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Consumer Markets deals insights

Q3 2018

Consumer Markets deals activity slowed in Q3 2018, with uncertainty about the now-renegotiated North American Free Trade Agreement (NAFTA) continuing to hold back investment and business confidence. A notable exception was the surge in activity and interest in the cannabis sector during the run-up to the legalization of recreational marijuana in Canada.

While many Canadians watched the NAFTA news developments nervously, Q3 2018 ended with a major announcement on the trade front: the three North American countries reached a new deal on Sept. 30, called the United States-Mexico-Canada Agreement (USMCA).

Overall, deal activity fell 13.2% in Q3 2018, to 197 deals from 227 deals in Q2 2018.  However, deal value remained strong at CA$21.4 billion, up about 19% from almost CA$18 billion in Q2 2018. The subdued activity reflects, at least in part, trade uncertainties and the erosion of Canadian competitiveness as a result of US tax reforms. While business confidence has been weak—a recent survey by Conference board of Canada found only 34% of business leaders believe it’s a good time to invest—the new USMCA may help reverse that sentiment.

Overview and insights

Deal value was up about 19% in comparison to Q2 2018 and by 9.2% over the CA$19.6 billion recorded in Q3 2017. Deal volume was down 13.2% in comparison to Q2 2018 but up 20.9% over the 163 deals recorded in Q3 2017. There were two mega deals in Q3 2018: the CA$5.1-billion investment by Constellation Brands Inc. in Canopy Growth Corp. and Brookfield Infrastructure Partners’ CA$4.3-billion acquisition of Enercare Inc.

Q3 2018 saw a 29.7% decline in private equity/venture capital deal volume in Canada, when compared to Q2 2018. Out of the 26 private equity/venture capital deals that occurred in Q3 2018, 13 related to the cannabis industry. Deals in the private equity/venture capital category were down from 37 transactions in Q2 2018, 10 of which related to the cannabis industry.

Among the larger transactions in Q3 2018 was the CA$5.1-billion investment by Constellation Brands, the maker of Corona beer, in Canopy Growth, a major player in the cannabis industry. Under a deal to acquire shares directly from Canopy, Constellation will take a 38% ownership stake in the company.

In another large deal, Brookfield Infrastructure Partners added a significant consumer business to its portfolio with its acquisition of Enercare for CA$4.3 billion. The deal provides Brookfield with a stable customer base and a recurring income stream through Enercare’s rental business.

Q3 2018 also saw Sobeys’ parent company, Empire Co. Ltd., acquire Farm Boy in a deal worth CA$800 million. In addition to ready-to-eat food items, Farm boy offers a range of fresh foods and a robust private-label selection. Empire believes the acquisition will give it more access to markets in the Greater Toronto Area and across Ontario and will help solidify its position when its e-commerce partnership with the Ocado Group takes shape in the coming years.

With Canada preparing for cannabis legalization in recent months, Q3 2018 saw a shakeup in plans for retailing recreational marijuana. In Ontario, the new government announced plans for private cannabis retail stores, which was a significant change from the previous arrangement to sell the drug exclusively through outlets set up by the publicly owned Liquor Control Board of Ontario.

Q3 2018 saw significant deal activity in the cannabis sector, including the investment by Constellation Brands in Canopy Growth. Other brewers entering the cannabis sector include Molson Coors Canada, which announced a joint-venture arrangement with Quebec-based Hydropothecary Corp. to develop non-alcoholic, cannabis-infused beverages for the Canadian market. The quarter also saw consumer giant Coca-Cola Co. expressing interest in cannabidiol (CBD), a component of cannabis known for its possible therapeutic effects.

The cannabis sector has attracted wide interest, with the Second Cup Ltd. coffee chain announcing in Q3 2018 that it’s looking at converting about 130 of its locations into cannabis stores. In addition, Shoppers Drug Mart Inc. announced a partnership with Manulife Financial Corp. that will see pharmacists advising the insurer’s customers on medical cannabis treatments.

Issues to watch

As Q3 2018 came to an end, the United States, Mexico, and Canada reached an agreement.

Some large retailers and consumer products companies have come under pressure from activist investors.

A big trend in the grocery sector is the growing focus on higher-quality produce.

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Michelle Pickett

Michelle Pickett

Deals Lead Partner, TMT & Consumer Markets, PwC Canada

Tel: +1 416 815 5002

Brooke Valentine

Brooke Valentine

Partner, PwC Canada

Tel: +1 416 687 8141

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