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Canadian M&A Roundup Q2 2018

Canadian M&A announced deals for the second quarter totaled CAD $40B, an increase of 23% from the previous quarter and keeping pace with Q2 2017’s total of $40.43B.

M&A Drivers

Some factors affecting M&A activity for Q2 2018 include

  • Trade uncertainty
  • Large deals in the energy sector
  • Continued consolidation for cannabis companies

Trade Uncertainty

Uncertainty surrounding NAFTA as well as new talks of trade wars with the United States has hurt inbound M&A activity with Canadian targets becoming less attractive to both strategics and financial sponsors in the U.S. The slowdown in inbound activity has been partially offset by Canada’s major pension funds actively purchasing companies and assets from abroad, such as CPPIB buying $1.6B of wind and solar assets from NextEra Energy.

Large Energy Sector Deals

The second quarter saw $20.6B of deal value in the energy sector. Most of that volume came from the Government of Canada’s purchase of the Trans Mountain Pipeline from Kinder Morgan and Enbridge Inc’s consolidation of their subsidiary companies. The Oil & Gas sector saw a 65% uptick from Q2 2017, led by Raging River Exploration merging with Baytex Energy in a $2B deal.

Continued Consolidation Activity in Cannabis

Growth in the cannabis industry has carried forward to the second quarter of the year with 33 cannabis related deals announced in the second quarter alone. Most of the deals involve larger companies in the industry buying out smaller growers and their assets in order to prepare for the spike in demand once legalization officially begins. The largest of these deals was Aurora Cannabis acquiring MedReleaf for $2.8B.  With the legalization date set in stone for October 17, 2018, a lot of the uncertainty surrounding the industry has been alleviated and consolidation should continue to accelerate.

Notable Deals

Aurora Cannabis Inc. Acquires Medreleaf Corp.

  • Industry: Healthcare
  • Date Announced: 05/14/2018
  • Size (CAD): $2,753M
  • Consideration: 100% Stock
  • Target Advisors: Canaccord Genuity (Advisory, Fairness Opinion), GMP Securities (Fairness Opinion), Davies Ward Phillips & Vineberg (Legal Council), Stikeman Elliot (Legal Council)
  • Acquirer Advisors: BMO Capital Markets (Advisory), McMillan LLP (Legal Council)

On May 14, 2018 the announcement was made that Aurora Cannabis will acquire 100% of outstanding shares of Medreleaf Corp. in a $2.8B all stock transaction. Shareholders of Medreleaf will receive common shares of Aurora at a 3.575 exchange ratio, which represented a 33.3% premium and a 24x EV/2019E EBITDA multiple at the time of announcement. The proforma company’s market cap will rival that of Canopy Growth, the largest cannabis company in the industry. The transaction is the largest to date in the cannabis industry.

The deal gives Aurora much needed scale by adding around 140,000 kg of funded capacity from Medreleaf. The bulk of synergies are expected to come from a broader product portfolio and cross selling capabilities. Medreleaf’s expertise in the medical marijuana sector will allow Aurora capture large positions in both the recreational and medical sub-sectors. Perhaps one of the most important pieces of this deal for Aurora, is Medreleaf’s contract with Shoppers Drug Mart, the largest retail pharmacy chain in Ontario. Out of the big four cannabis companies, Aphria, Aurora and Medreleaf have signed deals to supply Shoppers Drug Mart with medical marijuana. With the acquisition of Medreleaf, Aurora will become the largest supplier to the pharmacy chain making it harder Canopy Growth to establish a strong supplier relationship with them.

The acquisition raises questions about Aurora’s ability to properly integrate all of the businesses and assets they have acquired recently. The market already punished Aurora for their acquisition of Cannimed, dropping the stock price from $14 at the time of announcement, down to $8.50 just a week later, where it has had a hard time rebounding from. Another concern facing shareholders is the constant dilution, as Aurora continues to issue stock to fund their acquisitions.

Bank of Nova Scotia (Scotiabank) Acquires MD Financial Management

  • Industry: Financials
  • Date Announced: 5/31/2018
  • Size(CAD): $2585M
  • Consideration: 100% Cash
  • Target Advisors: BMO Capital Markets (Advisory), Stikeman Elliott (Legal Counsel)
  • Acquirer Advisors: Scotiabank GBM (Advisory), JP Morgan (Advisory), PwC (Advisory), Torys (Legal Counsel)

On May 31, 2018 it was announced that Scotiabank will acquire MD Financial Management from the Canadian Medical Association for an all-cash consideration of $2.6B. The purchase price represents a Price/AUM of 5.3% nearly twice as much as last quarter’s acquisition of Jarislowsky Fraser for a Price/AUM of 2.38%. The acquisition helps Scotiabank increase the size of their private client wealth management business and will make it the largest private investment counsel business in Canada.

As part of the agreement Scotiabank will be the only provider of financial services promoted by the Canadian Medical Association to physicians and their families for the next 10-years. With only around 30% of physicians and their families using MD Financial services, there is a lot of room for growth, which could prove to be a huge windfall for Scotiabank’s other financial services and offer the bulk of revenue synergies in the transaction. Back and mid-office consolidation have the potential to generate $50M in cost synergies as well according to Scotiabank CEO Brian Porter. The deal is in line with Scotiabank’s strategy to bolster their wealth management division and increase Wealth Management’s share of the banks revenues from 12% to 15%.

Funding for the acquisition will be mostly financed through a $1.5B equity offering, with the remainder to be paid with cash on hand. The company expects the transaction to be accretive to EPS by 2021 with MD Financial contributing approximately $150M to the bank’s bottom line within the same time frame.

Following the closing of the deal, MD Financial will still remain a distinct brand, and will stay headquartered in Ottawa, with no disruption to their front office operations.

Government of Canada Acquires the Trans Mountain Pipeline

  • Industry: Energy
  • Date Announced: 5/29/2018
  • Size(CAD): $4500M
  • Consideration: 100% Cash
  • Target Advisors: TD Securities (Advisory), Blake Cassels & Graydon (Legal Counsel), Weil Gotshal & Manges (Legal Counsel)
  • Acquiror Advisor: Greenhill (Advisory)

On May 29, 2018 it was announced that the Government of Canada will purchase the Trans Mountain Pipeline, as well as the assets associated with its expansion projects from Kinder Morgan for an all cash consideration of $4.5B. The original Trans Mountain Pipeline was built in 1953, in order to transport oil from Alberta to British Columbia. Expansion projects began in 2004 and 2013, with the 2013 expansion being stalled due to resistance from the government of British Columbia and Indigenous communities. The government’s purchase of the pipeline ensures the continuity of the expansion.

The goal of the government is to resume investment into the project immediately, while searching for another buyer of the pipeline and it’s assets. With the pipeline in the hands of the federal government, they are able to use their federal jurisdiction for inter-provincial projects to break down some of the red tape blocking the project as long as they can prove the expansion is in the country’s best interest. The export route from Alberta to BC is critical for Canada to ship its oil to end markets in Asia and transporting oil through pipelines is more cost effective and less risky than transporting by rail.

The acquisition has been met with a lot of criticism from both environmentalists and fiscal conservatives. According to a survey conducted by the Financial Post, reactions to the decision lean slightly towards the negative with 54.02% of Canadians opposing the purchase. With the developed world shifting towards clean energy, critics argue that building a pipeline expansion shows inertia on the part of the Canadian government. The optics of the deal can appear as a taxpayer funded bailout, adding $4.5B to the planned budget deficit of $17.8B. If the Liberal government fails to transfer the project to another buyer, it could be unfavourable for the parties reputation ahead of next year’s federal election.

League Table

Mergers & AcquisitionsInterview With A Mergers & Acquisitions Investment Banker – Part II · Interview with a Mergers & Acquisitions Investment Banker – Part I · Bid Pricing Strategy: Part II · Bid Pricing Strategy: Part I · Deal Protection in Mergers & Acquisitions · Investment Banking Bake-Off or Beauty Contest · Acquisition Finance: Equity Consideration · Acquisition Finance: Bullet Debt · Acquisition Finance: Bank Debt · M&A Process Walkthrough · Types of M&A Sell Side Processes · Investment Banking Teaser · Accretion/Dilution Analysis – Part IV: Synergies and Source of Funds for M&A · Accretion/Dilution Analysis – Part III: Using Debt for Acquisitions · Accretion/Dilution Analysis – Part II: Accretion/Dilution Math and Breakeven Premium · Accretion/Dilution Analysis – Part I: EPS, Earnings Yield and All-Stock Transactions · Purchasing a Company via Cash or Stock ·
Chris
Chris
Chris is a second year Math/BBA double degree student at the University of Waterloo. He is currently interning as a Fixed Income Research Analyst at a DCM startup. Outside of school and work Chris is an avid basketball player.

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