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Canadian M&A Roundup Q2 2019

The second quarter of 2019 yielded a total announced Canadian M&A deal value of CAD $112.6B, a 2.18% increase from $110.2B in Q1 2019. Year over year, there was an 8.97% increase from the $103.34B total deal value seen in Q2 2018.

M&A Drivers

The key drivers of Canadian M&A activity in Q2 2019 include:

  • Increasing cannabis deal activity in the US market
  • Private Equity activity in foreign markets
  • Foreign companies exiting the Canadian oil sands

US Market Sparks Cannabis Deal Activity

Canadian cannabis activity since legalization has mostly centered around consolidation, a trend which still played a role in Q2 with deals such as Citation Growth Corp’s acquisition of Buds For You Inc for $1,000M. However, a growing area of cannabis M&A activity in Q2 has been tied to the US Cannabis market in anticipation of future legalization in the US One of the largest deals completed this quarter, Canopy Growth Corp’s acquisition of Acreage Holdings Inc (discussed in more detail below), comes as a result of Canadian companies increasing interest in positioning themselves for the US market. This trend has also taken shape in the form of US cannabis companies, operating in states where cannabis is legal, increasing their M&A activity and looking to acquire developed Canadian brands that have an interest in the US Market. An example of this is the US based Cresco Labs Inc acquiring CannaRoyalty Corp, a Canadian based brand which has prioritized expansion into California in recent years.

Private Equity in Foreign Markets

Many of the largest deals in Q2 came as a result of private equity activity in foreign markets encompassing a multitude of sectors including Energy, Healthcare, and Consumer. The largest deal of the quarter, an $11,514M CAD megadeal, saw the Quebec based pension fund CDPQ along with ENGIE SA acquire Transportadora Associada de Gas SA, who specialize in the transportation of natural gas in Brazil. The second largest deal of Q2 saw CPPIB sell their stake in US based Acelity Inc (discussed in more detail below), while the third largest deal saw CPPIB acquire a stake in U.K based Merlin Entertainments PLC. While these deals boosted total announced deal volume in the quarter significantly, it is worth viewing the total value with some skepticism. Most of the buyouts and sales, including those listed above, involved a collection of funds of which Canadian private equity represented a much smaller portion of the announced deal totals than their foreign counterparts.

Foreign Companies Exiting the Oil Sands

The largest Q2 deal in the Canadian energy sector involved a foreign company selling its Canadian oil sands assets. Much like Statoil (Norway), Total SA (France), Shell (Netherlands-U.K.), ConocoPhillips (US) and Marathon (US), Devon Energy has also decided to sell its Canadian oil sand assets because of the uncertainty surrounding the pipelines in Canada and unfavourable business environment in Canada. Combined, the companies mentioned above have sold over $37 B CAD in Canadian oil sand assets since 2016. The sale of Canadian assets by foreign companies continues to be a key driver in the Canadian M&A market as companies seek business in the US. The US provides multiple benefits such as: key tax benefits, clear and predictable oil and gas regulations, and shorter well license approval times. Until Canada provides companies with a level playing field in comparison to other countries such as the US, expect foreign and domestic companies to shift their businesses to the US.

Notable Deals

3M Co Acquires Acelity Inc

  • Industry: Healthcare
  • Date Announced: 5/2/2019
  • Deal Size (CAD): $9,024M
  • Consideration: Cash
  • Target Financial Advisors: Goldman Sachs, JP Morgan
  • Acquirer Financial Advisors: Credit Suisse

3M Co announced on Thursday May 2nd it would buy privately held medical device maker Acelity Inc in a deal valued at $9,024M CAD in an effort for the US industrial conglomerate to expand its business in medical dressings and related products. 3M Co is buying the company from a consortium of funds advised by Apax Partners and affiliates of the Canadian based Canada Pension Plan Investment Board and Public Sector Pension Investment Board.

Acelity reported revenue of $1,950M in 2018, of which 80% represents sales of a specialized system that provides wound therapy. With this acquisition, 3M aims to boost its presence in the advanced wound care market, which is valued at more than $10 billion coupled with a year over year growth rate of 4-6%. 3M expects the deal to be accretive 25 cents to its earnings per share in the first year following completion of the deal with the exclusion of any one-time expenses. As a result of the deal, 3M’s 2019 share buyback program is now expected to be in the range of $1,500M to $2,000M in contrast to the pre-deal projected range of $2,500M to $6,500M.

The deal follows just weeks after 3M Co disappointed investors with a below expectations earnings call and the announcement of 2,000 jobs cuts. 3M has been slow to react to declines in key business areas like automotive and electronics and this deal, the largest in their history, marks a change in strategy for 3M as they seek to be more aggressive in reacting to the market in order to advance their business.

Canopy Growth Corp. Acquires Acreage Holdings Inc.

  • Industry: Healthcare
  • Date Announced: 4/18/2019
  • Deal Size (CAD): $3,951M
  • Consideration: Cash and Stock
  • Target Financial Advisors: Canaccord Genuity Corp., INFOR Financial Inc.
  • Acquirer Financial Advisors: Greenhill & Co., PricewaterhouseCoopers LLP (Canada), Ernst & Young

On Thursday April 18th, an arrangement agreement was announced between Canopy Growth Corp. and Acreage Holdings Inc. The agreement mandates that if federal laws in the United States change to permit the general cultivation, distribution and possession of marijuana, then Canopy Growth will acquire all issued and outstanding shares in the capital of Acreage. The Canadian based Canopy Growth Corp. will be strongly bolstered by the deal as Acreage Holdings is one of the largest, vertically-integrated, multi-state operators in the US They have a portfolio containing diverse holdings in the cannabis industry, including the cultivation, processing, and dispensing of cannabis products.

Initially, Acreage shareholders received $3.43 in cash per share and access to Canopy’s intellectual property and brands. Upon closure of the deal, investors will receive an additional 0.5818 of a Canopy share for each Acreage share they hold. The deal is currently worth $3,951M CAD, where a premium of more than $10 prevails on Acreage’s current share price due to the contingent risk attached to the deal.

While many Canadian cannabis companies are interested in global expansion, they are hampered by strict regulations enforced by the major US stock exchanges. These regulations prevent any legal entrance into the US for Canadian cannabis companies, resulting in Canopy orchestrating this first-of-its-kind deal in an effort to position them effectively to enter the US Cannabis market upon legalization.

Canadian Natural Resources Ltd Acquires Devon Canada Corp

  • Industry: Energy
  • Date Announced: 5/29/2019
  • Deal Size (CAD): $3,775M
  • Consideration: Cash
  • Target Financial Advisors: JP Morgan (Lead), Goldman Sachs
  • Acquirer Financial Advisors: TD Securities

On Wednesday May 29th, it was announced that Devon Energy Corp sold its Canadian assets to Canadian Natural Resources Ltd (CNR). On June 27th it was announced that the deal valued at just under $3,800 M CAD was complete. This marks the second deal that Devon Energy Corp has completed with CNR, with the previous deal coming in April 2014 when Devon Energy Corp sold its conventional oil assets to CNR for $3,125 M CAD.

The deal helps Devon Energy Corp exit the Canadian market, after realigning their business strategy and shifting their focus on US oil business growth. Furthermore, as a result of the weak demand for Canadian oil assets, Devon Energy Corp sold their assets at a slight discount with some analysts believing that they could’ve received 20-25 percent more. On the other side of the deal, CNR expands its Canadian asset portfolio by adding 607,000 hectares of land (two thirds which is undeveloped) and 128,300 barrels of daily production. In addition, the land acquired has proven oil reserves of at least 730 M barrels of oil. Finally, the deal marks CNR’s 7th major acquisition, since acquiring Devon Energy Corp’s conventional assets in 2014.

With the deal now being complete, CNR becomes the largest oil producer in the Canadian oil sands with production of 1.2 M barrels of oil per day, moving ahead of Suncor Energy. The move also marks the exit of another foreign oil producer. Over the past few years, companies such as Statoil (Norway), Total SA (France), Murphy Oil (US), and ConocoPhillips (US) have all left the Canadian oil sands. As a result of foreign company divestitures, an oligopoly is beginning to form with 4 companies accounting for 85% of the oil sands daily production.

Onex Corp Acquires WestJet Airlines Ltd

  • Industry: Industrials
  • Date Announced: 5/13/2019
  • Deal Size (CAD): $3,593M
  • Consideration: Cash
  • Target Financial Advisors: CIBC, Bank of America Merrill Lynch
  • Acquirer Financial Advisors: Barclays, Morgan Stanley, RBC Capital Markets, UBS

On Monday May 13th, it was announced that Onex Corporation was acquiring Canada’s second largest airline, WestJet Airlines Ltd for $3,593 M CAD. The deal comes with a 67% premium compared to the previous day’s closing share price. Onex has agreed to acquire all outstanding WestJet Airlines shares for $31.00 per share and as a result of the deal, WestJet shares rallied 62% following the news to $30.03 per share.

Onex is a private equity firm with AUM of roughly $31B CAD. Previously, CEO and Founder of Onex Corp, Gerry Schwartz, has had an interest in acquiring a major airline, having failed to acquire Air Canada in 1999 and Australian airline Qantas in 2007. As a result of the deal, Onex receives the Calgary based airline which serves 25 million customers annually and had F2018 financial result of $4,733M CAD in revenue and $91M CAD in net earnings.

With that being said, the deal is seen as a positive for both companies as WestJet is partnering with an aviation focused private equity firm while Onex receives the airline they’ve been seeking. Furthermore, the deal should be approved by shareholders with little resistance considering the 67% premium paid by Onex. As a result of the deal, M&A activity in the airline industry has picked up with Air Canada acquiring Transat AT Inc, Canada’s third largest airline in a deal valued at around $529.4 M CAD.

League Table

Sources

* All financial data sourced from Bloomberg

Mergers & AcquisitionsCanadian M&A Roundup Q2 2019 · Understanding a Merger and Understanding a Merger Model · Introduction to Hostile Takeovers and Unsolicited Bids · Sale and Leaseback Transactions in Investment Banking · Compiling a Buyers List in Investment Banking · Interview 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 ·
John
John
John Derraugh is a second-year student studying in the BBA/BMath Double Degree program at Wilfrid Laurier University and the University of Waterloo. He has worked in fintech and finance in previous co-op’s. In his spare time, he enjoys investing and racquet sports.

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