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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.

Karen Fisman, Director, Business Development and Publications Lead, Valitas Capital Partners
Karen Fisman, Director, Business Development and Publications Lead, Valitas Capital Partners

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