MERGERS & ACQUISITIONS

Strong activity continues in mergers, acquisitions, and divestitures

As Canada moved into the second half of 2021, merger and acquisition (M&A) transactions remained active, indicating positive investor sentiment against the continued pressures of the global pandemic.

The total value of M&A transactions in Canada during the second quarter of 2021 remained high at $5.7 billion, across 85 transactions. This was slightly down from $5.8 billion for the previous three months - the highest quarterly mid-market deal volume in Canada since the fourth quarter of 2017.

What is driving the high levels of M&A activity? The current analytic manifests interest in transactions supported by several factors, including: • Strong public equity markets, which support acquisitions by publicly listed companies • Low interest rates, which increase the ability of buyers to raise debt to finance acquisitions • Private equity funds with significant amounts of uninvested capital • Strong investor sentiment, despite uncertainties due to the risks surrounding Covid 19 variants and concerns regarding the outlook for inflation

The chart to the right summarizes transaction volume by sector (sectors as defined by the S&P/TSX Composite Index). The mix of transactions shows particularly high volumes in health care – specifically cannabis-related - materials, and energy. • Health care accounted for 21 percent of total deal volume with 18 completed deals.

Canopy Growth Corporation closed the largest mid-market health care deal in the quarter, acquiring The Supreme Cannabis

Company Inc. for $421 million. • Materials accounted for 21 percent of total deal volume in the quarter, nine of which related to gold mining. • Energy accounted for 16 percent of total deal volume, up from 11 percent in the previous quarter, with activity supported by higher oil prices.

North American equity markets continued to post gains in the second quarter, which showed the fifth straight quarter of market gains. Ten sectors posted positive returns, including energy and information technology, which led the market with double-digit percentage gains.

Canadian dollar and national economy

Commodity prices continued to increase during the second quarter, with demand outstripping supply, resulting in a positive impact on the Canadian dollar. The Canadian dollar ended the second quarter at 1.24 USD/ CAD, having appreciated by roughly three percent since the end of December 2020.

Canadian Real GDP is forecasted to increase two percent during the quarter, with expectations vaccination rates will continue to improve and industries that suffered from the pandemic begin to reopen. In turn, Canada’s unemployment rate is expected to drop slightly to 7.9 percent in the second quarter due to the recovery of labour markets in light of businesses reopening.

The consumer price index is expected to grow approximately 3.2 percent during the second quarter, with inflation rates hitting 3.4 percent in the quarter, the fastest pace in almost a decade.

Trends in Southwestern Ontario

MNP is witnessing strong buyer interest across many sectors including agriculture and food processing, manufacturing, automation and industrial Internet of things, recurring revenue businesses such as “software as a service”, transportation and trucking, and health-related businesses to name a few.

While varying on a deal-by-deal basis, purchase price multiples remain strong. Nevertheless, M&A fundamentals listed below remain key to success:

• Presenting historical growth, margin trends and customer profiles in a compelling manner

• Normalizing historical earnings before income taxes, depreciation, and amortization

• Presenting a defensible and attractive forecast with well defined growth prospects

• Demonstrating staying power and a solid management team

• Presenting the company’s attractive features and market opportunities

• Showing the business in a positive light vs. competitors

• Running a professional divestiture process to ensure optimal pricing and terms are achieved and confidentiality is maintained

In conclusion, despite Canadian mid-market M&A activity softening slightly during the second quarter of 2021, continued equity markets strength and low interest rates have supported M&A deal making. And the increased activity during the first half of the year shines a positive light on investor confidence in the markets.

Jon Edgett: Partner and Managing Director MNP Corporate Finance

Jon has held executive roles at leading firms for more than three decades. He is a leader in providing transaction advisory services, including divestitures, financing, due diligence and acquisitions. He can be contacted at jon.edgett@mnp.ca.