Although the volume of mergers and acquisitions (M&A) activity involving Canadian firms declined in the second quarter (Q2), the value of those transactions more than doubled, according to a new report from PricewaterhouseCoopers LLP (PwC).
There were 705 M&A deals reported in the Q2, down from 841 in the first quarter (Q1), PwC reports. However, the value of those deals jumped to $66 billion in Q2 from $28 billion in Q1. “Deal volume dipped in the first half of 2018, but it remains at a healthy level, setting a positive tone for the remainder of 2018 where activity is unlikely to slow down significantly given the strong underlying market dynamics including the amount of dry powder available,” says the report.
PwC reports that the strong first half deal activity was driven by a surge in the energy and real estate sectors, alongside health care, which was powered by the fledgling cannabis subsector. In fact, there were 48 deals among cannabis companies in the first half of 2018, for a combined value of $5.2 billion.
The forthcoming legalization of recreational marijuana in Canada “significantly impacted” the growing cannabis sector in the first half, the PwC report states. “With a large number of players and ample capital, companies are investing to create economies of scale, expanding their patient base, securing consumer-centric products and brands, entering new markets and acquiring protected distribution channels.”
Looking ahead, the firm says that there will likely be continued consolidation in the cannabis sector, with producers looking to further build scale while weaker, poorly capitalized firms fail and likely sell off assets to stronger players. In addition, PwC says that it expects to see an increased emphasis on international M&A, as domestic pot firms seek growth in emerging foreign medical markets.
Indeed, cross-border M&A activity was strong overall in the first half, PwC says. In particular, it notes that transactions from Canada into the U.S. increased by 8% in the first six months of 2018 compared with the same period in 2017
“Canadian companies, private equity and pension funds are taking a larger share of U.S. cross-border deals,” it says.
“The growth in international outbound deals demonstrates that Canadian businesses are performing well and will continue to pursue growth opportunities at home and abroad,” says Dave Planques, national deals leader, PwC Canada, in a statement. “Canada has had a solid relationship with the U.S., however, the global geopolitical environment is creating greater uncertainty for dealmakers. Diversifying portfolios or supply chains may help alleviate risk and expand market share.”
Overall, high valuations will support strong deal activity in the months ahead, “especially given the healthy amount of capital available to corporations and private equity funds,” the report suggests.
“The pace of deals may depend in part on supply, as acquisition targets have been limited in some sectors. That could change though as large companies re-evaluate their portfolios and consider divesting operations that don’t align with their core strategic priorities,” the report concludes.