Crosbie & Company Canadian Mergers & Acquisitions Report for Q3 2022

Softening Trend Continues - M&A Markets Going Through a Reset

In Q3 2022, announced Canadian M&A transactions declined for the third quarter in a row, hitting the second lowest quarterly level since the onset of COVID-19 and flirting with pre-pandemic levels last seen in 2016.  In the most recent quarter, there were 684 announced transactions, down 8% quarter-over-quarter, representing deal value of $63B, up 16% from Q2 2022. Quarterly activity is down about 35% since the high point in the current cycle. On a year-to-date basis, there were 2,282 announced transactions, representing a decline of 22% from the same period last year.

“The slowing of M&A we are seeing reflects the impact of uncertainty on buyer psychology as well as changing conditions in the capital markets and on main street,” said Colin Walker, Managing Director of Crosbie & Company Inc. “Due diligence is taking longer for many deals as buyers consider how inflation trends will impact company performance and the impact of tightening monetary conditions.  Valuations are also shifting in some sectors causing a need for an adjustment in buyer and seller expectations,” he added.   

The decline in M&A activity was more pronounced among smaller transactions than for larger sized deals. For the important mid-market segment (transactions with values below $250M) there were 251 announcements, representing 86% of all deals with disclosed values and 12% of the aggregate value of all deals in the quarter.  This size segment was down 8% and lead the overall decline.  

Mega-deal transactions (those with values above $1B) defied the broader trend and increased slightly in the quarter with 14 announcements worth $43B in value.  Five of these transactions involved a Canadian target.  Fairfax remained busy in the quarter, including its take-private of Recipe Unlimited, Canada’s largest full-service restaurant company with portfolio brands such as Swiss Chalet, Harvey’s, and The Keg. Outbound mega-deals had a significant infrastructure focus, with Brookfield acquiring two U.S.-based solar power companies, Ontario Teachers’ Pension Plan acquiring a New Zealand telecom tower operator, and Capital Power acquiring a U.S.-based natural gas power generation facility.   

As usual, cross-border transactions were a key driver of overall M&A activity contributing 50% of total announcements and 52% of aggregate value. Outbound M&A deal value increased 38% from last quarter due to several large mega-deals, whereas the value of Canadian acquisitions by foreign buyers declined 40%. Despite this divergence from a value perspective, inbound M&A activity remained healthy with 145 transactions (down only 3%). 

From a sector viewpoint, deal count increases were seen in Consumer Discretionary (+27 deals); Real Estate (+9); Communication Services (+9); and Utilities (+4).  The largest declines were seen across Industrials (-38 deals), Precious Metals (-20) and Information Technology (-15).  Energy and Information Technology generated the largest aggregate deal value at $20.0B and $10.3B respectively, driven by multiple Energy mega-deals, three of which involved Albertan targets, and Open Text’s $8.4B outbound acquisition of Micro Focus, one of the world’s largest software companies based out of the U.K. 

Overview

• Deal activity slipped further in Q3 2022 with 684 announced transactions, an 8% decline compared to Q2 2022 
• Activity in the quarter is down 32% from the cycle high in Q1 2021
• Aggregate deal value ($63B) was up by +16% relative to Q2 2022 as mega-deal activity remained firm at 14 transactions
• Cross-border M&A activity decreased by 7% to 341 announced transactions representing $33B in value (52% of aggregate deal value)

Mega-Deals 

• There were 14 mega-deals (deals surpassing $1B in value) announced in Q3 2022 representing $43B in value
• The largest deal this quarter was U.S.-based Phillips 66 $13B acquisition of DCP Midstream from Enbridge, a business engaged in the processing and distribution of natural gas and natural gas liquids
• Fairfax remained busy on several mega-transactions in Q3 2022, including its take-private of Recipe Unlimited, Canada’s largest full-service restaurant company. Foreign infrastructure assets were in demand, with Brookfield acquiring two U.S.-based solar energy companies, Ontario Teachers Pension Plan acquiring a New Zealand telecom tower operator, and Capital Power acquiring a U.S.-based power generation facility

Industry Sector Activity

• Deal count increases were seen in Consumer Discretionary (+27 deals); Real Estate (+9); Communication Services (+9); and Utilities (+4) 
• Sectors with the largest decline in deal count were Industrials (-38 deals); Precious Metals (-20); and Information Technology (-15) 
• Energy and Information Technology generated the largest aggregate deal values at $20.0B and $10.3B; Energy was buoyed by several energy mega-deals involving Albertan targets and Technology reflected Open Text’s $8.4B outbound acquisition

Breakdown by Transaction Size

• Weakness in activity during the quarter was greater in the mid-market than for the larger deals
• Mid-market transactions with disclosed values (deal value below $250M) comprised 86% of quarterly activity and 12% of quarterly value

Canadian Domiciled versus Foreign M&A Targets

• Acquisitions involving Canadian targets declined to 444 in Q3 2022, down from a peak of 483 in Q1 2021 (down 8%)
• Canadian firms made 495 acquisitions in Q3 2022, of which 299 (60%) involved domestic targets ($34M average deal value) with the remainder representing foreign targets ($118M average deal value) 

Cross-Border Deals

• Cross-border deals represented 50% of total activity and 52% of total value in Q3 2022
• The bulk of the decrease in cross-border activity was due to a decline in outbound M&A (-10%), whereas inbound M&A remained relatively firm (-3%)
• Canada/U.S. transactions represented 50% of cross-border announcements and 48% of total value

Deals by Provincial Domicile

• Ontario remained the most active province by deal count (167) and represented 33% of all transaction value in Q3 2022, down from 203 deals and 74% of all transaction value 
• British Columbia (113) and Alberta (64) activity was up relative to Q2, with the latter receiving a boost in value due to several energy deals 
• The aggregate value of domestic deals fell significantly quarter-over-quarter (-34%) as mega-deal’s skewed toward foreign targets