Despite continued macroeconomic uncertainty, highlighted by Canada's first inverted yield curve since the 2008-09 recession, and a lack of meaningful progress on cross-border trade negotiations, the food and beverage ("F&B") M&A landscape remains attractive for buyers seeking to enter new markets or increase scale.
Notwithstanding several macro headwinds, the Canadian food and beverage market saw a significant increase in M&A activity over the prior quarter, highlighted by 37 deals involving a Canadian party. This deal volume represents an increase of 95% over the 19 transactions announced or closed during Q1 2018, and an increase of 68% over the 22 transactions announced or closed during Q4 2018. A significant portion of this M&A activity can be attributed to continued interest and investment in the cannabis space, as both domestic and foreign companies seek to establish themselves and capitalize on the burgeoning North American edibles market, which is estimated to generate annual sales of CAD $4.1 billion by 2022.
The combination of deteriorating profit margins and continued geopolitical uncertainty has resulted in highly volatile public equity and debt markets, to which the F&B industry is not immune. Barring material changes in the policy stance of both the Bank of Canada and Federal Reserve, this volatility is expected to continue into Q2 and the remainder of 2019 as the global economic slowdown continues. That said, further weakening of the Canadian dollar represents an opportunity for foreign investors to acquire Canadian assets at a significant discount, with the expectation that the exchange rate will revert to the mean over the medium to long term. Furthermore, there has been no significant change to some of the underlying fundamentals driving M&A activity in the F&B industry, namely inexpensive debt financing, growing ownership succession needs and significant equity capital to be deployed. As such, the Canadian F&B market is expected to remain conducive to M&A activity in the near term.