Canadian M&A activity (which we define as all M&A deals involving a Canadian company as a material counterparty) showed continued strength in the second quarter of 2017, coming off the 5 year high observed in the prior quarter. Figures developed by Crosbie & Company using Capital IQ and other sources indicated 724 announcements in Q2, up 2% from the same quarter last year and representing the third most active quarter in the last three years. The quarter also marks the fifth consecutive quarter where activity increased year-over-year.
The total value of announced transactions for the quarter at $64B was somewhat lacklustre due to a lower contribution from mega-deals (transactions in excess of $1B in value) offset to some extent by a higher than average $25B contribution from transactions under $1B in value.
The strength in M&A activity during the quarter was spread across the industry spectrum, with 8 of the 14 sectors experiencing an increase in activity relative to Q2 2016. While the majority of the increase in activity came from the Consumer Discretionary sector, the increase was offset by declines in recently active sectors, Metals and Mining and Real Estate.
Domestic Versus Foreign M&A
Figure 2 indicates a shift in Canadian M&A activity from domestic targets to foreign targets. In Q2, there were 468 transactions involving Canadian targets (including both those with domestic or foreign buyers), down 3% from the same quarter last year. Conversely, there were 256 transactions involving foreign targets, representing an increase of 13% relative to the same quarter last year.
Mega-Deals
There were 12 mega-deals announced in Q2, representing an aggregate value of $39B and 61% of the total value of M&A activity for the quarter. The largest announced transaction was the $11.9B acquisition of a 50.4% interest in the Australian electric utility, Endeavor Energy, by a Macquarie Group led consortium that included BC Investment Management Corporation.
The second largest transaction of the quarter featured Pembina Pipeline Corporation acquiring Veresen Inc. for $7.8B. The transaction marks the continuation of the consolidation trend within the energy infrastructure space.
Financial Sponsors
Financial sponsors remained active in the second quarter of 2017 on both the buy-side and sell-side with 13 transactions (in excess of $100M) valued in aggregate at $23B. Five of the ten largest transactions in the quarter involved a financial sponsor.
CPPIB was particularly active in the quarter announcing the $2.5B acquisition of Parkway Inc., a US-based publicly-traded office REIT as well as its partnership with Baring Private Equity Asia in the $1.6B acquisition of Nord Anglia Education, Inc.
Industry Sector Activity
Metals and Mining remained the most active sector by number of announced transactions with 100 deals valued at $2.3B. Real Estate had 91 transactions worth $8.5B. The Consumer Discretionary sector showed the largest increase in activity during the second quarter, increasing 35% to 74 announced transactions worth $4.6B.
The most active sector by deal value was Energy with 57 deals valued at $13.9B, largely due to the Veresen Inc. transaction. Another key transaction in the sector was Parkland Fuel Corporation’s $1.7B acquisition of Chevron Canada’s refining, retail, commercial and wholesale fuel business.
Breakdown by Transaction Size
The middle market continues represent the lion’s share of Canadian M&A transaction volume with deals under $250 million representing 89% of all the transactions with disclosed values. In aggregate, the mid-market transactions were valued at $9.7B or approximately 15% of total M&A value.
Target by Province
In terms of activity by province, Ontario, British Columbia, Quebec and Alberta continue to lead the way, accounting for 86% of activity in the quarter.
The decline in domestic activity year over year (468 announcements in Q2 2017 vs 482 in Q2 2016), was primarily attributable to a decrease in activity in Alberta and Saskatchewan.
Cross-Border Deals
Cross-border transactions continued to account for a significant proportion of activity with 48% of all transactions involving a foreign target or buyer. Canadian companies making acquisitions abroad (“outbound” transactions) outnumbered foreign companies acquiring in Canada (“inbound” transactions) by a factor of 1.5 times.
Canadian companies remained active buyers south of the border, buying more US companies (136) for a higher value ($11.5B) than US acquisitions of Canadian companies (69 deals for $5.1B).