1) VENUE ® Market Spotlight CANADIAN DEAL-MAKING OUTLOOK June 2015 Edition
2) CONTENTS Welcome 3 Foreword 4 Survey 5 Notable Q2 deals in the room About RR Donnelley 9 10 VENUE® Market Spotlight: Canadian Deal-making Outlook
3) WELCOME Dear Valued Reader, Welcome to the June 2015 edition of the Venue Market Spotlight. This month we take a closer look at Canadian deal-making and what the future holds for the region over the next 12 months. Despite strong balance sheets, low interest rates and available financing, Canadian dealmaking has been a bit rocky this year. The region recorded a total of 112 deals worth US$8.6bn in Q1, the lowest quarterly deal value since Q4 2008, which saw 78 deals worth US$7.4bn. However, while inbound M&A activity into Canada fell during Q1 (55 deals worth US$4.2bn, the lowest since Q1 2009), outbound activity flourished also totaling 55 deals worth US$40.3bn. It is important to note that there are other factors responsible for the overall decline, specifically the Canadian dollar’s depreciation against the US dollar, which has significantly affected Canadian businesses’ M&A activity. Respondents to this month’s Spotlight however, remain positive that deal-making activity in the region will pick up. In addition, while the drop in oil prices seemed to affect all areas of the globe in various ways, Canada was particularly hit the hardest, alongside volatile equity markets and, of course, a weaker Canadian dollar. Canadian businesses’ will look most towards foreign acquirers and private equity buyers to help increase the region’s deal activity. At RR Donnelley, we go to great lengths to meet our clients’ business needs. As with all RR Donnelley solutions, our technology goes hand in hand with our service organization. Our Venue virtual data room, just one example, provides our clients with access to hands on, start to finish service unique to the industry and has been awarded a 98% positive rating from our loyal user base. As always, please enjoy this month’s Spotlight. Sincerely, Tom Juhase President, Financial Services Group RR Donnelley 3
4) FOREWORD Canadian M&A has had a sleepy start to 2015: in the first five months of the year, M&A declined 18% year-on-year (YoY) by volume to 215 deals, and 35% YoY by value to US$23bn. Several key factors have underpinned this shift. In particular, the Canadian dollar’s depreciation against the US dollar has decreased Canada-based businesses’ purchasing power. Also, the worldwide decline in commodity prices has been acutely felt in Canadian M&A, due to the central role of energy in Canada’s economy. These challenges are reflected in this month’s Spotlight: 48% and 32% identify the falling Canadian dollar and fluctuating commodity prices, respectively, as factors affecting deal-making in the coming year. That said, respondents are cautiously optimistic about Canadian M&A in the coming year. At 76%, a large majority expect M&A to increase significantly or to increase somewhat. While some respondents believe that this is because the overall business climate is set to improve, others believe that foreign investors will be attracted by the relative inexpensiveness, along with the underlying health, of Canadian firms. Respondents anticipate that, particularly in the energy sector, foreign acquirers will look to pick up assets from businesses that are struggling due to the broader business climate, but have good long-term growth prospects. Throughout the study, respondents highlight that sound strategic purchases, rather than opportunism, will underpin M&A in the coming year. Overall, respondents in this month’s Spotlight present a number of avenues and drivers for growth. While Canadian M&A has faltered due to a challenging business environment, the underlying fundamentals for growth are present: attractive assets, interested buyers, and strategic opportunities. Other key findings include: • At 76%, a clear majority of respondents believe that the average size of Canadian deals will be between US$26m and US$100m. This is generally consistent with announced figures from the first half of the year, in which 16% of announced deals had values between US$26m and US$100m – the second most active deal size segment. However, the most active segment of the market was between US$5m and US$25m, accounting for 21% of announced activity. • Forty-four percent of those interviewed say that the biggest buy-side driver in the coming year will be strategic purchases. Some respondents even say that financial considerations will likely take a backseat to strategic ones, as this will help buyers increase profitability and synergies in the longer term. • Unsurprisingly, a large majority of respondents (80%) tip Energy, Mining and Utilities to be the busiest sector in the coming year. This sector is historically the largest sector in Canada by both volume and value. VENUE® Market Spotlight: Canadian Deal-making Outlook Seventy-six percent of respondents expect Canadian M&A activity to increase in the next 12 months.
5) SURVEY What do you expect to happen to Canadian M&A activity over the next 12 months? 8% 20% 16% What type of buyer will become increasingly active over the next 12 months? 4% Significantly increase Foreign acquirers 12% Somewhat increase Private equity buyers Remain the same Domestic acquirers Somewhat decrease Other 52% 32% 56% Three in four respondents (76%) expect that Canadian M&A will increase in the next year. While 2015 YTD dealmaking figures have been depressed relative to the same period in 2014, these findings may indicate that a revival is on the horizon. Interestingly, respondents who expect M&A to increase offer starkly contrasting reasons why this is so. Some point to a gradual improvement in the broader business climate. For instance, the CFO of an energy company says, “The Canadian economy is now rebounding and offers strong growth for deal-makers. This will accelerate M&A, with corporates developing firm expansion strategies.” But a sizeable share of respondents anticipating an M&A increase point to a weak business climate as the driver: “The growing distress in the region will encourage strategic and financial buyers to approach the Canadian market and they will target businesses with potential, but which are unable to manage due to lack of investment capabilities and exhaustion of capital,” notes the CEO of an energy company. A slim 16% and 8% expect M&A to remain the same, or to somewhat decrease, respectively. When explaining their views, respondents point to currency fluctuations and recent declines in M&A. For instance, the managing partner at a private equity (PE) firm notes, “Looking at the sudden drop in deal-making activity, which was due to a variety of reasons like price volatility and currency fluctuations, investors will focus on other regions, mainly Asia and Latin America.” Over half of respondents (52%) expect that foreign acquirers will become increasingly active over the next year. These predictions align with the current deal-making landscape: in the first five months of 2015, 49% of deals involved a foreign bidder. In explaining the drivers behind international interest, several respondents again point to the relative cheapness of Canadian assets: “Availability of undervalued targets in Canada and the current favorable regulatory environment for foreign direct investments will attract foreign buyers,” comments the CFO of a technology company. An additional 32% of interviewees expect to see increased activity from private equity. The CFO of an energy company notes, “Private equity buyers have been active in Canadian M&A, as they have a knack for transforming businesses and making them productive through their tried and tested strategies. PE firms would not hesitate in making further investments as long as they find that it would raise the value of the acquired business.” Meanwhile, a slim 12% believe that domestic acquirers will be the most active. Just as international corporations will look to take advantage of the weak Canadian dollar, so too will some Canada-based corporates, according to the managing director of a PE firm: “Domestic buyers will take the volatility situation as an opportunity to invest in new regions and closely related sectors, so that they can cut down on operational costs and middle party expenses.” 5
6) SURVEY (CONTINUED) Which sectors in Canada will see the most activity in the coming year? (Select all that apply) 80% Energy, Mining & Utilities Consumer Falling Canadian dollar 20% Fluctuating commodity prices 36% Industrials & Chemicals What economic factor would affect deal-making in Canada the most in the coming 12 months? (Select the most important) 36% Lower interest rates TMT Pharma, Medical & BioTech Financial Services 48% 32% 28% 32% 24% 0 10 20 30 40 50 60 70 80 90 Percentage of respondents At 80% a clear majority of respondents point to Energy, Mining and Utilities as M&A’s busiest industry in the next year. This tallies with industry data from January through May 2015, in which the sector accounted for 27% and 65% of Canadian M&A volume and value, respectively. Several respondents point to oil price volatility as the key driver of M&A: “The energy sector is affected by the fall in oil and gas prices throughout the globe. Thus energy corporates are trying to stabilize their balance sheets by embarking on new deals that will help reduce the operational expenditures once the combined business has restructured,” notes the CFO of an Energy, Mining and Utility company. Following this, respondents are relatively mixed as to the busiest industries in Canada: between a quarter and a third of respondents point to Consumer, Industrials and Chemicals, TMT, Pharma, and Medical & BioTech as the sectors that will see the most activity. ENERGY WILL SEE THE GREATEST M&A ACTIVITY VENUE® Market Spotlight: Canadian Deal-making Outlook Respondents point to several factors that will likely affect Canadian M&A in the coming year. Still, interviewees mention throughout the study that the falling Canadian dollar has presented challenges for businesses, but has also helped pique international acquirers’ interest in Canadian assets. Accordingly, the largest share (48%) point to currency weakness as the most pressing. “The fall in the Canadian dollar is sure to have an impact on businesses, as their fund values will drop in reserves. These businesses may have to take out more debt. This will drive foreign buyers to Canada, as they will find it easier to convince Canadian businesses to sell by offering them capital,” comments the vice president of finance at a PE firm. Following this, a sizeable share of respondents (32%) say that fluctuating commodity prices will affect deal-making. Interestingly, some respondents say that this will cause M&A figures to falter, while others view it as a growth opportunity. Further, 20% of respondents indicate that low interest rates will affect M&A. All of this sub-set believe that the low interest rate environment will be a boon to deal-making. According to the CEO at a technology company: “Low interest rates and availability of credit at low costs are facilitating businesses to conduct expansion strategies and in increasing their presence in the market.”
7) What do you expect to be the average deal size for Canadian activity? What will drive activity in Canada in the coming year from the perspective of buyers? 8% US$26m-US$100m Strategic purchases US$101m-US$500m 24% 20% 44% More opportunities to purchase companies in distress Better pricing for companies at this time 76% 28% Pressure from shareholders to spend spare capital A clear majority of respondents (76%) expect that the average deal size will be in the lower and middle market, in the value range between US$26m and US$100m. This broadly chimes with announced findings in the first half of the year, with the largest share of deals valued at under US$100m (although the largest share of announced deals were valued between US$5m and US$25m). While some respondents report that the anticipated deal size is due to Canada’s weak economic environment, many others point to the robustness of the Canadian mid-market: “Most deals will involve SMEs consolidating as a result of increasing competition in the market. Also, there is a strategic focus to increase growth through combined efficiencies, resources and infrastructure,” comments the CFO of a transportation company. When considering Canadian M&A activity in the coming year, respondents point to a range of buy-side drivers. The largest share of the survey pool (44%) say that, for buyers, strategic purchases will be the biggest spur to activity. A number of these respondents highlight many Canadian businesses’ health and growth potential in attracting buyers: “Buyers will choose to make strategic purchases and will work on business integration when undertaking deals. Acquirers want to remain competitive, and so will focus more on strategy than financials. This will be helpful to both parties in the long-term,” says the managing director of a PE firm. Still other respondents in this sub-set note that, while the Canadian economy is weaker, the primary appeal of acquiring Canadian businesses is synergistic and growth-oriented. Still, a substantial minority (24%) point to US$101m – US$500m as the average deal size. Respondents again attribute this view to increased foreign corporate and PE interest in comparatively cheap Canadian assets. “Foreign cash rich acquirers are aware of the Canadian market conditions and will aim at capturing large businesses at a relatively low price than actual value, which likely means that the average deal size will be between US$101m and US$500m,” the managing director of a PE firm explains. That said, 28% of respondents believe that more opportunities to purchase distressed companies will be the primary driver of M&A. The managing director of a PE firm elaborates: “Companies that are not able to manage the economic storm and the low economic environment may offer to sell their businesses in the next year. Prospective buyers will assess potential targets, and could end up with a good bargain.” Similarly, 20% of respondents say that the key buy-side driver will be better pricing for companies. 7
9) Notable Q2 deals in the room Venue® data room: A special report Connextivity Inc. acquires PriceGrabber® June 16, 2015 Industry: Retail Evercore acquires Kuna & Co. May 27, 2015 Target: Kuna & Co. Counsel for Target: DLA Piper Counsel for Buyer: Freshfields Bruckhaus Deringer LLP Industry: Investment Banking Microsoft Corporation acquires 6 Wunderkinder GmbH Avago Technologies Ltd acquires Broadcom Corporation May 28, 2015 June 1, 2015 Financial Advisor for Target: Evercore Partners Inc; JP Morgan Target: 6 Wunderkinder GmbH Counsel for Target: Davis Polk & Wardwell LLP; Paul Weiss Rifkind Wharton & Garrison LLP; Skadden Arps Slate Meagher & Flom LLP; Sullivan & Cromwell LLP; WongPartnership LLP Counsel for Target: Fenwick & West LLP Counsel for Buyer: K&L Gates Private Equity Firm for Seller: Earlybird Venture Capital GmbH & Co KG; Sequoia Capital; Atomico; e42 GmbH Industry: Computer software; Internet / ecommerce Starwood Capital acquires 50 hotels from Mount Kellett Capital Management May 19, 2015 Industry: Leisure; Accommodation; Restaurants/Pubs Financial Advisor for Buyer: Bank of America Merrill Lynch; Barclays; Citi; Credit Suisse; Deutsche Bank AG Counsel for Buyer: Latham & Watkins LLP; Simpson Thacher & Bartlett LLP Industry: Computer: Semiconductors; Computer software; Telecommunications: Hardware . Verizon acquires AOL May 12, 2015 Financial Advisor for Target: Allen & Company LLC Counsel for Target: Wachtell, Lipton, Rosen & Katz; White & Case LLP Financial Advisor for Buyer: Guggenheim Partners, LLC; LionTree Advisors, LLC Counsel for Buyer: Weil Gotshal & Manges LLP Industry: Internet /ecommerce TerraForm Global, Inc. IPO May 7, 2015 Issuer: TerraForm Global, Inc. IPO Counsel for Issuer: Kirkland & Ellis LLP Counsel for Underwriter: Latham & Watkins LLP Underwriter(s): J.P. Morgan; Barclays; Citigroup; Morgan Stanley Industry: Energy: Electrical power generation; Alternative energy For more information: Please contact your RR Donnelley Sales Rep. Call 1.888.773.8379 Twitter acquires TellApart April 28, 2015 Target: TellApart, Inc. Private Equity Firm for Seller: Bain Capital LLC; Greylock Partners Industry: Internet / ecommerce; Media; Advertising; Search engines and other internet enabling technology Or visit www.venue.rrd.com Venue demo (audio enabled): https://Venue.RRD.com/Demo Corporate Headquarters 35 West Wacker Drive Chicago, IL 60606 U.S.A. GoDaddy IPO April 1, 2015 Issuer: Go Daddy Inc Counsel for Issuer: Wilson Sonsini Goodrich & Rosati, P.C. Counsel for Underwriter: Davis Polk & Wardwell LLP Underwriters: Morgan Stanley; JP Morgan; Citigroup; Barclays; Deutsche Bank Securities; RBC Capital Markets; KKR; Stifel; Piper Jaffray; Oppenheimer & Co.; JMP Securities Industry: Internet / ecommerce Deals. Done. Simple. 888.773.8379 www.rrdonnelley.com www.venue.rrd.com Copyright © 2015 R. R. Donnelley & Sons Company. All rights reserved.
10) ABOUT RR DONNELLEY RR Donnelley is a global provider of integrated communications. The company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that help to drive top-line growth, reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to clients in virtually every private and public sector. RR DONNELLEY AT A GLANCE $11.6 billion 2014 net sales 65,000+ 500+ Employees Global locations Venue® is a secure online workspace with a powerful feature-set and an intuitive design that allow you to easily organize, manage, share and track all of your sensitive information. Venue® data rooms provide complete control, ensuring that you can manage who has access to your data room, which documents they see, and how they can interact with those documents. Venue data rooms are backed by RR Donnelley, a $11.6 billion corporation with more than 500 locations and over 65,000 employees worldwide. RR Donnelley’s total revenues are larger than all other virtual data room providers combined. We bring extensive experience to providing integrated communications services. For more information regarding Venue®, RR Donnelley, or this report, please contact us directly. Daniel Perez | Sr. Marketing Manager, Venue Data Room RR Donnelley | Financial Services Group | financial.rrd.com 255 Greenwich St. | New York, NY 10007 | Phone: 888.773.8379 Fax: 212.341.7475 |email@example.com VENUE® Market Spotlight: Canadian Deal-making Outlook Corporate Breakups Manufacturing locations 750+ About Venue® Nearly 125 Issued and pending patents Nearly $2 billion Capital investments over the past six years
11) VENUE DATA ROOM ® The World’s Workspace Venue is the fast-growing virtual data room solution of RR Donnelley, the leader in integrated communications services. Our Venue virtual data room provides a secure online workspace with a powerful feature-set and an intuitive design that allow you to easily organize, manage, share and track all of your sensitive information. A Venue workspace provides complete control, ensuring that you can manage who has access to your data room, which documents they see, and how they can interact with those documents. We serve hundreds of thousands of Venue users, who are accessing content related to the highest profile deals in the market. With a Venue data room you have access to the RR Donnelley global footprint, where you can leverage our suite of financial services— everything you need from pre-negotiation to post-transaction filing and archiving— anytime, anywhere. Work faster and more efficiently with Venue’s powerful, intuitive features that deliver what you need right now. Best-in-class security: Trust your information to our industry-leading security: AT 101 compliant, redundant, third-party-tested platform, exclusive protection features and maximum precautions for all interactions. Mobile : Venue mobile allows you to manage your documents and users no matter where you are, in a variety of different languages. Whether you are rushing to a meeting—or in the midst of travel— access your Venue data room in a familiar and easy-to-use interface from any IOS device. The Venue Executive Suite: Leverage the enhanced functionality of the intuitive Venue interface to deliver even more control over and access to your multiple Venue data room projects from the executive level dashboard. Unmatched room service: We give you hands-on, startto-finish service that’s unique to the industry. The Venue team delivers local service no matter where you are thanks to in-house staff at hundreds of locations around the globe. Google search: Secure, full-text search, powered by Google. User activity reports: Track exactly who is —or isn’t— accessing the files of your data room with instant, realtime reports. One-click translations: Continue to leverage the RR Donnelley global footprint to help you do business anywhere in the world, easily and securely, with our translations services. Our linguists translate documents within a Venue data room in over 140 languages—with a simple click. For more information please visit www.venue.rrd.com. 888.773.8379 www.rrdonnelley.com www.venue.rrd.com Copyright © 2014 R. R. Donnelley & Sons Company. All rights reserved. 11
12) VENUE® Market Spotlight: Canadian Deal-making Outlook