Top Trends in Cross-Border M&A

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In the first half of 2018, according to a report by PWC Canada, mergers and acquisitions (“M&A”) activity in Canada hit $93 billion. This is largely attributable to increased activity in the cannabis, technology, real estate and energy sectors. This trend is likely to continue for the rest of the year despite the current climate of uncertainty surrounding the impact of the United States – Mexico – Canada Agreement (“USMCA”). In this post we will discuss four trends and developments in Canadian and cross-border capital markets and M&A and why they are significant. They are:

  1. Growth and importance of strategic vs. financial buyers

  2. Prevalence of mid-market deals

  3. Growth of inbound vs. outbound transactions

  4. Technology and cannabis sectors are driving transactions

The Growth and Importance of Strategic vs. Financial Buyers

A notable trend in Canada last year which was characterized by resurgent M&A activity, was the dominance of strategic buyers. Improved market conditions prompted private equity funds to exit their investments rather than acquiring new targets. As a result, strategic buyers re-emerged as dominant buy-side players in Canadian M&A, while private equity funds tended to be on the sell-side of the equation.

Mid-Market Deals Dominate

In Canada, the M&A landscape is dominated by mid-market deals (i.e. transactions valued at less than $500 million). Last year was no different. According to a variety of surveys, about 80 percent of public M&A deals were valued at less than $100 million. In fact, Canadian public M&A transactions with a deal value of $1 billion are a rare commodity, with just a handful occurring in any given year. In 2017, according to a number of deal surveys, only 3 percent of Canadian public M&A transactions exceeded that value.

Growth of Inbound/Outbound Deal Activity

Cross-border M&A activity accelerated in 2017 improved from 2016, notwithstanding that the Canadian market showed a decline in total deal value over the same period. The decline in total deal value was largely driven by fewer “mega-deals” of $1 billion or more. For the first time in years, outbound deals to the U.S. and elsewhere from Canada decreased. In contrast, inbound M&A deals to Canada increased substantially on a year-over-year basis.

Technology and Cannabis Are Driving Transactions

The technology and cannabis sectors are two areas of the Canadian economy that have been ripe for M&A and capital markets activity recently. This could create challenges for issuers in other sectors that have fallen out of favour with investors recently, including junior mining.

Technology Deals

On the technology front, fintech and blockchain technology have accounted for a substantial portion of recent capital raising and M&A activity. Cryptocurrency and related blockchain technologies dominated a lot of press attention in 2017 especially in view of the extreme volatility in the value of Bitcoin.

Cannabis Deals

Cannabis companies in Canada are in a frenzy of activity as legalization of recreational use approaches. Some public cannabis operators have experienced extreme growth in market capitalization over a very short period of time. For example, Canopy Growth Corporation, has seen its market capitalization grow from $17 million to $10.15 billion in the space of four years.

There is, however, a market imbalance related to cross-border cannabis activity. Some states in the U.S. have legalized recreational cannabis, but it remains a criminal activity both federally and in several states. The lack of clarity in the U.S. resulted in the TSX refusing to list recreational cannabis companies with a U.S. connection. This might create an opportunity for domestic Canadian cannabis issuers in terms of a competitive advantage in raising capital in the domestic market.

Recent initiatives of the U.S. border protection agency regarding questioning of Canadian residents crossing the U.S. border concerning their cannabis investments and involvement has been given media attention lately. It is, however, interesting to note that Constellation Brands recently made a strategic equity investment in Canopy Growth Corporation valued at $4 billion. This is a clear indication of the interest that foreign money is now showing in the Canadian cannabis market.