fund launched and managed by Caldwell Investment Management Limited that primarily invests in public equity markets of United States and Canada, has acquired Real Matters, Incorporated, a BMO Capital Partners, Whitecap Venture Partners, Wellington Financial LP, Caldwell Investment Management, Quadrexx Asset Management, and Radar Capital backed business that provides a cloud-based real estate technology platform and network of independent field agents that optimizes the management of regulated real-estate processes, such as appraisals, insurance inspections, title search, and mortgage closings. Total transaction value is estimated to be $2.1 million.

Co-Operators General Insurance Acquires Assurance Aubin Insurance Brokers

Co-Operators General Insurance Company, which provides insurance and financial services to individuals and businesses in Canada, has acquired Assurance Aubin Insurance Brokers Limited, which provides insurance brokerage services. No transaction terms were released.

Schneider Electric Acquires MaxEAM

Schneider Electric SE (ENXTPA:SU), a provider of energy management solutions worldwide, has acquired MaxEAM Incorporated, which develops software applications that extend the functionality of Schneider Electric Avantis. No transaction terms were released.

Complete Innovations Acquires Securatrak

Complete Innovations Incorporated, a Madison Dearborn Partners and Symmetric Capital backed business that develops and provides mission-critical fleet, asset, and mobile workforce management solutions to customers worldwide, has acquired Securatrak Pty Limited, which provides turn-key GPS tracking hardware and software solutions for organisational fleets located throughout Australasia. No transaction terms were released.

Vertex Resource Group Acquires Red Giant Energy Services

Vertex Resource Group Limited, which provides consulting, construction, and oilfield services, has acquired Red Giant Energy Services Limited, which specializes in the storage, management, treatment, disposal and remediation of oilfield fluids in the Western Canadian Sedimentary Basin. No transaction terms were released.