Capital Ideas | Newsletter Q3 2016

Capital Ideas for Middle Market Businesses

Middle Market Business Insights

According to data published by international financial data tracker Bureau Van Dijk, North American deal volume and value declined significantly during the first half of 2016 following the global trend. According to Bureau Van Dijk, there were 12,298 transactions completed in H1 2016 (a decline of 17.3% over H2 2015) with a combined value of $692.5 billion (a decline of 41.3% over H2 2015). During H1 2016 the U.S. saw 10,147 US deals worth a combined $633.4 billion. Canada saw 2,152 deals worth$59.9 billion.

Private Equity

Falling in line with general M&A trends, North American private equity and venture activity also slowed on the value and volume fronts. Private equity and venture investors took part in 6,487 deals in the region worth $120.8 billion. In contrast, H2 2015 saw 7,792 deals worth $262. 6 billion invested in the second half of 2015.

Sector Activity

Sectors that saw the most activity were metals/metal products (981 deals) followed by general capital machinery (799 deals) and publishing/printing (791) deals.

Deal Leverage

Senior debt rates for the first half stayed relatively steady with a debt-to-EBITDA ratio of approximately 3.0x. The number shows there is still a hearty appetite for lenders to private capital for M&A and other capital expenditures.

Notable Closed Transactions in H1

  January 2016 – NuVasive, Inc. acquired Ellipse Technologies, Inc., a portfolio company of MedFocus Family of Funds, Wexford Capital Private Equity, HBM Partners AG and BioStar Ventures, for US$410 million in cash and contingent payout. NuVasive, Inc. engages in the provision of medical devices. It is involved in the manufacture, development and sale of minimally-disruptive surgical products to treat the spine problems including spinal cord as well as cervical spine. Ellipse Technologies, Inc. develops and commercializes implants for spinal and orthopedic applications.
  February 2016 – Lowe's Cos, Inc. acquired RONA, Inc. for approximately CAD2.6 billion (US$1.8 billion) in cash via plan of arrangement. Under the terms of the agreement, Lowe's Cos, Inc. offered CAD24 (US$17.06) per RONA, Inc. common share. Lowe's Cos., Inc. is engaged in the retail sale of home improvement products. The company offers products for maintenance, repair, remodeling, home decorating and property maintenance. RONA, Inc. operates as a retailer and distributor of hardware, building materials and home renovation products.
  March 2016 – CCL Industries, Inc. acquired Checkpoint Systems, Inc. for US$425 million in cash. CCL Industries, Inc. engages in the development of label solutions for global producers of consumer brands in the home and personal care, healthcare and specialty, automotive and durable goods, premium food and beverage sectors. Checkpoint Systems, Inc. manufactures and distributes integrated electronic security systems.
  June 2016 – Zimmer Biomet Holdings, Inc. acquired LDR Holding Corp for US$1.1 billion in cash. Zimmer Biomet Holdings, Inc. designs, develops, manufactures, and markets orthopedic reconstructive, spinal and trauma devices, biologics, dental implants and related surgical products. LDR Holding Corp. is a medical device company, which engages on designing and commercializing novel and proprietary surgical technologies for the treatment of patients suffering from spine disorders.

Oil's Uptick

June saw the average spot price of Brent crude oil increase by $2 per barrel in June to $48 per barrel. The jump marked the highest monthly average for Brent since October 2015 and it was the fifth consecutive increase in the monthly average Brent price – the longest consecutive monthly uptick since 2013. The U.S. Energy Information Administration (EIA) expects global oil inventory builds to average 0.6 million barrels per day in the second half of 2016. This is expected to limit upward price pressures in H2 2016. Brent prices are also expected to remain unchanged.

The collapse in oil prices slowed M&A in the oil and gas sector. In 2015, the total combined value for all upstream deals in Canada topped Cdn$21 billion, about half of the 2014 total of Cdn$41 billion. Still, there is a significant buying opportunity for strategic companies with strong balance sheets looking to pick up struggling competitors on the cheap.

Likewise M&A activity in the North American shale space declined significantly as falling oil prices put many companies in precarious financial positions.

2016 H2 Outlook

According to data from international accounting firm Ernst and Young, the second half of 2016 should show a marked increase in M&A activity while not quite reaching the fervor of 2015. The spike is expected to be driven by stability in both the debt and equity markets. In addition, many sellers may be looking to exit prior to the end of 2016 as a new administration prepares to lead the United States.

On the public markets, the second half of 2016 is projected to continue at strong clip with the bulk of the fallout from Brexit in the rearview. However, uncertainty still permeates Europe and the election cycle stateside could cause some volatility. IPO activity should continue to pick up piggybacking the recent success of companies like Twilio (TWLO).

One stock that has continued to rise of late is social media giant Facebook. The company’s Q2 earnings report beat expectations on both earnings and revenue, with earnings of 97 cents per share (analysts predicted 81 cents) and revenue of $6.44 billion (analysts predicted $6 billion).


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Third Quarter  |  2016