Canadian mid-market M&A activity stalled in Q3 2023, with the total transaction count dropping to 351, down 88 from the previous quarter. The decline is attributable, in part, to negative economic growth (-0.5%) and a round of interest rate increases (+25 basis points) aimed at bringing inflation toward the Bank of Canada’s 2% per year target.
Private equity firms will seek to deploy the excessive dry powder that they held onto this quarter, so M&A activity should rebound as economic conditions stabilize.
Canadian mid-market
Stalled economic growth and higher costs of borrowing tempered M&A activity in Q3 2023, with total transaction count falling from 439 transactions in Q2 2023 to 351 transactions in Q3 2023. M&A activity is expected to rebound going forward as economic conditions stabilize and private equity firms with excess dry powder vie for accretive acquisition opportunities.
Q3 2023 - M&A Volume by Sector
The adjacent chart summarizes transaction count by sector in Q3 2023, and corresponding sector highlights are noted below:
- The Materials sector led the quarter with 98 transactions, accounting for 27.9% of the total transaction count in Q3 2023. A notable transaction was IsoEnergy Ltd.’s merger with Consolidated Uranium Inc., which valued the latter at an Enterprise Value (EV) of $238.4 million.
- The Industrials sector followed with 64 transactions, accounting for 18.2% of the total transaction count in Q3 2023. A notable transaction was IPH Limited’s acquisition of Ridout & Maybee LLP for an EV of $64.4 million.
- The Energy sector saw the highest quarter-over-quarter increase in M&A activity, which grew by 52.9% to 26 deals. A notable transaction was Precision Drilling Corporation’s acquisition of CWC Energy Services Corp. for an EV of $144.2 million.
Equity markets
The S&P/TSX Composite posted a loss of 3.3% in Q3 2023. Despite most sectors experiencing negative returns, the Energy and Healthcare sectors recorded gains during the quarter, each outperforming the broader market. Of the 206 constituents listed on the S&P/TSX Composite Index (excluding real estate), only 71 recorded a gain in Q3 2023.
Q3 2023 Sector Performance*
- The Energy sector posted the largest gain of 18.3% in Q3 2023. Sector gains were supported by oil-based constituents such as Athabasca Oil Corporation (+51.6%) and Baytex Energy Corp. (+38.7%) after crude oil prices rose by 29.9% during the quarter. Sector performance was slightly offset by the compression of constituents such as Enbridge Inc. (-8.5%) and TC Energy Corporation (-12.8%), as higher interest rates increased the financing cost of building and operating pipelines.
- The Healthcare sector posted a gain of 13.8% in Q3 2023. Supporting the gain was Chartwell Retirement Residences (+8.6%) after it reported a 19.3% quarter-over-quarter increase in net income and announced the sale of its Ontario LongTerm Care platform. Also supporting sector gains was Tilray Brands Inc. (+57.6%) after the U.S. Department of Health and Human Services recommended to the U.S. Drug Enforcement Administration that marijuana be reclassified from a Schedule I controlled substance to a Schedule III controlled substance, opening the door for it to be an FDA-approved drug. Despite experiencing a significant gain during the quarter, Tilray Brands Inc.’s impact on overall sector performance was limited by its modest market capitalization relative to other constituents.
- The Utilities sector returned a loss of 13.2% in Q3 2023 as high interest rates weighed on the traditionally capital-intensive sector, impacting constituents such as Algonquin Power & Utilities Corp. (-26.6%) and Brookfield Renewable Partners LP (-24.5%). Sector losses were slightly offset by the gain of Altagas Ltd. (+9.5%) after shareholders reacted positively to the company’s announcement to acquire natural gas processing plants and a natural gas storage facility from Tidewater Midstream and Infrastructure Ltd., increasing the company’s processing, extraction, storage, and distribution capacity.
- The Communications Services sector posted a negative return of 13.6% in Q3 2023. Contributing to the loss were constituents such as BCE Inc. (-14.2%) and TELUS Corporation (-14%), as the companies reported a year-over-year decline in quarterly net income. BCE Inc. reported Q2 2023 net income of $329 million, down from $596 million in Q2 2022, while TELUS Corporation reported Q2 2023 earnings of $200 million, down from $468 million in Q2 2022. The companies were impacted by high interest rates, which increased the financing cost of large infrastructure investments such as the deployment of 5G towers and installation of fibre optic cables.
Canadian economic update
The Canadian Dollar (CAD) moderately depreciated against the United States Dollar (USD) in Q3 2023, ending the quarter at 1.35 CAD/USD versus 1.32 CAD/USD at the end of Q2 2023. The CAD’s relative value initially surged as the BoC’s interest rate hike in July 2023 attracted foreign investment but declined mid-quarter as Canada’s slowing economy weakened international demand for the loonie. Further contributing to the compression of the CAD were analyst expectations that the BoC would refrain from implementing further interest rate hikes.
Following a slight economic contraction in Q2 2023, the Canadian economy continued to slow down, with GDP contracting by an estimated 0.5% in Q3 2023. The downturn was driven by higher borrowing costs, which continued to temper consumer demand and corporate spending. GDP is expected to contract by another 0.5% in Q4 2023 as the BoC’s quantitative tightening policies continue to subdue consumer spending and corporate investment.
Following a decline in housing starts during the trailing 12-month (TTM) period ending September 30, 2023, projections indicate a further decline in housing starts from 263,000 in 2022 to 236,000 and 215,000 in 2023 and 2024, respectively. This trend is attributed to high interest rates, ongoing shortages in construction labour, and rising material costs.
Following a steady decline from Q4 2022 to Q2 2023 as quantitative tightening measures took effect, the Consumer Price Index (CPI) grew 0.3% quarter-over-quarter, reaching 3.8% as of September 30, 2023. CPI is expected to fall to 3.4% in Q4 2023 as the BoC maintains the target overnight interest rate in continued efforts to curb inflation.
Canada’s unemployment rate rose slightly from 5.2% in Q2 2023 to 5.5% in Q3 2023 as the pace of new job creation struggled to match the country’s steady, largely immigration-fueled, population growth. The unemployment rate is projected to grow to 5.9% in Q4 2023, driven by the ongoing growth of Canada's population and reduced economic growth, which hinders the generation of new jobs.