Canadian merger-and-acquisition activity is expected to strengthen in 2019 as a slump in oil prices could fuel consolidation among energy companies and cannabis deals gain momentum, M&A advisers said.
Deal volume jumped 15 percent to a 12-year high of $275.2 billion in 2018, from a year ago, according to figures from Refinitiv. Buyout firms dominated big-ticket deals in the financial services, real estate and energy sectors, the data showed.
While energy formed a part of deal activity, it did not make the outsized contribution seen in recent years. The sector made up about 12 percent of deals in 2018, compared with 19 percent in 2017.
Some bankers expect that to change, given small and midsize companies have been struggling with the effects of lower oil prices and may be under pressure to merge.
“Energy has the potential to be more active in 2019 than it was in 2018,” said David Rawlings, head of JPMorgan Canada. “Energy is going to be a bigger part of the story again.”
The biggest deal of the year was the $17 billion acquisition of a 55 percent stake in Thomson Reuters Corp’s Financial and Risk business by a Blackstone Group-led consortium.
Brookfield Asset Management was involved with the second- and third-biggest deals of 2018. Brookfield agreed to buy Johnson Controls International Plc’s batteries division for $13.2 billion and Forest City for about $11.4 billion.
“Despite the level of activity we saw in 2018, global private-equity dry powder is even higher than it was last year,” said Geoff Barsky, head of Canadian and international M&A at BMO.
Barsky expects an increase in cash-based M&A as private equity firms have raised a lot of capital to put to work.
The mining sector, a key part of the Canadian market, has been coming back to life, with Barrick Gold Corp’s $6.5 billion acquisition of miner Randgold Resources expected to spur more deals.
In 2018, Canadian equity capital markets deal volume slumped to a 14-year low as there was a dearth of major deals in the natural resource sectors.
“We expect the strong backdrop for mining M&A will continue,” said Grant Kernaghan, Citigroup’s managing director of Canadian investment banking.
The challenge for deal activity will be elevated levels of volatility and equity market weakness. This is expected to create a disconnect between buyer and seller expectations in M&A deals, as well as possibly weigh on equity issues.
“What we’re waiting for is the stable tone by which those boards and management teams feel comfortable to go to market,” said Nitin Babbar, head of Canadian equity capital markets at RBC.
Rima Ramchandani, co-head of the capital markets practice at Torys LLP, said “greater volatility can mean less attractive IPO pricing relative to other capital raising options.” She anticipates 2019 initial public offerings in the cannabis, healthcare, technology and consumer industries.
Canada’s legalization of recreational marijuana in 2018 is expected to result in more deals, advisers said.
“We’re a unique beneficiary of the federally legalized cannabis sector,” said Emmanuel Pressman, chair of the corporate department at Osler, Hoskin & Harcourt, who advised Constellation Brands on its $4 billion investment in Canopy Growth.