Canadian M&A Market Update: Down But Not Out
October 2023
BATTERED AND BRUISED, THE CANADIAN M&A MARKET CONTINUES TO SHOW SOFTNESS IN Q3.
The M&A market continues to contend with ‘higher-for-longer’ interest rates, geopolitical challenges and a general economic slowdown. As a result, deal activity dropped in both announced volume and number of deals during the last quarter. On a value basis, M&A dropped to $43 billion in Q3 compared to $99 billion the previous quarter (57% decline) and $48 billion in Q3 2022 (10% decline). However, on a year-to-date basis Canadian M&A volumes have increased to $195 billion in 2023 (mostly led by energy) compared with $150 billion in 2022.
Obtaining traditional bank financing has become increasingly difficult, hence the emerging trend of buyers relying on larger equity positions, private credit partners, and seller financing to fund acquisitions.
KEY TAKEAWAYS THIS MONTH:
Canadian M&A is Soft, but Not Off Brand: Although Canadian M&A continues to be soft in 2023, it is following a broader global trend. Q3 2023 saw M&A transaction value drop to $43 billion, compared to $99 billion the previous quarter (57% decline) and $48 billion in Q3 2022 (10% decline). Year-to-date transaction value, however, increased 30% year-over-year. This has largely been led by ‘mega’ deals in the energy sector, with Canada-wide deal volume declining 15% year-over-year. Going forward, we expect M&A activity will continue to be muted for the remainder of 2023.
Distinct M&A Trends Emerging: Tightening credit conditions have led M&A buyers to seek alternative financing sources to complete deals, including having larger equity positions, relying more heavily on private credit partners, and using higher levels of seller financing. Due diligence efforts have also become more in-depth and detailed as buyers assess economic sensitivities.
Canadian M&A Deal Volume and Value (2019 Q1 - 2023 Q3)
CANADIAN M&A ACTIVITY CONTINUES TO SEE WEAKNESS.
A mixture of macroeconomic variables has been largely responsible for a decline in Canadian M&A activity, which declined in Q3 2023. On a value basis, Q3 2023 saw M&A activity drop to $43 billion compared to $99 billion in Q2 (57% decline) and $48 billion in Q3 2022 (10% decline). Interestingly, on a year-to-date basis Canadian M&A value has increased to $195 billion in 2023 from $150 billion in 2022 – however, most of this growth has been driven by energy-related transactions or mega deals (more below). Going forward, we continue to believe elevated interest rates, geopolitical tensions and a general economic slowdown in Canada will weigh on M&A activity.
Industry Highlight: Oil & Gas (Oil & Gas Services, Pipelines)
Industry Highlight: Energy (Alternative Sources, Renewables)
CANADIAN ENERGY AND RENEWABLES M&A… THE SAVIOUR OF Q3.
Elevated commodity prices have driven M&A activity in the Canadian Energy and Renewables sector, which accounted for $19.6 billion of announced deal value in Q3 2023 (or almost half of the quarter’s total deal value). Most of the deal value in the quarter was Enbridge’s announced acquisition of three natural gas utilities from Dominion Energy ($14 billion), but the trend appears to be continuing to persist into Q4 2023 with Tourmaline Oil announcing its $1.5 billion acquisition of Bonavista Energy. On a year-to-date basis, Energy and Renewable M&A activity has accounted for 19% of all Canadian M&A value, with notable acquisitions including:
Crescent Point Energy’s acquisition of Spartan Delta’s Montney oilfield assets for $1.7 billion;
ConocoPhilips’ purchase of TotalEnergies’ Surmont oilsands project for $4 billion; and
Suncor Energy’s acquisition of Total’s stake in the Fort Hills oilsands mine for $1.5 billion.
Canadian M&A EBITDA Multiples: 2021 Q3 - 2023 Q3
DEAL MULTIPLES ARE LOWER.
Valuation levels for private transactions have trended downwards in almost all industries and deal sizes in response to reduced public market valuations and broader pressures on corporate financial performance. During Q2 2023, valuation multiples dropped by 1.3x (or approximately 17%) from 2023 Q1 – we largely expect that muted valuation levels will persist in the short term as ‘higher-for-longer’ interest rates remain in place as the Bank of Canada continues its battle with persistently high inflation.
OTHER NOTABLE 2023 M&A TRENDS.
Credit Conditions Are Tightening: Volatility in financial markets as well as ongoing uncertainty in interest rate policy have constrained traditional debt financing sources for M&A buyers. There has been a shift towards using larger equity positions, increasing reliance on private credit and increasing seller financing to complete acquisitions. We expect this is largely driven by the impact of inflation on borrowers and the banks’ concerns around potential credit losses.
Deeper Due Diligence Focus: M&A buyers have decreased their risk appetite and have increased their focus on quality assets regardless of deal size. As such, most buyers are able to: (a) front-run much of their due diligence processes prior to submitting an offer and (b) run longer and more in-depth due diligence procedures. M&A buyers are also experimenting with AI tools in sourcing transactions and conducting due diligence.
OTHER TOPICS WE ARE KEEPING TRACK OF AT DWA.
The Supreme Court of Canada has issued an opinion that the Impact Assessment Act (IAA, Bill C-69) and its Physical Activities Regulations are largely unconstitutional, allowing provinces larger decision-making power over their natural resources.
CMHC reports that the annual pace of housing starts is UP 9% year-over-year in September 2023.
GOLD HEIST… $20 million of gold stolen from Toronto’ Pearson International Airport.
Sources: Statistics Canada, Capital IQ, GF Data, Diamond Willow Advisory.
