Contribution from Kirill Sukhikh, Edited by Vlad Kovalenko

Canadian M&A market in the fourth quarter has seen a decrease in aggregate deal value by $8.8B comparing to the previous quarter. 677 deals valued at $69.8B were announced over the third quarter. Consumer Cyclical sector accounted for $17.27B, Financial sector for $16.24B and Basic Materials sector for $7.96B. However, the biggest number of deals happened in Financial, Basic Material and Consumer Non-Cyclical sectors with a number of deals of 146, 134 and 111 respectively. The driving forces for M&A deals during Q4 were linked to legislative ease of the US market on sports gambling, the gold price at a 5-Year-Market, and an abundant amount of capital and investors of different types looking for good deals.

Key Drivers

• Legislative ease of the US market on Sports Gambling
• Interest by Public & Private Investors in Canadian Market
• Gold Value at 5-Year-Market High with Expectation to Grow

Legislative ease of the US market on Sports Gambling

In May 2018, the Supreme Court of the US struck down a federal law that effectively banned commercials sports betting in most states and left it up to the states to decide whether to regulate sports betting. Since then the US market for sports betting started to grow in value due to the increasing number of sports leagues, casinos, sportsbook operators, tech firms, and advertisers. International gambling companies also did not hesitate to expand tentatively in the U.S. as that market cracks open. The result of such legislation also led to the consolidation activity between online gambling companies and one of the biggest acquisitions in gambling between the Stars Group and Flutter Entertainment. The deal was worth 15.7% of all M&A activity in the last quarter of 2019 in Canada and would give companies the combined firepower to more closely focus on American betters, online poker players and sports fans.

Public & Private Investors remain active

Public and Private investors were a significant part of M&A deals during the last quarter and continued to invest in Canadian business just as in Q3 of 2019. Private Equity deals reached the count of 80, 18 PE buyouts and 26 additional stake purchases that totaled at $32.16B. Various investment institutions acquired firms in industries such as Renewable Energy, Infrastructure and Communications. This interest is majorly due to abundant dry powder that Canadian Private accumulated over the past year, low interest rate environment and corporations which are continuing to look for the right deals to achieve growth and competitive advantage. A significant interest in renewable energy is driven by pension and infrastructure funds, given the steady returns such assets generate.

Gold Value at 5-Year-Market High with Expectation to Grow

Trade tensions, potential interest rate cuts, a volatile stock and bond market and geopolitical uncertainties such as Brexit Economic led to the increase in the gold prices and robust market activity in the Canadian Basic Material M&A sector. Throughout the year, the yellow metal price broke through the US$1,500 per once and settled just below that threshold at the end of the year, sparking a gold mining M&A activity. Most of the activity is related to the major firms buying junior miners to fill their development pipeline. With such interest in Gold companies, the M&A growth rate (YoY) for the Mining industry in Canada was approximately 525% according to Bloomberg. In total. there were 123 M&A deals targeting mainly Canadian mining corporations with a total value of $7.9B.

Notable Deals

Flutter Entertainment PLC Acquires Stars Group Inc

• Industry: Gambling – Consumer Cyclical
• Date Announced: 10/02/19
• Deal Size: $10.7B
• Consideration: Stock
• Target Financial Advisers: Barclays, BMO Capital Markets, Moelis & Co
• Buyer Financial Advisers: Goldman Sachs, PJT Partners Inc

On October 2nd, 2019, an Irish gambling company, Flutter Entertainment PLC, announced a merger with Stars Group, the owner of the largest poker site PokerStars. The announced deal is an all-share merger that is valued at $10.7 billion and represents a premium of ~40% to the Tuesday closing price. New Flutter Shares will be exchanged for TSG Shares with a ratio of 0.2253 to 1. The multiples of Stars Group are as follows EV/Sales (LTM) is 4.3x and EV/EBITDA (LTM) is 14.0x.

The merger will create the biggest online gaming group in the world, which would have more than 13 million active customers in over 100 international markets. The merger will open opportunities for a quick response to a growing number of gamblers using online and mobile devices and will be offering game products across sports betting, poker, and casino. US Sports Betting Market will be a big focus of the new group after the US Supreme Court outlined the way for the states to legalize sports betting. In addition, the merger is expected to accelerate the delivery of Flutter’s four pillars: maximize profitable growths across its core markets in UK, Ireland, and Australia, increase platform capabilities for international markets, secure new positions in markets such as Spain, Italy, and Germany, and position the combined group to pursue the US betting sports market. Firms expect £140m in cost-saving synergies of £140m a year with opportunities to cross-sell products to their customers in international markets and lower finance costs. The only concern remains about the competition, as a combined group market share in the UK could exceed 30 percent, which would result in an in-depth investigation in the U.K.

When the merger is complete, the Combined Group’s Board of Directors will comprise of 14 people with expertise drawn directly from Flutter and TSG. Garry McGann, Chair of Flutter, will assume the chair of Combined Group; Divyesh Gadhia, Executive Chairman of TSG, will assume the role of Deputy Chair; Peter Jackson, CEO of Flutter, will assume the role of CEO and Rafi Ashkenazi, CEO of TSG, will assume the role of COO.

Canada Pension Plan Investment Board Acquires Pattern Energy Group Inc

• Industry: Investment Management – Financial
• Date Announced: 11/04/19
• Deal Size: $5.16B
• Consideration: Cash
• Target Financial Advisers: CenterView Partners LLC, Evercore Partners Inc, Goldman Sachs
• Buyer Financial Advisers: BofA Securities

On November 4th, 2019, Canada Pension Plan Investment Board (CPPIB) announced a definitive agreement to acquire Pattern Energy Group Inc and all its assets for $26.75 per share in cash, which implies the total value of the company of $5.16B including all its debt. The offered price of $26.75 per share represents a premium of 14.8% to Pattern Energy’s closing share price on August 9, 2019, which was the last day prior to market rumors regarding the potential acquisition. The transaction is expected to close by the second quarter of 2020, subject to Pattern Energy shareholder approval, receipt of the required regulatory approvals, and other customary closing conditions. Pattern Energy Group was acquired at EV/Revenue of 8.8x and EV/EBITDA of 17.5x based on the last twelve-month performance.

Pattern Energy is one of the most experienced renewables developers in North America and Japan with a high-quality, diversified portfolio of contracted operating assets, which aligns well with CPPIB’s renewable energy investment strategy. Once the Pattern Energy deal with CPPIB closes, the statement said, it will be combined with Pattern Development, a company backed by private equity firm Riverstone Holdings LLC, to create an integrated renewable energy company that both builds and operates power assets. Pattern Energy Chief Executive Officer Mike Garland will lead the combined entity, the statement added.

Kirkland Lake Gold LTD Acquires Detour Gold Corp

• Industry: Gold Mining – Basic Materials
• Date Announced: 11/25/2019
• Deal Size: $3.53B
• Consideration: Stock
• Target Financial Advisers: BMO Capital Markets, Citi
• Buyer Financial Advisers: National Bank Financial Inc, RBC Capital Markets

On November 25th, 2019, Kirkland Lake Gold Corp (KL) announced a definitive agreement to acquire all the issued and outstanding securities of Detour Gold Corp. Under the terms of the agreement, all outstanding common shares of Detour Gold will be exchanged for KL Common Shares at a ratio of 0.4343 to 1, which give Detour gold shareholders approximately 27% of the shares in the new entity and allows Kirkland to take advantage of a record stock price to acquire the company. This ratio implies a consideration of CAD$27.50 per Detour Gold common share representing a 24% premium to the closing price of the Detour Gold shares on November 22nd, 2019. The implied transaction value is approximately $3.53B. The TTM Deal Multiples of the target company are TV/Revenue – 4.28x and TV/EBITDA – 12.23x which is close to median deal multiples of similar transactions: TV/Revenue – 4.55x and TV/EBITDA – 10.52x.

The combination merges two near opposites companies. Kirkland Lake operates two high-grade underground mines at some of the lowest cash costs in the sector, whereas Detour operates a single, low-grade bulk tonnage open pit mine at comparatively higher costs. The acquisition would boost Kirkland’s annual gold production by about one-third to more than 1.5 million ounces per year, as Detour Lake gold mine is expected to produce for more than 20 years and can generate 600,000 ounces a year. However, the operating margins are expected to decline as Detour operates at comparatively higher costs. Expected pre-tax savings from this deal are around $75m to $100m per annum.

Detour Gold shareholders will diversify their portfolio with KL’s high-quality portfolio of low-cost and high-grade mines, and significantly enhance financial strength, free cash flow generation and trading liquidity of their shares. KL shareholders gain an opportunity for value creation through further optimization and expansion of current production, mineral reserves and mineral recourses. The deal could attract new institutional investors who want a gold stock in their portfolio, but who viewed Kirkland and Detour as too small or lacking in liquidity.

Both companies anticipate the shareholder meetings and closing of the transaction by the end of January 2020. The deal requires approval by a two-thirds majority vote by Detour Gold shareholders and a majority vote by Kirkland Lake Gold shareholders, in addition to regulatory and court approvals.

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