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Canadian M&A Roundup Q3 2018

Canadian M&A has seen a sharp increase in activity in the third quarter of 2018 with $152.4B in announced deals, an increase of 63.6% from Q3 2017 and 21.8% from Q2 2018.

M&A Drivers

  • Hostile bids
  • Consolidation in mining
  • Beverage companies entering the cannabis space

Hostile Bids

According to Reuters and data from Kingsdale Advisors, hostile bids in Q3 have reached a 2 year high. One of the more notable hostile bids this quarter was Lundin Mining’s offer for Nevsun Resources. However, before shareholders could vote on the deal, Nevsun found a white knight in Chinese mining company Zijin (deal discussed below). Another major hostile bid was Husky Energy’s $6.4B offer for MEG Energy.

Consolidation in Mining

After a slowdown in mining M&A activity in recent quarters, Q3 has seen an increase in consolidation, led by Barrick Gold’s acquisition of Randgold to create the world’s largest gold company (discussed below). Many analysts see this acquisition as a potential catalyst for further deal-making in the space as companies look to add scale with gold prices struggling to rebound.

Beverage Companies Entering the Cannabis Space

With beer sales stagnating in recent years, many alcoholic beverage companies have begun turning to cannabis, not only to diversify their product portfolio, but also to develop cannabis infused drinks with the hopes of appealing to a broader market. The most notable investment has been Constellation Brands investing another $5B into Canopy Growth, increasing its stake to over 30%. The industry has also seen Molson Coors form a joint venture with Quebec based HEXO in order to develop weed-infused beverages.

Notable Deals

Brookfield Asset Management Acquires Forest City Realty Trust

  • Industry: Real Estate
  • Date Announced: 07/31/2018
  • Deal Enterprise Value(CAD): $12,660M
  • Consideration: 100% Cash
  • Target Financial Advisors: Goldman Sachs, Lazard
  • Acquirer Financial Advisors: Bank of America Merrill Lynch, Barclays, BMO Capital Markets, CIBC, Citi, Deutsche Bank, Moelis & Co, RBC Capital Markets, Scotiabank, TD Securities

On July 31, 2018 Brookfield Asset Management announced the acquisition of Forest City Realty Trust in a $12.7B all cash deal. The purchase price represents a 10.94% premium on the price of Forest City’s shares at the time of announcement. The deal follows an announcement in January 2018 that Brookfield was in talks with Forest City regarding a potential acquisition. Forest City shares rose 8.7% on announcement of the deal.

After the initial talks in January, Forest City announced that they would remain a standalone company. However, investor activism and increasing demand for their real estate asset portfolio prompted them to put the company back on the market. The company has a portfolio consisting of mixed use developments in urban centres as well as life science research space in Cambridge, Massachusetts. For Forest City unitholders the deal provides an instant cash premium.

For Brookfield the transaction is in line with their recent strategy of acquiring high quality real estate assets. Just last quarter the alternative asset manager purchased GGP for $15B. With sophisticated investors switching from equities to alternative investments, Brookfield has seen a steady increase in investment into it’s real estate fund. And with continuing bearish sentiment surrounding retail assets, Brookfield has been able to pick up high quality real estate assets at reasonable valuations.

Zijin Mining Group Acquirers Nevsun Resources Ltd.

  • Industry: Metals & Mining
  • Date Announced: 09/05/2018
  • Deal Enterprise Value(CAD): $1648M
  • Consideration: 100% Cash
  • Target Financial Advisors: BMO Capital Markets, Citigroup
  • Acquirer Financial Advisors: Morgan Stanley

On September 5, 2018 Nevsun Resources and Zijin Mining Group announced that they have entered into an agreement for the purchase of all issued and outstanding Nevsun shares at a price of $6/share by Zijin. The CAD$1648M deal offers shareholders a 57% premium and values Nevsun at 17.32x EBITDA. The transaction occurs after repeated offers and hostile bids for Nevsun from Lundin and Eurosun.

After rejecting multiple joint offers from Eurosun and Lundin for $4.75/share, Nevsun finally found a white knight when Zijin offered to purchase the company for $6/share-a 26% premium over the previous offer.

Zijin has recently been on a spree acquiring copper mines in order to diversify away from gold. With gold prices far removed from their historical highs earlier this decade, Nevsun’s Timok copper mine in Serbia allows Zijin to strengthen their copper mining operations and compliments the 63% stake it recently purchased in another Serbian copper mine, RTB Bor.

With copper prices at one year lows due to the uncertainty around the global free trade of consumer electronics, Zijin has been able to acquire copper mines at fair valuations. Although investors are bearish on copper, long term demand will remain high due to the metals importance in consumer electronics and electric car batteries.

The deal is still subject to regulatory approval in both China and Canada but is not subject to any financing conditions.

Barrick Gold Corp Acquires Randgold Resources Ltd.

  • Industry:Metals & Mining
  • Date Announced: 09/24/2018
  • Deal Enterprise Value(CAD): $6970M
  • Consideration: 100% Stock
  • Target Financial Advisors: Barclays, CIBC
  • Acquirer Financial Advisors: M Klein & Co LLC, Morgan Stanley

On September 24, 2018 Barrick Gold announced the acquisition of Randgold Resources for  CAD $6970M. The all stock deal will see Barrick pay no premium for the Randgold shares which have been performing relatively poorly this year compared to their peers, mostly due to complications in many of their African mines. The transaction values Randgold at 10.52x EBITDA. The combined company will become the world’s largest gold mining company.

For Randgold shareholders the acquisition by Barrick provides some diversification away from African mines, which have been a focal point of Randgold’s strategy. Although African mining projects can often be lucrative, the mining industry in Africa lacks the strong legal and political infrastructure of North America, often making these projects riskier to assume. Randgold’s African projects have been embroiled in a series of conflicts with local governments including tax disputes in Mali and labour disputes in the Ivory Coast. With the Democratic Republic of Congo changing it’s mining code to require higher payments from mining companies operating in the country, it may have been the last straw for Randgold and its shareholders. As shareholders of the new combined company, they will be able to hedge the risk of African mining projects with safer North American mines owned by Barrick.

The deal gives Barrick and opportunity to pick up quality African mining assets at a low price in order to replenish some of the mining assets they have been selling off in recent years to pay down debt. Barrick’s size and scale, combined with their experience in multiple geographies around the world may allow the combined company to negotiate better terms for their African mines.

Issues have also been raised concerning the large personalities of John Thornton and Mark Bristow. The two men will run the company side-by-side after the merger with Thornton staying as executive chairman and Bristow assuming the role of CEO. Both men are known for their tough management style, and some analysts are expecting a clash of personalities.

After the closing of the deal, shareholders of Randgold will own one third of the new company.

League Table

*All financial data sourced from Bloomberg

*Canadian M&A deal volume in the previous two quarterly updates only took into account volume for Canadian targets. As a result, deal volumes in the previous two quarterly updates have been understated.

Mergers & AcquisitionsBid 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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