M&A in Canada: resilient market, smart investors

Canada’s market for mergers and acquisitions was highly active in 2017 in terms of volume, but with smaller values. Strategic buyers drove much of the action. And private equity firms found plenty of sell-side opportunities, but continued to be selective when doing new deals.

The mid-market remained the focal point, but with an emphasis on smaller transactions. Both inbound and outbound deal-making showed strength. And, generally speaking, investors of all types exhibited prudence in what continues to be a frothy and competitive market at home and abroad.

Sophia Tolias, Counsel, Torys LLP
Sophia Tolias, Counsel, Torys LLP

With good prospects for a robust Canadian economy, my Torys LLP colleagues and I think there is plenty of reason to expect sustained momentum in Canadian M&A activity in 2018.

In the following, we analyze some of 2017’s most important trends and look at some of the factors that we believe are likely to shape the deal environment in the year ahead.

What happened?

The Canadian public M&A market was active in 2017. The number of acquisitions of domestic public company targets rose sharply, by 45 percent year over year, surpassing volume levels on record since 2011.

canadian public ma market

Meanwhile, aggregate deal values fell to $25 billion from the recent six-year high of $36.87 billion in 2016, largely as a result of fewer mega-deals in the Canadian marketplace last year.

canadian public ma deal value ranges

Strategic buyers are driving deals

Strategic buyers were largely responsible for the buoyant deal-making in 2017, making up the vast majority of the investor pool in the domestic public M&A market. Approximately 60 percent of public acquisitions were funded in cash, as strategic acquirers put corporate funds to work.

Fewer financial buyers acquired public company targets last year, and volume levels fell to their lowest on record since 2011.


In fact, private equity investors have continued to take advantage of strong market conditions to liquidate their investments, acting predominately on the sell-side of Canadian M&A transactions. Fewer financial sponsors invested capital in 2017, facing persistent challenges in sourcing quality assets in a highly competitive environment.

Despite this, the volume of sponsor-to-sponsor transactions rose to its highest level in the last three years.


Increasingly, Canadian businesses are owned by sponsors who are operating like quasi-strategic investors, assisting their portfolio companies (i.e. their platform investments) in becoming strategic acquirers in order to take advantage of synergies through deal-making. We expect this trend to continue, with more sponsor-to-sponsor deals to follow in the coming months.


Overall, domestic M&A transactions involving a financial buyer or financial seller slowed down in 2017, and aggregate deal values in the private equity industry also decreased, in line with the trend observed in the Canadian public M&A market.

The decline in capital invested in both the public and private equity markets is in stark contrast to the amounts of capital that financial investors have available for investment, reportedly at US$954 billion in September 2017 (with some other estimates well over US$1 trillion).

Michael Akkawi, Partner, Torys LLP
Michael Akkawi, Partner, Torys LLP

Mid-market M&A: the Canadian experience

The mid-market segment continues to remain the focal point for Canadian deal-making. Over the last several years, transactions valued under $500 million have made up over 90 percent of domestic public company acquisitions, and M&A transactions involving a financial buyer or seller have followed a similar trend.

Mid-market deals were notably prominent in 2017: on average, a Canadian public M&A transaction was valued at $218 million, representing a marked decline from 2016 when transactions were commonly double in size.

Specifically in the private equity industry for domestic M&A transactions involving a financial buyer or seller, average deal sizes have also been getting smaller over the last few years, falling to $291 million in 2017.

canadian prive equity deal value ranges

Although the mid-market segment attracted the majority of investor interest, many of the record high investments in 2017 were large-scale transactions involving U.S. financial investors acquiring Canadian targets. An example of this was OMERS Private Equity’s and Berkshire Partners’ agreement to sell Husky IMS International Ltd to Platinum Equity for US$3.85 billion.


Inbound and outbound transactions

In 2017, Canadian public companies proved to be attractive targets for foreign buyers whose investments in the Canadian public M&A market increased by over 10 percent year over year.


Foreign financial buyers were especially active in Canada, with investments by foreign financial investors on the climb since 2015. We expect foreign buyers will continue to be well-positioned to pursue growth opportunities in Canada as the current Liberal government has signalled that Canada is open to global investment.


Meanwhile, the volume of outbound M&A transactions by Canadian investors, predominately pension funds and other institutional investors, continues to climb, topping volume levels observed since 2010.

However, aggregate capital invested overseas has nearly halved since the peak in 2015, but remains well above investment amounts reported before that time. Canadian pension funds continue to pursue co-investment opportunities abroad, forming alliances with local sponsors to penetrate new markets.


Investors are demonstrating prudence

Declining investments both domestically and internationally are a reflection of investors’ growing prudence in the current M&A environment.

High valuation multiples, a scarcity of quality assets and over-crowded markets are causing investors to take their time to invest capital in new deals. More diligence is being done before engaging in a deal process, with more time being spent on valuating and testing key deal drivers.

John Emanoilidis, Partner, Torys LLP
John Emanoilidis, Partner, Torys LLP

Smart investors are nonetheless finding good-value investments, although these may be harder to source than in the past and transactions may be more complex.

The high level of competition is causing some investors to change the nature of the risks they are willing to take in order to achieve targeted returns, such as by acquiring companies with increased operational risks. This new approach is requiring financial investors to enhance internal expertise and seek outside sector specialists in certain industries.

Investors are also searching for opportunistic investments in disrupted sectors. Overall, given the efforts of sponsors, some transactions are being pre-empted, with quality assets being sold ahead of any auction process being commenced.

A leap in tech investments

The technology sector experienced strong growth in 2017, with private equity investments in the sector surging by over 10 percent year over year.


In the public M&A space, we saw an uptick in deal activity in the financial services, manufacturing and industrials sectors, but oil and gas and mining public M&A activity remained relatively static.

Outlook for 2018

While Canada’s strong economic growth is predicted to ease in the coming months, the economic outlook for 2018 is still anticipated to be solid.

Accordingly, we expect deal-making will remain robust in the domestic market, especially as the mid-market core of Canadian M&A activity is unlikely to be severely impacted by broader macro-economic influences in the global markets.

In particular, more private businesses are expected to come to market as baby boomers retire. This is likely to keep stoking investor interest in the mid-size market segment. Growing corporate liquidity and favourable lending markets should also continue to support corporate buyers in their pursuit of domestic strategic investments. Cross-border transactions too will persist as businesses and investors continue to look outside of Canada for growth opportunities.

While investors remain cautious, and are taking their time to source opportune transactions, deals will continue to get done in the coming months.

To view Torys LLP’s original report complete with graphs, footnotes and data sources, please click here.

Sophia Tolias is a counsel at Torys LLP with a focus on M&A and private equity transactions. She wrote this article in collaboration with Michael Akkawi, a partner and head of the firm’s private equity practice, and John Emanoilidis, a partner and co-head of the firm’s M&A practice.

Photo of M&A concept courtesy of malerapaso/E+/Getty Images

Photos of Sophia Tolias, Michael Akkawi and John Emanoilidis courtesy of Torys LLP