M&A activity in the food and beverage (F&B) industry for the second quarter of 2019 remained strong, as a total of 31 deals involving a Canadian party were announced or closed during the period.
While this volume represents a slight decrease from the 37 deals undertaken in Q1 of 2019, the industry has seen continued increases in year-to-date activity, as only 22 deals were announced or closed during Q2 of the prior year. Driven in part by the opportunity to generate economies of scale through vertical integration, strategic buyers represented the vast majority of purchasers during Q2.
Consistent with the prior quarter, the primary driver of increased F&B transaction activity during Q2 relates to continued interest in the fast-growing cannabis market, as industry participants seek to acquire land, production capabilities and intellectual property located both in Canada and abroad. The expectation is that activity will continue into Q3 of 2019 and several quarters to follow, driven partially by market participants who wish to establish an industry footing in anticipation of continued state medicinal and recreational marijuana reform in the US, as well as the possibility of US federal legalization in the near future.
The ongoing culture shift toward healthier, organic food and beverage products is another factor contributing to increased M&A activity in the sector, as companies seek to diversify away from traditional F&B product offerings into more differentiated niche markets.
Ongoing trade disputes between China and the US have continued to take a toll on global financial markets, pushing 2019 and 2020 growth expectations lower and unemployment higher. To cushion the resulting economic slowdown, both the European Central Bank and Federal Reserve have signalled that they will inject fiscal stimulus by the end of 2019, with the possibility of interest rate cuts as soon as this month. While Canada is not immune to the political tension, economic growth was moderate in Q2 of 2019, and as such there is no expectation that the Bank of Canada will decrease the key lending rate in the short term. Although there continues to be a lot of uncertainty surrounding the macroeconomic landscape, continued social and cultural shifts, inexpensive debt financing, continued ownership succession needs and favourable foreign exchange rates result in a Canadian F&B market that remains conducive to M&A activity in Q3 and beyond.