DealCast Episode 1 | KPMG | CA

The Canadian M&A market & current deal trends

DealCast Episode 1

Webcast originally aired on Tuesday, July 19, 2016

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President, KPMG Corporate Finance Inc.

KPMG in Canada

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Summary:
Canada’s mergers and acquisition market faces increased uncertainty because of changes both at home and abroad. Overall, however, this year remains a terrific time for buyers and sellers.

Canada’s M&A market has withstood the 2007-08 recession and remained robust into 2016. The number of transactions has stayed at a consistently high level for the past few years, reaching 640 in 2015, down slightly from 2014 but up 73 per cent compared to the level in 2005.

The country’s oil and gas sector has experienced markedly less buyout activity since 2014, mainly due to falling crude prices which have crimped firm profitability.

Activity in other sectors, such as in the food industries, has been strong. Swander Pace’s 2015 purchase of Hamilton’s Voortman Cookies is an example of one such deal.

The real estate sector is still a prime area for buyouts, mainly in the renovation and contracting space. The telecommunications sector has also seen a lot of activity although here there are a limited number of firms available for purchase.

One factor underscoring Canada’s solid M&A activity is the large amount of capital – estimated at $3.1 trillion - among private equity firms and corporations that can be used to buy other enterprises. Effectively, these companies are seeking to use this cash rather than have it sit in a bank; buying other firms is a way to earn a better return and boost corporate growth.

More potential purchasers has led to higher enterprise value multiples for target companies – reaching 10.7 times EBITDA in 2015 before slumping to 8.2 times in the first half of 2016.

Another factor boosting sales activity is the falling Canadian dollar. The lower valued loonie can potentially cut the price of a Canadian acquisition to a U.S. buyer although the currency effect might be overblown.

On the sale side, owners are often reluctant to sell, taking a view that their companies are more than just price multiple statistics. Still, 550,000 Canadian owners plan to exit their enterprises by 2022, making potential assets in the range of $3.7 trillion going on the market. In addition, only 53 per cent of these owners plan to pass along their firms to the next generation within the family, implying they will seek outside buyers.

These factors could lead to more firms coming up for sale just as the demand from private equity and other corporations for potential buyout targets starts to take off.

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