Prepare now to create value

2024 Canadian M&A outlook

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  • Report
  • 6 minute read
  • December 15, 2023

In our 2023 mid-year Canadian M&A update, released in June 2023, we talked about how we were seeing reason for optimism and a slow return to historical deal volumes as interest rate increases and inflation both tempered.

However, since July, we’ve seen deal volume and value drop further. Q3 2023 was the lowest quarter in terms of deal volume since 2017, and as of November 30, 2023, Q4 looks to be another soft quarter. In the period from July 1 to September 30, 2023, there were 576 deals in Canada with a total value of $45 billion.1

*Only includes deals from October 1–November 30, 2023

Our PwC Canada economics and policy practice expects challenging Canadian labour market conditions and associated pressures on wages to ease in the coming year due to strong immigration levels, and inflation is expected to reach 2% later in 2024. To mitigate the impacts of elevated rates on households, the Bank of Canada is expected to begin gradually cutting interest rates within the next quarter or two. We expect this will give dealmakers a path to return to a normalized level of deal flow.

Getting deals done right in the current environment, especially with the higher cost of capital, continues to be critical. Over the next year, dealmakers will need to carefully assess whether to move on opportunities and if they have strategic value.

Here we outline three key segments of the Canadian economy that may yield interesting opportunities for dealmakers in the coming months.

Be aware of upcoming distressed opportunities

There are many reasons why businesses may face financial difficulties, including intense competition, evolving economics, a changing tech environment or even the occurrence of a disruptive event.

Given current global and macroeconomic conditions, it’s not surprising that we’re starting to see clear signals (for example, blue-chip organizations reducing headcount) that indicate elevated levels of stress in the market. However, it may take several quarters before we’ll see significant numbers of organizations with liquidity issues. Many companies still have cash on their balance sheets, but that cash is dwindling.

For the moment, we’re seeing signs of distress in real estate, specifically in poorly performing commercial office properties and residential high-rise condos. This is an impact of higher interest rates, fewer buyers and fewer deposits to start new building projects. Executives or stakeholders in areas of the economy sensitive to softness in consumer demand should also be on high alert.

Organizations that aren’t able to pass on costs can very quickly find themselves in an immediate liquidity crunch.

As the market for distressed transactions increases, we expect there will be interesting opportunities for well-capitalized organizations to make strategic acquisitions at attractive valuations.

Keep the rising critical minerals sector on your radar

From a Canadian industry perspective, deals in the energy, utilities, mining and industrials (EUMI) sectors have been more robust than others. In Q3 2023, EUMI accounted for 66% of deal value, its highest share since Q3 2021, with the mining sector, and in particular critical minerals, playing a large role.2

However, this sector isn’t immune to economic headwinds. We’re seeing declines in battery commodity prices driven by slower demand from China, current economic and geopolitical uncertainty and a challenging financing environment. We’re also seeing some hesitancy in moving forward and completing deals.

For those deals that do move ahead, mergers and acquisitions (M&A) processes continue to take longer, with increased scrutiny from investors, governments and other stakeholders.

Nonetheless, the overall M&A outlook for critical minerals remains very positive, with miners continuing to position themselves for the energy transition, as demand for critical minerals is expected to grow. Security of supply and building local supply chains are also major focuses in critical minerals M&A, with supply chain participants becoming more concerned about future supply of critical minerals. This is leading to trends around minority investments, joint ventures and partnerships to help share investment risk and secure offtake. Geopolitical risks and government action will also drive critical minerals deal activity.

Outside of M&A, we’re seeing significant investments in the critical minerals sector. The Canadian mining and industrial market has seen a large number of investments to the electric vehicle (EV) battery ecosystem, ranging from mining projects, transformation plants, battery active-material manufacturers and battery-cell makers. This trend is a combination of Canadian companies investing in the EV value chain and foreign companies investing in Canadian markets, supported by attractive subsidy and incentive programs in Canada.

As value chains regionalize, further vertical integration all the way through to the finished product will be instrumental to the ability to support the development of EV value chains.

We expect critical minerals to be one of the most active sectors—and a key driver of M&A and investment activity in Canada—in the next few years and over the next decade.

Find value in existing assets with private equity

After a stand-off period of price discovery, asset pricing is levelling out, with some upward pressure from several factors. These include private equity funds that raised in late 2022 and early 2023 that are looking to deploy their dry powder in the market, fewer available deals and increased competition from strategic acquirers.

The number of available platform deals will likely be lower year over year due to asset availability and the cost of capital, so we expect mid-market funds to focus instead on bolt-ons.

This may drive deal volumes up, but overall deal value will likely be down.

The combination of high interest rates, tight credit markets and the competitive bidding process for premium assets leads us to expect an increased focus on value creation, as well as a tight talent market for value creation professionals. We also expect to see an increase in secondary deals as several factors converge to spotlight this investment class: pressure from limited partners (LPs) to return funds, difficulty in raising new capital and increased comfort with secondaries as a deal type.

Funds looking to access retail investors (including family offices) will drive a shift towards evergreen and/or open-ended fund structures. We anticipate longer-horizon LPs (for example, pensions and annuities) will be keen to place capital in these structures, at least in the near-term high-rate environment.

Bottom line

Organizations that prepare and do their homework now will emerge as leaders when we return to a robust M&A environment. To successfully take advantage of opportunities and get deals done right, organizations need to be ready to mobilize, swiftly identify the right target, evaluate the opportunity, execute the deal and mitigate risk.

Interested in learning more about how to use M&A to your organization’s best advantage?

Get in touch with us today to start the conversation.

Deals are an opportunity – for faster growth, stronger capabilities and dramatic transformation

1 Source: Capital IQ data, PwC Canada analysis.
2 Source: Capital IQ data, PwC Canada analysis.

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