With a 39% jump in deal volume in comparison to the beginning of the year, the second quarter of 2019 saw a solid rebound in mergers and acquisitions activity in Consumer Markets. At CA$11.3 billion, deal value was up 125.7% over Q1 2019.
On a year-over-year basis, the 196 deals recorded in Q2 2019 were up 4.8% when compared to 187 transactions in Q2 2018. But deal value was down by 20.1% over Q2 2018, which included a mega deal involving the Stars Group Inc.’s CA$6-billion acquisition of Sky Betting & Gaming.
Looking at the deals activity more closely, 26% (CA$2.9 billion) of overall deal value is attributable to two transactions involving Hudson’s Bay Co.: an agreement with Signa Holding GmbH to purchase HBC’s remaining 50% share of its German real estate assets and a proposal, led by HBC’s executive chairman, to take the company private by acquiring the 45.2% stake currently held by Land and Buildings Investment Management LLC and other investors. The two HBC deals have yet to close, and the plan to take the company private has met with some opposition.
Another significant factor in Q2 2019 deals activity was cannabis. At CA$5.9 billion, cannabis-related deals represented 52.1% of overall deal value. And at 92 deals, they accounted for 46.9% of overall deal volume. Looking further at the cannabis activity, out of the 81 transactions in which complete location data was available, 50 were outbound deals involving a target outside of Canada. Among the 50 outbound deals, 35 involved a United States-based entity. Those 35 deals represented 37.5% (CA$4.2 billion) of overall deal value.
With much of the activity dominated by the HBC and cannabis-related deals, the sentiment in the Consumer Markets sector continues to reflect a cautious outlook overall. Looking beyond the overall transaction figures, what were some of the top trends in Consumer Markets in Q2 2019?
With consolidation in the cannabis industry taking shape, the sector is maturing as the initial frenzy around it settles.
Many companies are realizing that growing cannabis is harder than anticipated. And with continued uncertainty around policies in both Canada and the United States, companies are looking to shore up future operations and cash flow by making acquisitions in pursuit of vertical integration and bringing in new expertise to run their operations.
Looking at the top 10 transactions in the cannabis industry in Q2 2019, six involved a target in the medical cannabis space. Canadian companies are also paying significant attention to global developments around cannabis legalization, particularly in the United States. Take, for example, Canopy Growth Corp. The company spent CA$2.4 billion in Q2 2019 across multiple acquisitions. The deals include Canopy Growth’s offer to buy Acreage Holdings Inc. as part of a bet on broader legalization in the United States. And in May 2019, Canopy Growth acquired Germany-based C3 Cannabinoid Compound Co., cannabinoid-based pharmaceutical company. Canopy Growth also announced plans in May 2019 to buy United Kingdom-based skincare company, “This Works”.
Hemp-derived products are another area of focus, particularly in light of the passage of the US Agriculture Improvement Act of 2018. Extracting cannabidiol (CBD) from hemp is attractive for many companies because the crop can be grown outdoors at scale under Canadian rules that are less restrictive than those for producing cannabis with higher amounts of tetrahydrocannabinol (THC).
Also adding to the potential for continued deals activity in the cannabis space is the upcoming legalization of edible products. Looking at the various restrictions imposed by Health Canada—including requiring companies to process cannabis-infused products in a separate facility that they must build before applying for a licence—we see a strong potential for new partnerships in this area.
More generally, we believe a number of factors will keep deal activity in the cannabis sector in the headlines for some time. They include the push toward oils, extracts and edibles; the interest in the sector by consumer packaged goods companies; and the ongoing cash-flow challenges faced by holders of cannabis cultivation licences. There are also promising signs that future deal activities in the sector will be more disciplined and calculated.
For some time, major retailers have been focusing on forging partnerships and pursuing strategic investments to make sure they continue to be relevant in a fast-changing environment.
As retailers grapple with disruption, they’re taking a number of approaches to shoring up their businesses. They include:
In Q2 2019, Metro Inc. formally launched its partnership with Uber Eats for home delivery of ready-to-eat meals in Quebec. Through the partnership, 23 Metro stores can now arrange for deliveries of prepared meals to customers in Montreal and some neighbouring areas through the Uber Eats app. In other developments, a partnership between FedEx Canada and Staples Canada will see 305 of the retailer’s locations house full-service FedEx shipping centres.
The growth of e-commerce is a significant factor in many of these partnerships, which was also the case in the announcement in Q2 2019 of plans by Sobeys Inc. and Ocado Group to open a second automated customer fulfillment centre in Montreal in addition to the one already under construction in Vaughan.
The development builds on a deal Ocado struck with Sobeys at the beginning of 2018 to become the supermarket chain’s exclusive online partner. The Montreal centre will serve Ottawa and major cities in Quebec, while the Vaughan location will cover the Greater Toronto Area. In total, Sobeys plans to eventually have four robotic distribution centres.
Also on the e-commerce front, retailers continue to adapt their stores to changing consumer behaviours.
At one of Walmart’s larger locations in downtown Toronto, for example, the retailer is devoting less space to its own goods as customers increasingly buy them online. Instead, it’s leasing out more of its space to other retailers and restaurants. The store is also testing a scan-and-go app that will help customers save up 25% of their shopping time.
The rising commoditization of grocery shopping also gives retailers an opportunity to expand further into private labels and refresh their overall business approach. Changes introduced by Walmart in Q2 2019 include the unveiling of a new urban concept at the Toronto location featuring the addition of a section for customers to sit while they eat prepared foods. The location is also redesigning its grocery section to give it more of a market feel and dedicating significantly more space to fresh foods.
If the buoyancy in Beyond Meat Inc.’s stock price is any indication, Q2 2019 offered further evidence of the trend toward plant-based proteins. In the last three months, Burger King Corp. reported that the success of meatless Impossible Whopper was making it difficult for its parent company, Restaurant Brands Inc., to keep up with the demand. Maple Leaf Foods Inc. also furthered its pivot to this segment in Q2 2019 with its announcement that it would build North America’s largest plant-based protein facility in Indiana.
Also in Q2 2019, food giant Tyson Foods Inc. announced it had sold its 6.5% interest in Beyond Meat. Tyson’s strategy is to launch its own non-meat protein products, with market testing anticipated this summer.
Canada’s opportunity to benefit from the plant-based trend can be summed up in one word: peas. Pea protein is a major factor in the plant-based phenomenon, and Canada is a major producer of the crop with the potential to be a global leader in this area. As with cannabis, the coming quarters may see a jump in transaction activity as companies look to secure supplies and pursue vertical integration.
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