Written By Gordon Cameron, Matthew Hunt and Xenia Wong
The general sentiment for prospective deal making in Canada at the end of Q1 2023 might best be described as restrained optimism, especially in comparison to 2021 and early 2022. Despite continued headwinds from various macroeconomic factors, Q1 ended on an encouraging note with a modest upswing in total Canadian deal activity (by deal count) from the last quarter.
This quarterly review provides a snapshot of Canada's M&A landscape for Q1 2023. In addition, we will also take a look at some recent trends in Canadian M&A activity with a discussion on increased momentum for go-private transactions, developments in debt financing in M&A deals and cross-border de-SPAC transactions which are proving to be resilient.
A Snapshot of Q1 2023 M&A Deal Activity
All numbers are according to Bloomberg data as of March 30, 2023, in U.S. dollars (announced, completed or pending deals, excluding those that have been terminated or withdrawn—where a Canadian company is the acquiror, target or seller).
In Q1 2023, against the backdrop of global economic uncertainty, U.S. inbound M&A activity (a traditionally strong area for Canadian M&A activity) experienced a decrease in both deal value and count, a trend consistent with the previous three quarters.
While total Canadian M&A deal value also decreased compared to the previous three quarters, total Canadian M&A deal count increased, albeit modestly, from 766 deals in Q4 2022 to 801 deals in Q1 2023 (indicating a move towards smaller deals) and remained relatively consistent with deal count in Q3 and Q2 2022. During the first quarter of 2023, three sectors have led total Canadian M&A activity (by deal count), namely mining, software and REITs. Mining topped the tables with $1.94 billion on 229 deals. However, software was ahead massively on deal value with $11.6 billion on 68 deals and followed by REITs with $2.43 billion on 55 deals.
Q1 2023 Trends in Canadian M&A
Go-Private Transactions: The number of go-private transactions in the United States and Canada (while down from Q4 and Q3 2022) rose sharply in Q1 2023 in comparison to the same period last year. Generally speaking, there has been an overall uptick in go-private activity and total deal value has jumped more than six-fold since the beginning of 2022. Further, according to PitchBook, software go-privates have been "off to a running start" in 2023, with three transactions comprising, in aggregate, $5.6 billion and making up more than one-third of the go-privates to date—a promising trend for Canada's highly innovative technology and software sectors.
The table above includes all Canadian and U.S. going private transactions, including all transactions that involve non-Canada/U.S. partners.
Financing: Despite market uncertainty from 2022 continuing into 2023, Canada's pace of inflation continued to decelerate and cooled to 5.2% in February, the largest deceleration since April 2020, according to Statistics Canada. Further, interest rates hikes have paused in Canada and slowed south of the border. The Bank of Canada did not raise interest rates on April 12, marking the second time in a year that rates have not increased. In the United States, the U.S. Federal Reserve lifted rates by only 25 basis points on March 22. This positive economic data, which ordinarily might be a boon for debt financing, has been tempered by the effects of recent turmoil in the U.S. and international banking systems.
De-SPAC Transactions: The sharp decline in SPAC IPO activity will likely continue in 2023, but mergers between U.S.-listed SPACs and targets (a "de-SPAC" transaction) have proven to be more resilient.
At the end of March 2023, there were approximately 300 U.S.-listed SPACs searching for targets, and while this number is lower than in previous years there is still intense competition for high-quality companies with high-growth stories. As a result, U.S.-listed SPACs are looking abroad to foreign markets, including Canada. This is creating opportunities for Canadian companies interested in becoming listed on a U.S. stock exchange upon the closing of a de-SPAC. During Q1 2023, there were at least five de-SPAC transactions involving a U.S.-listed SPAC and a Canadian company that were either announced or closed. Canadian companies in high-growth sectors such as, advanced technology, fintech, cleantech, energy (including renewable energy), cannabis and industrial, are of particular interest to U.S.-listed SPACs.
More details are available in Bennett Jones' detailed look at Canada Cross-Border De-SPAC Transactions: What US-Listed SPACs and Canadian Companies Need to Know.
As turmoil in the financial services sector occurred in the latter part of Q1, its full impact on M&A activity for the remainder of the year remains to be seen. It seems clear that global economic headwinds will continue to create a challenging environment in the near term. Broadly speaking, however, there is no indication of a precipitous decline in deal-making to start 2023. Strategic and financial buyers are still doing deals and many industries, in particular mining and software, are forging ahead despite market volatility. We expect these trends to continue.
Bennett Jones' Mergers & Acquisitions practice spans all industries—particularly those that drive the Canadian economy. To discuss the developments and opportunities shaping the Canadian M&A landscape, please contact the authors.