Canada’s Middle Market M&A Update – Q3 2022
Canadian Middle-Market M&A activity in Q3 2022 demonstrated significant resilience despite rising interest rates, ongoing inflation, continuously evolving geopolitical tensions, and a looming recession, all of which have been weighing down on investor sentiment. Aggregate deal value increased from $4.6 billion across 60 transactions in Q2 2022 to $5.0 billion across 60 transactions in Q3 2022.
M&A activity in Canada is anticipated to remain steady for the remainder of 2022 as corporations vie for accretive acquisition opportunities, and as increased private equity presence drives competitive tension for attractive businesses.
Canadian mid-market
Quarter-over-quarter, aggregate deal value increased from $4.6 billion in Q2 to $5.0 billion in Q3 across 60 disclosed transactions in each period.
Q3 2022 - M&A Volume by Sector
The adjacent chart summarizes transaction volume by sector in Q3 2022, and corresponding sector highlights are noted below:
- The Consumer Discretionary, Energy, Materials, Communications Services, and Utilities sectors all experienced increased transaction volume in Q3 2022 compared to Q2 2022.
- The Materials sector led the quarter with 13 transactions, accounting for 21.7% of the total deal volume in Q3 2022. A notable transaction within the sector was International Royalty Corp.’s acquisition of Great Bear Royalties Corp. for $196.1 million.
- There were 11 transactions in the Energy sector, representing 18.3% of total deal volume in Q3 2022. A notable transaction within the sector was Tourmaline Oil Corp.’s acquisition of Rising Star Resources Ltd. for $193.3 million.
- The Consumer Discretionary sector contributed eight transactions, accounting for 13.3% of total deal volume in Q3 2022. A notable transaction within the sector was BRP Inc.’s acquisition of all of the assets of Kongsberg Inc.’s Powersports Business for $136.0 million.
Equity markets
The S&P/TSX Composite posted a loss of 14.1% in Q2 2022 as almost all sectors experienced negative returns. The Consumer Discretionary, Industrials, Communication Services, Financials, Information Technology, Materials, and Healthcare sectors all experienced double-digit percentage losses in Q2 2022. Of the 245 stocks that make up the S&P/TSX Composite, only 32 recorded a gain, which was primarily comprised of Energy sector equities.
Q3 2022 Sector Performance*
- The Industrials sector returned 3.0%, outperforming the broader market in Q3 2022. Top performers in the sector included Waste Connections, Thomson Reuters, Canadian National Railway, and Canadian Pacific Railway, as they all delivered better than expected quarterly earnings results.
- Consumer Discretionary was the second best performing sector, returning 2.6% in Q3 2022. Sector gains were driven by the stock appreciation of industry leaders, such as Restaurant Brands International (+14.8%), Dollarama (+5.0%), and Aritizia (+32.1%) as a result of each company reporting quarterly earnings that exceeded analyst expectations.
- Communication Services was the worst performing sector in Q3 2022, falling 10.0%. The negative performance is attributed to rising interest rates, which made fixed income investments an attractive alternative to stocks in the traditionally high-dividend yielding Communication Services sector. In addition, Rogers Communication’s stock fell 14.5% due to a system-wide network disruption in July 2022, which impacted most mobile customers, banks, and emergency services providers.
- After falling 45.4% in Q2 2022, the Health Care sector fell an additional 6.8% in Q3 2022. The main detractor for the sector was Bausch Health Companies, whose stock fell 12.6% after a US district court failed to side with the company in its patent infringement case over a competitor’s use of its Xifaxan drug.
Canadian economic update
The Canadian Dollar (“CAD”) depreciated against the US Dollar ("USD") in Q3 2022, ending at 1.37 CAD/USD versus 1.29 CAD/USD in the previous quarter. While a decline in oil prices and exports weighed on the Canadian Dollar, the relative weakening of the CAD was primarily due to multiple increases in the United States Federal Reserve overnight lending rate. Although the rate hikes were a means to curb inflation, the corresponding increase in US bond yields attracted greater global investment, which strengthened the USD.
The Canadian economy has bounced back from pandemic lockdowns, as pent-up consumer demand and government support fueled Canadian Real GDP ("GDP") growth in every quarter since Q3 2021. However, following a strong rebound of 4.5% in 2021, GDP growth maintained a slower pace in Q3 2022, with year-over-year growth reaching 1.5%. The slow down in GDP growth is a result of labour shortages and rising interest rates, which have curbed spending in Canada. Decelerated GDP growth is expected to persist into 2023 due to ongoing inflation and a rising unemployment rate, combined with persistent labour and housing shortages.
Housing starts are forecasted to drop from 271,000 in 2021 to 261,000 and 240,000 by the end of 2022 and 2023, respectively, due to rising interest rates. The Consumer Price Index ("CPI") remained high in Q3 2022, falling only 0.3% from Q2 2022. The CPI is expected to remain above 6.0% for the remainder of 2022, followed by a forecasted decrease to more precedented levels in 2023 as supply chain disruptions are expected to alleviate and energy prices come down.
Although Canada’s unemployment rate increased from 5.1% in Q2 2022 to 5.2% in Q3 2022, tight labour markets continue to drive strong labour demand and improved opportunities for workers.