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M&A UPDATE: “CLOSINGS, COMPARABLES AND CRYSTAL BALLS”CICBV NATIONAL BUSINESS VALUATION CONFERENCEQUEBEC CITY, JUNE 15 & 16, 2017
Aroon Sequeira CPA, CA, CBVSequeira Partners Inc.asequeira@sequeirapartners.com
2
Today’s Agenda
Overview of M&A Activity
Deal Metrics and Terms
Outlook
3
Transaction Drivers
MOTIVATIONS
Motivators
Acquisition as a Growth
Strategy
Opportunistic
PE Seeking Acquisitions
Rationalization
or
Consolidation
Opportunistic
“Sale for Growth”
Succession
Distress
Sellers Buyers
THE GLOBAL BACKDROP
5
TRENDS IN M&A
The Global Backdrop
Source: Pitchbook
Annual Number and Value of Transactions
$2
09
$2
32
$2
87
$2
47
$1
94
$4
07
$2
67
$2
68
$2
60
$3
14
$2
67
$3
65
$2
55
$3
43
$2
96
$3
87
$3
40
$3
88
$4
38
$5
33
$6
00
$4
52
$5
36
$5
32
$5
89
$5
62
$5
53
$4
82
$3
85
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
$0
$100
$200
$300
$400
$500
$600
$700
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2010 2011 2012 2013 2014 2015 2016 2017
Dea
l Co
un
t
Dea
l Val
ue
($B
)
Deal Value ($B) Deal Count
6
TRENDS IN M&A
The Global Backdrop
Source: Thomson Financial, PNC
Global Announced M&A Deal Volume
7 Years 8 Years 5 Years 7 Years +
7
TRENDS IN M&A
The Global Backdrop
Source: Thomson Financial, PNC
North American Annual M&A Volume (# of Transactions)
1st Wave: 1897 – 1904Trigger: MonopoliesEnd: Weak financial system
2nd Wave: 1916 – 1929Trigger: Vertical integrationEnd: Crash of 1929
3rd Wave: 1965 – 1973Trigger: Conglomerate eraEnd: Tax changes, stock decline
4th Wave: 1981 – 1989Trigger: Hostile takeovers, junk bondsEnd: Tight financing market, recession
5th Wave: 1992 – 2007Trigger: Low rates, surge in PE, housing bubbleEnd: 2008 Recession
6th Wave: 2010 – ?Trigger: Low rates, excess cash, dry powder, poor organic growth opportunitiesEnd: ???
8
Global Median & Average M&A Deal Value
Source: Pitchbook
$2
2
$2
4
$2
6
$2
5
$3
2
$3
0
$3
6
$2
24
$2
25
$2
47
$2
84
$3
14 $3
73
$5
08
$0
$100
$200
$300
$400
$500
$600
2010 2011 2012 2013 2014 2015 2016
Dea
l Val
ue
(USD
$M
)
Median Average
The Global Backdrop
TRENDS IN M&A
2016 Global M&A Transaction Volume by Deal Size
Beware of Averages
71%
14%
7% 5%
1% 0%
Under $100M $100M-$250M $250M-$500M
$500M-$1B $1B-$5B $5B+
*Metrics are for reported deals only. Many small transactions go unreported
Mean
9
REGIONAL 10 YEAR AVERAGES
The Global Backdrop
31%
37%
27%
2% 3%
North America Europe Asia Africa South America
Number of Deals
43%
31%
20%
2% 3%
North America Europe Asia Africa South America
Value
Source: Institute for Mergers, Acquisitions, & Alliances
Europe
N.A.AsiaN.A.
Europe
Asia
10
The Global Backdrop
RISING TRANSACTION MULTIPLES
* As of March 31, 2017
Global Average EV / EBITDA Multiples
Source: Pitchbook
3.8
x
4.5
x
4.0
x
4.5
x
4.9
x
5.0
x
4.5
x
4.8
x
3.5
x 3.7
x
3.7
x
3.2
x 3.9
x
4.0
x
4.5
x
3.6
x
0x
2x
4x
6x
8x
10x
2010 2011 2012 2013 2014 2015 2016 2017*
Debt/EBITDA Equity/EBITDA
7.3x8.2x
7.7x 7.7x
8.8x 9.0x 9.0x8.4x
Data skewed toward large transactions as many small transactions are not reported
11
4.6
x
5.2
x
4.7
x
5.4
x
5.1
x
5.7
x
5.5
x
6.2
x
3.5
x 4.0
x
3.8
x 3.8
x
4.0
x 4.5
x
5.4
x
4.7
x
0x
2x
4x
6x
8x
10x
12x
2010 2011 2012 2013 2014 2015 2016 2017*
Debt/EBITDA Equity/EBITDA
8.1x
9.2x8.5x
9.1x 9.1x 10.1x10.8x 10.9x
The Global Backdrop
RISING TRANSACTION MULTIPLES
* As of March 31, 2017
US Average EV / EBITDA Multiples
Source: Pitchbook
Data skewed toward large transactions as many small transactions are not reported
12
92%
83%
68%
32%
20%16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950's 1975 1985 1995 2005 2015
The Global BackdropTANGIBLE ASSETS
Tangible Assets: as a Proportion of Total Market Capitalization
Source: World Bank and Ocean Tomo, LLC, Jan 1, 2015
Woodstock 1969
Personal Computers
Internet1995
Today, approximately
85% of our economy is
underpinned by “New Assets”
13
PRIVATE EQUITY
The Global Backdrop
$542
$677 $688
$321 $307$367
$415
$552 $571$598 $589
0
100
200
300
400
500
600
700
800
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$U
SD (
Bn
)
Capital Raised
Source: Preqin
14
M&A Activity by Type (USD Billions)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2010 2011 2012 2013 2014 2015 2016
Sponsor Backed Corporate M&A
The Global BackdropWHAT’S DRIVING ACTIVITY & MULTIPLES?
Supply and demand? More money than good deals
Over $2.0 Trillion cash on corporate balance sheets
Over $757 Billion in PE dry powder
Availability of cheap debt
Global M&A Activity by Type (USD Billions)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2010 2011 2012 2013 2014 2015 2016
Sponsor Backed Corporate M&A
OVERVIEW OF CANADIAN M&A ACTIVITY
16
TRIP BACK IN TIME
Canadian Economic Backdrop
Source: Stats Canada, Trading Economics, World Bank
Year
Population
Inflation Rate
BoC Rate
Unemployment
CAD / USD
GDP
Stanley Cup Champion
1987 1997 2007 2017
26.5 M
8.8%
0.754
$0.43 Trillion USD
29.9 M
1.62%
3.52%
9.1%
0.722
$0.65 Trillion USD
33.0 M
2.14%
4.60%
6.0%
0.931
$1.46 Trillion USD
35.2 M*
1.91%
0.50%
6.7%
0.753
$1.55 Trillion USD*
*2016 Figures
4.36%
8.40%
17
REPORTED DEAL ACTIVITY IN CANADA
Canadian M&A Activity
Value and Number of Announced Transactions
Source: Crosbie & Co.
$317
$106 $121$157
$193$213
$194$239
$276
$331
2,729
2,254 2,268
2,8243,004
2,822
2,548
2,8692,621 2,685
0
500
1000
1500
2000
2500
3000
3500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
50
100
150
200
250
300
350
Nu
mb
er o
f Transactio
ns
$C
AD
(B
n)
Value Volume
18
DEAL ACTIVITY BY REGION
Canadian M&A Activity
33%
18%19%
15%
14%
2014 2015 2016
36%
21%
15%
12%
15%
Number of Targets by Province
Value of Targets by Province
36%
19%15%
16%
15%
23%
7%
46%
12%
12%36%
14%
31%
8%11%
27%
9%
36%
10%
18%
Ontario BC Alberta Quebec Other*Transaction value is not always disclosed**Other includes undisclosed transactions
Source: Crosbie & Co.
19
BUYER PROFILE OF SEQUEIRA TRANSACTIONS
Canadian M&A Activity
Buyer Profile: 2010 - Present
Source: Internal Documents
U.S. / International38% Canada
62%Strategic
59%
Private Equity26%
Sample of 40 transactions over 6 years
PE Backed Strategic
15%
20
DEAL ACTIVITY BY SECTOR
Canadian M&A Activity
0
50
100
150
200
250
300
350
400
450
500
Nu
mb
er
of
De
als
2012 2013 2014 2015 2016
Number of Announced Deals by Sector
Source: Crosbie & Co.
21
DEAL ACTIVITY BY SECTOR
Canadian M&A Activity
Value of Announced Transactions by Sector
-
20,000
40,000
60,000
80,000
100,000
120,000
$C
AD
(M
)
2012 2013 2014 2015 2016
Source: Crosbie & Co.
CP Rail’s failed$50.3B acquisition of Norfolk Southern
Enbridge’s announced $61B acquisition of Spectra Energy
22
DOMESTIC VS FOREIGN M&A
Canadian M&A Activity
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2012 2013 2014 2015 2016
CDN Buyer/Foreign Target Foreign Buyer/CDN Target CDN Buyer/CDN Target
Number of Announced Deals
$0
$50,000
$100,000
$150,000
$200,000
$250,000
2012 2013 2014 2015 2016
$C
AD
(M
)
CDN Buyer/Foreign Target Foreign Buyer/CDN Target CDN Buyer/CDN Target
Value of Announced Deals
Source: Crosbie & Co.
CP Rail’s failed acquisition
23
TSX VALUATION
Canadian M&A Activity
Sector Index
Source: TMX Money
94%81%
129%
87%
112%86%
130%
77%
106%
80%
106% 113%118%
62%
91%
118% 124%133% 135%
157% 161%177%
200%
275%
0%20%40%60%80%
100%120%140%160%180%200%220%240%260%280%300%
Mar-07 Mar-12 Mar-17
CANADIAN PRIVATE EQUITY
25
Private Equity Transaction
CANADIAN MARKET
• Canadian PE market is maturing
• Direct investment by pension funds is significant
• U.S./Global PE shows up on mid to large deals
• Typically 5-7 year investment horizon
• Equity return expectations of 25%+
• Family Offices becoming a larger factor
Private Equity looks for strong:
ReturnsGrowth
Management
26
Private Equity Value Proposition
FIRST & SECOND PAYDAY ILLUSTRATION
Staged approach to exit
First Payday
Transaction Valuation:
Maintainable EBITDA 5,000,000$
Multiple Paid 5.0x
Enterprise Value 25,000,000$
Transaction Funding:
Debt 2.5x EBITDA 12,500,000$
Equity
PE 75% 9,375,000
Shareholders 25% 3,125,000
25,000,000$
Cash to Shareholders:
Enterprise Value 25,000,000$
Equity Re-Investment (3,125,000)
Pre-tax Cash to Shareholders 21,875,000$
Second Payday
EBITDA - 5 Year Growth 15,260,000$
CAGR% 25%
Exit Multiple Paid 6.0x
Enterprise Value 91,560,000$
Debt and Other Dilution 2.5x EBITDA (38,150,000)
Equity Value 53,410,000$
2nd Payday on Retained Interest 13,353,000$
IRR on Re-Invested Funds 34%
Total Proceeds:
First Payday 21,875,000$
Second Payday 13,353,000
Total Proceeds to Shareholders 35,228,000$
IRR on Re-Invested Funds 34%
27
NORTH AMERICAN PRIVATE EQUITY MIDDLE MARKET MULTIPLES
Private Equity
Total Enterprise Value / EBITDA Multiples ($10M - $250M)
5.8x
6.0x 6.0x6.1x
6.2x
6.0x5.9x 5.9x
6.1x6.2x
6.4x 6.4x
6.7x6.8x
5.0x
5.2x
5.4x
5.6x
5.8x
6.0x
6.2x
6.4x
6.6x
6.8x
7.0x
* Size range of deals is between $10MM - $250MM TEV
Source: GF Data
No reliable information on strictly Canadian multiples but expect it to be lower
28
NORTH AMERICAN PRIVATE EQUITY SIZE PREMIUM
Private Equity
Total Enterprise Value / EBITDA Multiples By TEV Size Range (2003 – 2017)
Average TTM Revenue Growth – 15.5%
Average EBITDA Margin – 20.3%
PE platform deals are of above average quality
Source: GF Data
5.5x
6.2x6.8x
7.6x
1,006
764
529
248
0
200
400
600
800
1,000
1,200
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
$10-25M $25-50M $50-100M $100-250M
Nu
mb
er o
f De
als
29
NORTH AMERICAN PE DEBT MULTIPLES
Private Equity
2.4x 2.4x 2.6x 2.7x 3.0x 3.1x
1.0x 1.1x 0.8x1.0x
0.9x 0.8x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
2011 2012 2013 2014 2015 2016
Senior Debt Sub Debt
Debt Multiples Per Year
Source: GF Data
PE deals have higher leverage
* Size range of deals is between $10MM - $250MM TEV
DEAL TERMS
31
CONSIDERATION, REPS, WARRANTIES, & INDEMNITIES
Deal Terms
Bridging the pricing gap
• Shares
• Private Equity Acquirer – almost always required
• Public Company Acquirer – often involves shares
• Private Company Acquirer – seldom involves shares
• Vendor Notes
• Interest typically below subordinated debt market rates
• Security behind senior lenders
32
CONSIDERATION, REPS, WARRANTIES, & INDEMNITIES
Deal Terms
• Earnouts
• Devil is in the detail
• Timeline
• Calculation
• Carry over / cumulative provisions
• Reps, Warranties, & Indemnities
• Convergence between Canadian and U.S. terms
• U.S. is more “seller friendly” (E.g. Indemnity Caps)
• Greater use of reps and warranty insurance
Balancing post-closing risk between Buyers and Sellers
33
Deal Terms
ILLUSTRATIVE EXAMPLES
RECONCILING NOTIONAL VALUATIONS VS OPEN MARKET PRICING
35
RECONCILING VALUE & PRICE
Notional vs Open Market
Notional Value
No Compulsion to Act
Transact in Cash
Rational Parties
“Market Terms” on Reps, Warranties etc.
Equal Knowledge
Open Market
May or May Not Have
May Have Significant Non-Cash Consideration
Human Element
May Vary From Market
Not!
36
CERF – ILLUSTRATIVE EXAMPLE
Reconciling Notional Values vs Open Market Pricing
acquired
February 2, 2016
Transaction Details
Purchase Price (EV)
Trailing EBITDA
EV / EBITDA
$21.0 MM CAD
$4.9 MM CAD
4.3x
Purchase Price Breakdown
10%
15%
51%
24%
Common Shares Pref. Shares
Debt Assumed VTB Note
EV / Net Asset Value 0.6x
Price under book value combined with non-cash consideration makes it difficult to rely on transaction multiple as a reliable precedent
Source: CERF Inc. Press Release – Feb 2, 2016
LOOKING FORWARD
38
Looking Forward
WHERE TO FROM HERE?
Transaction Drivers Transaction Detractors
• Succession
• Cash on corporate balance sheets
• PE dry powder
• Continued economic growth
• PE need to transact
• Platforms and add-ons
• Liquidity events
• Cheap debt
• Recovering resource industries
• Acquisition of technologies and other IP
• Has the cycle peaked?
• Risk of economic downturn
• Valuations too high
• Political uncertainty
• BC election
• Trump factor
• Brexit fallout
• Stalled growth in China
• Are we at the top of the debt cycle?
• Rising interest rates
Thank you!
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