Q3 Canadian mega-deals plummet, but mid-market remains strong

A recent edition of the Globe & Mail featured the following eye catcher: “Canadian M&A Craters in the Third Quarter”. While it’s true that mega-deals cratered in the third quarter, mid-market activity, the bread and butter of Canadian mergers and acquisitions, remained strong.

When Valitas Capital Partners pulled announced deal data from Capital IQ and took a deep-dive look into Q3 2017 M&A results, this is what we found.

1. Why the plunge in deal value?

Total deal value in the quarter dropped from $129.4 billion in Q3 2016 to $63.5 billion in Q3 2017. But it’s important to consider the reasons why.

In fact, the plunge in value is largely attributable to Enbridge Inc’s $61 billion merger with Spectra Energy Corp in Q3 2016. (There was no equivalent transaction size in this most recent quarter). On top of that, a slowdown in mega-deal activity, with volume dropping from 14 transactions in 2016 to 8 this year, contributed to the drop in aggregate value.

The drop in mega-deal activity does not come as a surprise to us at Valitas. Other M&A experts agree, telling us it has been known for some time that Canadian M&A activity in the $1 billion+ range is getting softer. We all agree on a further point as well: that the mid-market presents a different story.

2. Canada’s mid-market is still going strong

Excluding deals in the $1 billion+ range, we looked closely at mid-market activity. We’ve given away our findings in the heading above, but let’s discuss the details.

In the sub-$1 billion range, deal value in the quarter increased by 19 percent over last year to $23.9 billion from $20 billion. Individual deal size was larger, as volume declined to 326 transactions from 367 in the previous year. Activity in the $100 million to $499 million range was particularly strong in the quarter, with volume up 48 percent to 46 announced transactions, and value increasing by 57 percent to $11 billion.

The M&A insiders that we spoke to tell us these results are consistent with what they are seeing in their individual practices, that is, a robust mid-market with plenty of interest from domestic and foreign buyers. Their reports are similar to our own experience at Valitas.

3. Cross-border activity: volume up, value down

Given the decline in mega-deal activity, and the impact of the Spectra deal on Q3 2016 results, it was no surprise that cross-border deal value declined in the quarter, to $46.9 billion from $89.2 billion the previous year.

The number of cross-border deals increased, however, to 380 from 355 in Q3 2016, once again reflecting that healthy mid-market activity we’ve described above. In our discussions with industry experts, a theme emerges: there is sustained strong interest in Canadian companies from foreign buyers, particularly those from the United States and China.

So what is our takeaway?

While Canadian M&A value plunged in the most recent quarter, that drop is reflective of a decline in mega-deals rather than a slowdown in the broader market. In fact, as the data suggest, 2017 is shaping up quite well for the mid-market. And according to M&A insiders, ourselves included, Q4 2017 is already off to a strong start.

You can read Valitas Capital Partners’ entire Q3 2017 M&A review here.

This story was authored by Karen Fisman, director, business development and publications lead, at Valitas Capital Partners, a boutique M&A advisory firm. She collaborated on the piece with Peter Yuan, a Valitas investment banking analyst. The team at Toronto-based Valitas has completed about 200 M&A and financing transactions with value exceeding $180 billion.

Photo of M&A concept courtesy of wildpixel/iStock/Getty Images

Photo of Karen Fisman courtesy of Valitas Capital Partners