M&A year in review and 2020 outlook

Private equity a bright spot as Canada records $160 billion in M&A activity in 2019

Canada recorded US$160 billion in deal activity in 2019, as corporations and private equity firms continued to pursue mergers and acquisitions to fuel their growth and transform their businesses. While deal activity was down from the prior year, the numbers were generally in line with recent trends and reflect a healthy market overall. Some sectors experienced a slowdown in activity, while others—notably mining—saw a spike in announcements of deals both earlier in 2019 and toward the end of the year.

Comparing activity in 2019 to the prior year, total deal volume fell 20%, while overall deal value was down by only 6%. Average deal size rose 27% to US$217 million.

Contributing to the falloff in deal volume was a sharp drop in micro-cap deals and a less pronounced dip in large-cap deals. Micro-cap deals between US$1 million and US$50 million fell 35% in 2019, while large-cap transactions between US$1 billion and US$5 billion declined 14%. 

There were three mega deals (valued at more than US$5 billion) in 2019, compared with five in 2018. On the corporate side, the largest deals included Newmont Mining Corp.’s acquisition of Goldcorp Inc. and Ireland-based Flutter Entertainment’s friendly, all-share takeover of Stars Group Inc., an online gaming company. 

On the private equity side, Power Corporation of Canada acquired the remaining stake in Power Financial Corp. Other private equity equity players and pension funds, including Blackstone Group Inc., Brookfield Asset Management Inc., Onex Corp. and CPP Investments, were active in large and notable deals valued between US$1 billion and US$5 billion.

Looking forward, we believe Canada will see a healthy deal market in 2020. Good assets will continue to trade at good prices. Transactions will continue to take longer to complete as buyers ramp up the level of due diligence and overall scrutiny during the deal (a trend noted through 2019). And the prospects remain good for strong private equity activity given the amount of dry powder, a healthy fundraising environment and new funds being launched.

With those overall trends in mind, let’s take a closer look at what happened in 2019 and see what’s on the horizon for 2020.

A closer look at Canadian M&A activity in 2019

Strong fundamentals for Canada’s tech sector

Technology deals once again comprised the largest share (18%) of overall transaction activity, although the volume of activity was down 23% from 2018. 

The decreased activity shouldn’t detract from the strength of Canada’s technology sector and the positive outlook for transactions. Technology plays an increasingly central role in the value chain and transformation ambitions of large companies, many of which see acquisitions as a way to get ahead of digital disruption and fill gaps in their capabilities.

Canada is a major destination for corporate and private equity buyers looking for world-class technology assets and talent. The Canadian technology sector has enjoyed significant tailwinds in recent years: favourable immigration policies, a skilled workforce, ample venture capital and supportive tax incentives. 

Financial technology, digital health, Software as a Service (SaaS), and artificial intelligence (AI) should continue to be particularly attractive areas for deal activity. Canada has shown remarkable leadership in SaaS, demonstrating a clear ability to build and scale top-quality businesses. Canada has also enjoyed a major advantage in AI, particularly around the use of machine learning capabilities like deep learning. 

With valuations continuing to rise, investors in 2020 are paying more attention to business models and paths to profitability at the Series A fundraising stage and beyond. Service-based businesses with technology-enabled platforms remain attractive, but investors are applying more scrutiny to differentiate companies that are true technology plays versus those that should still be valued as traditional service-based businesses.

Cannabis sector evolving after 2019 market correction

Transaction activity in Canada’s cannabis sector declined throughout 2019, amid slumping share prices and a sharply curtailed financing environment. In response to the industry’s market correction, some cannabis companies have been trying to unwind or revise prior deals by either cancelling transactions outright or renegotiating the price to better reflect market realities. 

While dealmaking will continue in 2020, it will take a different form. Investors are looking for profitability, and cannabis companies will focus on operational excellence and execution. In this environment, we expect to see increased merger activity as companies pursue scale and industry consolidation accelerates. As companies shed assets, scale down expansion plans and rethink the need for vertical integration, we may also see more restructuring-driven deal activity.

Retail bucks the trend

Looking at other sectors, health care was responsible for 13% of total Canadian deal volume in 2019, although activity was down 19% from the prior year. At 90 transactions, the retail sector was one of the few areas to see a jump in deal volume (23%) in 2019, driven by an uptick in restaurant deals and a significant increase in specialty retail, which includes cannabis.

In restaurants, one Canadian player that has been particularly active is MTY Food Group Inc., whose acquisitions in 2019 included the purchase of US pizza chain Papa Murphy’s Holdings Inc. While MTY highlighted the deal’s impact in reducing the seasonality of its results and the increased exposure to a growing US pizza market, there have also been signs of growth in Canada. In late 2019, for example, Burger King announced a deal with Toronto-based franchisee Redberry Group as part of plans to open more than 100 restaurants in Ontario and Manitoba over the next five years.

Top performing sectors

High technology
18% of deal volume

Health care
13% of deal volume

Industrials
12% of deal volume

Rising share for private equity

Private equity deal volume fell 18% in 2019, while aggregate deal value rose 9% and the average deal size increased by 33%. This compares favourably to corporate transactions, which saw deal volume fall 21%, aggregate deal value decrease by 13% and average deal size rise 10%. On a volume basis, private equity’s share of total Canadian deal activity rose slightly, to 28% from 27% in 2018. 

Canada saw strong private equity fundraising in 2019, with many funds raising significant new capital, in many cases the new funds being notably larger than the prior fund. We’re also seeing new funds established, often led by high-quality talent spun out of successful existing private equity or pension funds, which should lead to continued growth for, and competition in, the private equity space in Canada.

Adding to the potential for growth in private equity deal activity is the fact that private equity funds in Canada, and around the world, continue to sit on substantial amounts of dry powder and will be under continued pressure to deploy it. We expect private equity funds to remain active in the technology sector and capitalize on restructuring driven divestitures and corporate carve-out activities in the year to come. Even in the event of a downturn in the economy, Canada is unlikely to see a substantial sustained downturn in private equity deal activity.
 

Outlook for Canadian M&A activity in 2020

Navigating economic fears and uncertainties

There’s some apprehension in the air as we move into 2020. Nearly two-thirds (63%) of Canadian participants in our latest CEO Survey said they expect economic growth to decline over the next 12 months. The pessimistic outlook was significantly higher than in the previous two years. 

But Canadian CEOs are much more upbeat about their own organization’s prospects for the year ahead: 72% are confident they’ll grow revenues over the next 12 months. And many are looking at deals as a means to drive that growth, with plans that include mergers and acquisitions (49%) and joint ventures (54%). Another 18% of Canadian CEOs say their plans include selling a business, which suggests 2020 could bring some attractive transaction opportunities.

64% of Canadian CEOs expect global economic growth to decline over the next 12 months

Source: PwC’s 2020 CEO Survey

Despite the apparent pessimism revealed in our CEO Survey, the outlook for deal activity remains positive in Canada and elsewhere. Investment capital remains abundant, and opportunities abound. We expect deal activity in Canada and around the world to remain steady in 2020.

That said, we do expect Canadian deal activity to shift in the year ahead, as the restructuring activity that began to pick up in late 2019 will likely continue into 2020. The cannabis industry continues to evolve, Alberta’s oil and gas sector is struggling again and there are signs of distress in the commercial real estate sector in that province and even in Ontario. For well-capitalized companies, 2020 could offer attractive opportunities for strategic acquirers to pick up quality assets at good prices.

Private equity funds with platform companies will likely continue to pursue bolt-on acquisitions to generate synergies and drive further growth. In this environment, companies with high debt-to-equity ratios or underperforming assets may want to look for a buyer sooner rather than later to avoid selling in a saturated market.

Deals by geography in 2019

701 Domestic

613 Outbound

458 Inbound

Contact us

David Planques

David Planques

Partner, National One Analytics Leader, PwC Canada

Tel: +1 416 815 5275

Richard Pay

Richard Pay

Private equity and Pensions Leader, PwC Canada

Tel: +1 416 941 8357

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