m&a update: “ losings, comparables and …...2017/02/04 · 5 trends in m&a the global...

M&A UPDATE: “CLOSINGS, COMPARABLES AND CRYSTAL BALLS”CICBV NATIONAL BUSINESS VALUATION CONFERENCEQUEBEC CITY, JUNE 15 & 16, 2017

Aroon Sequeira CPA, CA, CBVSequeira Partners [email protected]

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


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


19

BUYER PROFILE OF SEQUEIRA TRANSACTIONS


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


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


21

DEAL ACTIVITY BY SECTOR


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


CP Rail’s failed$50.3B acquisition of Norfolk Southern

Enbridge’s announced $61B acquisition of Spectra Energy

22

DOMESTIC VS FOREIGN M&A


-

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


CP Rail’s failed acquisition

23

TSX VALUATION


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:


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


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!