Going private was the theme in 2023 – is it still a top option in 2024?
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Though attractive opportunities remain, now’s the time to take a deeper dive, say Stikeman Elliott lawyers
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In 2023, the volatility and high interest rate environment caused a shift from investors pursuing growth in growth-focused sectors to attention on cash flow, profit margins, and sustainability profiles, says David Massé, partner and head of the securities group at Stikeman Elliott’s Montreal office.
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Specifically, reduced activity in the technology, biotech, and mining sectors – which together have historically represented a significant portion of Canadian equity issuances in the non-financial services sector – created funding complexities and valuation gaps for certain issuers, which have had to resort to alternative approaches to fund their growth and operations, including going private to secure stable sources of private equity capital.
“We are continuing to see significant interest and volume in going-private transactions, in particular from US and international private equity sponsors,” Massé confirms. “They continue to consider privatizations of Canadian public companies that are generally of a smaller size than their US counterparts.”
On the issuer or company side, boards of directors have fiduciary obligations to be open to all potential reasonable opportunities, and last year several companies were in precarious financial circumstances. Going private became a necessity to preserve the business and fund growth strategies, and Grewal says that will be the story “until we get a robust market where financing is more accessible – and we’re not there yet.”
“It’s too early to predict when the cycle may shift,” she adds. “We’re still in a period of uncertainty and unwelcome volatility. You do think differently in a market like this in terms of what might be viable or prudent.”
Going-private transactions already in the pipeline will likely continue to move forward over the next few months, although the window may narrow if the market becomes more stable. While the volatility continues, however, so will going-private opportunities as some companies continue to face cash-flow issues and growth challenges.
For those buyers looking to advance potential go-private transactions when opportunities are optimal, “it continues to be a good time to start investigating and negotiating, and potentially get some leverage with respect to the transaction,” Grewal says.
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Published Apr 17, 2024
Stikeman Elliott is a premier force in the space, drawing on the significant expertise of its specialist areas, including tax, competition, and foreign investment review in acting for strategic buyers, private equity sponsors, and targets in several of the most significant going-private transactions in Canada – in both friendly and hostile/unsolicited situations. In particular, the firm has the most active practice in Canada acting for private equity (PE) firms acquiring Canadian-listed entities.
While targets tend to be focused on control over their value-maximization process, risk of leaks, impact on employees and other stakeholders, and deal certainty once the right partner is identified, major considerations for buyers in going-private transactions range from achieving success in auction processes while maintaining valuation discipline and allocation of regulatory and other transaction risks, through to covenants and termination fees and treatment of human capital. For example, there may be a management rollover that could add complexities and additional steps given Canadian rules regarding related-party transactions.
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“We are continuing to see significant interest and volume in going-private transactions, in particular from US and international private equity sponsors”
David Massé, Stikeman Elliott LLP
“We’re still in a period of uncertainty and unwelcome volatility. You do think differently in a market like this in terms of what might be viable or prudent”
Ramandeep Grewal,
Stikeman Elliott LLP
Lay of the land
Client considerations and the Stikeman Elliott difference
Source: Canada Economy on Track to Beat First-Quarter Forecasts (yahoo.com)
Predicted growth beats 1% consensus estimate in Bloomberg survey and Bank of Canada’s forecast of 0.5%
This follows 1% growth between October and December
Industry-based numbers tracking a GDP increase of 3.5% annualized
Canadian economic data Q1 2024
GOING PRIVATE was the theme in 2023, given the state of equity markets and where stock prices and valuations were, and the lawyers at Stikeman Elliott LLP anticipate that will continue in 2024 – “however, the window may shift, depending on what direction the economy takes,” warns Ramandeep Grewal, partner and co-head of the financial products & services group at the firm.
“There’s still an opportunity currently for strategic or financial buyers, but to the extent there’s an attractive asset, it may be prudent to take a deeper dive,” she says.
Given persisting economic instability, Massé agrees that the market for going-private transactions should continue to be strong for most of 2024. Specifically, Massé points again to the technology and mining sectors as areas ripe for this trend, “due to perceived undervaluation, the relative strength of the US dollar to the Canadian dollar, pressure for value catalysts from shareholder activists, and other drivers of consolidation specific to each sector.
“As the central banks continue to evaluate the timing for a decrease in their benchmark lending
rates, investors are looking for signs of predictability and stability in their cost of capital,” he adds. “This will hopefully provide financing certainty for leveraged buyouts in the second half of 2024 and early 2025.”
Source: Statistics Canada Canadian Survey on Business Conditions, first quarter 2024
41%
of businesses expect rising interest rates and debt costs to be an issue
of businesses expect cost-related obstacles over the next three months
73.6%
of businesses anticipate rising inflation as an obstacle
55.4%
Business Conditions Survey (January–February 2024)
“All of these considerations go into the mix when approaching a transaction and determining how to go forward,” Grewal says, adding that while the sheer volume of transactions the firm has handled differentiates it, “it’s our business-focused, practical approach to understanding client objectives and prioritizing those that truly sets us apart.
“Diligence is paramount. What is the client buying as an asset? With a go-private, they own it 100 percent from Day 1, but they also have to operate it. What’s optimal going forward? We think ahead to what steps need to be in place to ensure not only a smooth transaction but a smooth transition from a public company to a private company.”
For Massé, providing highly strategic and tailored advice, combined with the hands-on approach to managing key aspects of going-private transactions, including the M&A deal and its interaction with debt financing and regulatory risk allocation, is par for the course in his and his colleagues’ day-to-day practice. The firm also promotes extensive knowledge-sharing practices to ensure that each of its partners and associates benefits from the experience acquired in all transactions in which Stikeman Elliott is involved.
“We stand out by our creativity, business judgment, and significant experience in going-private transactions,” Massé says. “Our approach to negotiating and executing these transactions is influenced by our significant experience. The true value for our clients resides in our ability to identify key transaction risks, describe the issues in plain language, and recommend strategic and creative solutions with confidence – from initial approach and announcement through to closing.”
Stikeman Elliott is a premier force in the space, drawing on the significant expertise of its specialist areas, including tax, competition, and foreign investment review in acting for strategic buyers, private equity sponsors, and targets in several of the most significant going-private transactions in Canada – in both friendly and hostile/unsolicited situations. In particular, the firm has the most active practice in Canada acting for private equity (PE) firms acquiring Canadian-listed entities.
While targets tend to be focused on control over their value-maximization process, risk of leaks, impact on employees and other stakeholders, and deal certainty once the right partner is identified, major considerations for buyers in going-private transactions range from achieving success in auction processes while maintaining valuation discipline and allocation of regulatory and other transaction risks, through to covenants and termination fees and treatment of human capital. For example, there may be a management rollover that could add complexities and additional steps given Canadian rules regarding related-party transactions.