By Christopher Gillett, CFA, Sales Director
As firms, funds, and investors within Canada adjust to the changes resulting from the COVID-19 pandemic, M&A transactions are on the rise. In partnership with Mergermarket, Datasite gathered a panel of experts to discuss how those trends are likely to evolve.
Rachel Stone, Mergermarket’s moderator for the event, began by asking the audience and the panelists about their expectations for Canadian M&A volumes over the coming year. The experts agreed with the overwhelming majority of the audience in forecasting continued growth.
Senia Rapisarda, Managing Director at HarbourVest, noted that many players in the tech and healthcare spaces have raised considerable funds and are looking toward new acquisitions. Jeff Swinoga, the National Mining and Metals Co-Leader for EY, agreed that the outlook for M&A is positive. He did suggest that sectors that depend heavily on physical infrastructure and assets may lag behind a bit, as the ongoing pandemic prevents critical on-site due diligence.
Sean Dainty, Datasite’s own VP of Sales, added that activity on the platform supports a bullish perspective on growth. “In Canada, we had a record month in March in terms of new projects,” he explained. “Deals that are popping up on the Datasite platform now will complete in 6 to 9 months, so I think that bodes well for announced deals in the second half.”
Large deals may be less common
The panel broadly agreed that mid-tier and smaller firms will account for the bulk of M&A growth over the next 12 months. Salil Ratnaparkhe, Assistant VP of Corporate Development for Sun Life Financial, seconded Jeff’s assessment that constraints on due diligence are driving caution.
Jeff added that he expects to see some mid-tier activity and a healthy junior market in his industry. “There could be some majors,” he said, “but they’re quite healthy right now...their focus is on replacing their reserves and resources, maybe not just being bigger for bigger’s sake.”
Rachel noted that Canada accounted for two of Q1’s largest takeovers worldwide, as Canadian Pacific Railway and Rogers Communications both announced acquisitions at enterprise values of over $25 billion. However, the panelists felt that huge mergers like these are largely outliers in the Canadian market.
Impacts of oversight and ESG concerns
Pointing to the Canadian government’s recent move to block a Chinese company from acquiring a mining operation, Rachel asked whether heightened scrutiny around foreign investment will slow M&A growth.
Jeff responded first, arguing that while some specific deals may be harder, there remains enormous opportunity, especially since the government may want to support consolidation among domestic producers. Senia and Salil concurred, stressing that regulations on foreign investment are not new, and investors in these fields are accustomed to navigating oversight. “It’ll just be another step that they plan for,” said Salil. “And perhaps it may add time to the deal process, but I don’t think that it would fundamentally shift the investment thesis.”
An audience poll on obstacles to metals and mining deals highlighted global commodity pricing, concerns over ESG impacts, and the ongoing effects of COVID-19. This sparked a discussion about the recent rise in environmental, social, and governance concerns as a major priority for investors.
Jeff noted that the pandemic, with its attendant health and safety concerns, has highlighted the importance of working well with community stakeholders. Senia commented that ESG has already become an important factor in tech deals, with European investors leading the push for increased attention to social impact. Salil added that many institutional investors are adopting the UN Principles of Responsible Investing, suggesting ESG perceptions will be a significant factor in valuations going forward.
Sean provided some data in support of this assessment, highlighting a recent survey in which roughly ⅔ of M&A professionals said they expect ESG risks to be a higher priority in due diligence.
COVID impacts and distressed M&A
The participants agreed although a prolonged pandemic recovery would hurt the economy as a whole, it would be unlikely to have an outsized effect on the M&A market.
The audience asked whether distressed M&A and divestments are likely to increase this year. Salil felt that the answer would depend on the broader economic outlook, as stock market volatility or a prolonged COVID-19 recovery could trigger a wave of distressed assets coming to market. He noted that large companies will be unlikely to divest unless forced to, preferring to wait for valuations to bounce back. Senia concurred that the length of the COVID recovery will significantly affect the prospects for distressed M&A.
Jeff suggested that mining companies unable to transform to more eco-friendly production models may become distressed as they’re increasingly shut out of funds that emphasize sustainability.
Asked how participants in M&A deals could protect themselves given the ongoing uncertainty resulting from COVID-19, Salil pointed to structuring transactions to include elements such as deferrals, earnouts and other contingent consideration. Senia noted that HarbourVest has already seen increased interest in structured terms. Meanwhile, Jeff pointed again to the importance of securing local community buy-in for deals in extractive industries.
The final audience poll focused on the outlook for SPAC issuance in Canada, with a narrow majority predicting a moderate increase. Senia inclined toward the likelihood of a surge as acceptance and understanding of the model grows. “The economics can be quite interesting, and the velocity can be quite appealing,” she said. “It’s not going to reach US levels, but...I think there’s going to be a significant increase.”
Other panelists expected more restrained growth. Sean mentioned that companies are exploring a variety of innovations in public offerings, of which SPACs are only one example. Salil observed that recent Canadian SPAC issuance has mostly focused on the cannabis industry, arguing that significant growth would require an expansion in the range of target industries.
Closing audience questions
The panel considered two final questions from the audience.
The first was about the factors driving the recent growth in M&A. Aside from the thawing of deals that were chilled by the pandemic, Salil pointed to greater consolidation across the market, which has placed pressure on smaller companies to either become buyers or sellers.
Finally, on whether CPC-style deals are likely to become more common, Senia said that she expects similar innovations to emerge, assuming the economics continue to support them.
Overall, the panelists described an M&A market poised for growth as companies adapt to the new realities of a post-pandemic economy. Buyers and sellers will need to pay closer attention to social impact, but small and mid-sized firms in particular face many opportunities in the year ahead.
Listen to additional insights from our expert panel on Canada's evolving M&A landscape, the impact of this past year, and so much more.
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