Q4 2017

DEALS WEST

WESTERN CANADA’S CORPORATE TRANSACTION QUARTERLY

2017 - NOTABLE CAPITAL WEST DEALS

Q4 2017

DEALS WEST

WESTERN CANADA’S CORPORATE TRANSACTION QUARTERLY

NAFTA and the Impact on M&A

Since the new U.S. administration took office and even prior to taking office, it was made clear that renegotiating NAFTA was a key objective. Over the past 12 months, NAFTA renegotiation meetings have taken place and more meetings are scheduled in the coming months. By mid-2018, the future of what a “new” NAFTA will look like will be clearer.

In early 2017, PitchBook reported that private equity deal activity in terms of size and value has decreased in response to NAFTA renegotiations. Private financial market investors have adopted a “wait-and-see” approach until positive signs of the renegotiated agreement become apparent. Should this not be evident in months to come, protracted NAFTA renegotiations will undoubtedly impact the North American economy and potentially hinder future growth.

U.S. renegotiations are targeting specific key industries of the Canadian economy, most notably agribusiness, forestry and auto manufacturing. Auto manufacturing has shown to be the most contentious issue as the U.S. wants strict “Buy American” rules. Significant alterations or complete withdrawal from NAFTA would be impractical for the U.S. considering the significance of its existing trade relationship with Canada. Canada will need to continue focusing its efforts on key members, including the 35 states for whom Canada is the top export market, reminding the U.S. what it stands to lose.

While the NAFTA renegotiation cloud is impacting M&A activity in select sectors, M&A activity overall remains robust. Although uncertainty around NAFTA’s future may abate appetite for Canadian M&A, low interest rates, a rebounding resource sector and positive domestic market sentiment indicate a generally healthy environment for M&A going forward.

With ongoing renegotiations and the next round of talks set for the coming weeks, we should expect to see the U.S. administration begin easing demands especially given electoral time pressures and the consistent reminder that it is the U.S. that has a trade surplus with Canada – not the other way around. M&A activity will surely see an uptick as soon as signs that a ratified agreement are close, particularly those involved with the above noted sectors.


Q4 2017 AND Q4 2016 MID-MARKET TRANSACTION COMPARISON IN CANADA

Total Canadian mid-market transaction values have reached a three year high of $8.7 billion on a quarterly basis in Q4 2017, up 2% from Q3 2017. Overall, transaction values have improved year over year across major industry sectors, with the exception of industrials & materials, which declined by 13%.

The Canadian economy is expected to see an upturn in 2018, as corporate liquidity becomes more robust and U.S. tax reform boosts the attractiveness of U.S. companies. With Canadian stocks at record highs, deal activity is set to be further bolstered by active equity markets. By industry, the strongest improvement in M&A activity was seen in real estate, food & beverage, and financial sectors.

CANADIAN DEALS BY INDUSTRY

The top ten M&A deals in Canada in Q4 2017 involved several industry sectors, with industrial & materials and energy, mining, & utilities being the most common. The most notable deal with presence in Vancouver in the table below was the acquisition of Alterra Power by Innergex Renewable Energy – this transaction added eight operating projects and a strong pipeline of prospective projects to Innergex’s asset portfolio.

Q4 2017

DEALS WEST

WESTERN CANADA’S CORPORATE TRANSACTION QUARTERLY

2017 Mid-Market M&A Review

MID-MARKET TRANSACTIONS IN CANADA

For a second consecutive quarter, total transaction values surpassed $8.5 billion in Q4 2017, a level not experienced since Q4 2014. The continued M&A momentum indicates a positive outlook for the Canadian economy.

Real estate and energy, mining, & utilities were the most active sectors in Canada, collectively accounting for approximately 45% of total transaction values in the country. While real estate has historically been, and continues to be, one of the most active sectors, the energy sector has seen increased consolidation efforts as companies seek to strengthen their balance sheets and diversify assets.

In Q4 2017 Canadian mid-market M&A activity saw a slight 2% increase by transaction values and a significant increase of 48% by volume compared to Q3 2017.

The value of mid-market deals in Canada also increased in 2017 from the prior year, up 10% to $30.3 billion, but still lagging behind the value of mid-market deals over the 2010-14 period. Adjusting these figures to remove energy sector deals, total deal value was also up approximately 10% versus the prior year and thus in line with recent historical averages.

MID-MARKET ACQUISITIONS IN CANADA
($25 million - $500 million)


MID-MARKET TRANSACTIONS IN WESTERN CANADA

Mid-market transaction activity in Western Canada remained flat in Q4 2017. While transaction volume remained constant, the value of mid-market transactions declined by 40% compared to last year ($1.5 billion in Q4 2017 compared to $2.5 billion in Q4 2016), driven primarily by decreased deal activity in the technology, media & telecom ($1.0 billion) and energy, mining & utilities sectors ($0.4 billion).

Compared to Q3 2017, the number of transactions increased by 44% in Q4 2017, but total value decreased ($1.5 billion in Q4 2017 compared to $2.2 billion in Q3 2017).

MID-MARKET ACQUISITIONS IN WESTERN CANADA ($25 million - $500 million)


MID-MARKET TRANSACTIONS IN NORTH AMERICA

North American mid-market M&A activity in Q4 2017 decreased 16% by volume (803 deals in Q4 2016 to 675 deals in Q4 2017), while total transaction values decreased by 9% from Q4 2016.

On a quarterly basis, mid-market M&A transaction values in North America increased slightly by 5% in Q4 2017 compared to Q3 2017.

On a rolling twelve month basis, mid-market M&A activity in North America continued to dip in Q4 2017, with deal values totalling $315 billion, down 17% from a seven year high achieved in Q2 2016. Overall, transaction activity continues to be driven by a strong North American economy and significant pools of capital from purchasers.

Deal activity continues to be driven primarily by strong corporate earnings and availability, as well as low cost of debt capital. Mid-market multiples have increased driven by higher valuations of strategic buyers, optimism on U.S. tax reform, and overall confidence in the U.S. and Canadian economies. Over the past three years, the average EBITDA valuation multiple for an S&P 500 company has increased from 10.2x in January

2015 to 12.7x at the end of 2017 – an improvement of 25%, and generally reflects the robust valuations seen in the mid-market.

MID-MARKET ACQUISITIONS IN NORTH AMERICA ($25 million - $500 million)