Report
Nicholas Cortellucci, CFA

Finding the Next Takeout in Canadian Small-Caps - Part Four

What you need to know:
• Since our last note in September, there have been 11 new takeouts in Canadian small-caps. This has accelerated in recent weeks with the acquisitions of Softchoice, Quisitive, and Carebook.
• Our potential takeouts portfolio is up 61% since inception (November 2023) and 13% since our last note, compared to the TSX up 28% and 9% respectively. We review the biggest winners and losers in the portfolio and present a list of new ideas on our radar.

How Have Things Progressed?
Since our last note on September 5th, acquisitions of Canadian small-caps slowed down for a few months before ramping up again in December, with 11 takeouts occurring (Figure 1). Similar to last time, the acquisitions were across various industries and market caps, but the common themes mentioned in our criteria below stood true. This included the acquisition of RediShred and Payfare which were included on our list.

We will reiterate that valuations have drastically improved for fundamentally solid companies as private equity and strategic investors took notice to the trough level multiples. Our takeouts portfolio posted solid performance, being up 13% since the last note and 61% since inception (vs. the TSX up 9% and 28% respectively). Please refer to page three for a review of our performance and changes to the portfolio going forward.

Do the New Acquisitions Fit Our Criteria?
Looking at the new takeouts, we outline how they fit into our 6-part framework below.

1) Poor Stock Performance – The new cohort of 11 takeouts was down 57% on average compared to their previous ATH, outpacing the overall group at 42%. We continue to view this as a leading indicator that a firm is a takeout candidate given that acquirors are looking for discounted prices.
2) Cheap vs. U.S. & International Peers – A great example of this trend is RediShred which was acquired for 6.3x 2025E EBITDA compared to established U.S. peers at >15x. While retail and small institutions are buying up these undervalued stocks, there is not enough capital in the small/micro-cap space in Canada at the moment to provide a full re-rate.
3) Profitable – 9 of the 11 firms were profitable on an EBITDA basis over the last twelve months. This has been a very consistent indicator with 28 of the 37 acquired firms being profitable.
4) Solid Growth & Tailwinds – On average, the newly acquired companies grew revenue by 40% over the LTM and were expected to grow revenue by 13% next year.
5) Market Cap Over $30M – 7 of the 11 takeouts occurred at a valuation of over $30M, with the average being $260M. We will reiterate that $100-300M market cap range seems to be the sweet spot for takeouts.
6) Private Equity Friendly – Only 3 of the 11 acquisitions were by private equity firms, a major decline from the historical data. This could be a reflection of the increased valuations in the space.
Underlyings
ADF Group Inc.

ADF Group is engaged in the design and engineering of connections, fabrication and installation of complex steel superstructures, heavy steel built-ups, as well as architectural and miscellaneous metalwork for the five principal segments of the non-residential construction market namely, office towers and high-rises, commercial and recreational buildings, airport facilities, industrial complexes and nuclear facilities, and transport infrastructures.

BQE WATER INC.

BQE Water is engaged in the acquisition and development of processes to treat metal-laden, sulphate-rich waste water streams for acid neutralization and metal recovery. The principal operations of Co. are to build process plants and earn revenues from recovered metals, treatment fees, plant sales and process licenses.

Colabor Group Inc

Colabor and its subsidiaries is engaged in the business of distributing and marketing food and food-related products in Canada. Co. has two reportable segments, distribution to food distributors (Wholesale Segment) and distribution to foodservice enterprises (Distribution Segment).

Covalon Technologies Ltd.

Covalon Technologies is a public medical technologies company that researches, patents, develops and commercializes medical technologies that improve patient outcomes and save lives.

CRESCITA THERAPEUTICS

Crescita Therapeutics is a Canadian drug development company with a portfolio of products and technologies. Co. operates two distinct business units: the Topical Products and Technology (TPT) Group and the Immunology Group. The TPT Group has one commercial product, a pipeline of topical and transdermal products focusing on pain and dermatology and multiple drug delivery platforms that support the development of patented formulations that can deliver actives into or through the skin. The Immunology Group has two commercial products: WF10™ and Oxoferin™.

Enterprise Group

Enterprise Group is a construction services company operating in the energy, utility and transportation infrastructure industry. Co.'s focus is primarily underground construction and maintenance and specialty equipment rentals. Co. provides directional drilling and installation of underground power, telecommunications and natural gas lines to the utility infrastructure segment of the construction industry. Co.'s heavy equipment rentals division, E One Limited, provides equipment rentals for both the oilfield and civil construction sectors and project crews constructing pipelines and facilities.

Firan Technology Group Corp.

Firan Technology Group is a supplier of aerospace and defense electronic products and subsystems. Co. also provides prototype development and manufacturing services. Co. has two operating segments: FTG Circuits and FTG Aerospace. FTG Circuits manufactures printed circuit boards within the North America marketplace for the aviation, defence and related industries. FTG Aerospace manufactures illuminated cockpit panels, keyboards, bezels and sub-assemblies for original equipment manufacturers of avionic products and airframe manufacturers. Co. distributes its products primarily in Canada, the United States, Asia, Europe and other countries.

Gatekeeper Systems Inc

HAIVISION SYSTEMS INC

Imaflex Inc. Cl A

Imaflex is engaged in the design, manufacture and sale of packaging materials including custom-made polyethylene films suited for various packaging needs; polyethylene garbage bags for both the retail and industrial markets; and the metallization of polyethylene film for specific agricultural usage.

Magellan Aerospace Corp.

Magellan Aerospace, through its subsidiaries, is engaged in the engineering, manufacture, repair and overhaul of components and assemblies for the aerospace industry; the modernization, repair and overhaul jet engines, defense aircraft and helicopters; the design and manufacture of rocket and satellite systems; and the design and production of magnesium and aluminium castings, primarily for the aerospace industry. Co. operates in two segments, Aerospace and Power Generation Project. Co. has operations in Canada, the U.S. and the U.K.

NeuPath Health

One Stop Systems

One Stop Systems designs, manufactures and markets computing modules and systems. These computers allow the company's customers to provide computing capabilities (often embedding within their equipment) to their target markets. The company provides custom servers, compute accelerators, solid-state storage arrays and system expansion systems. In addition, the company is a provider of PCIe over cable adapters and expansion systems. PCIe is the communication protocol used within servers for Input/Output expansion.

Quorum Information Technologies Inc

Redishred Capital Corp.

Redishred Capital is engaged in the granting and managing of shredding business franchises under the "Proshred" trademark.

Sylogist Ltd.

Sylogist is a software and services company providing enterprise information management solutions to municipal, education and private sector customers. Co. operates two division, the Enterprise Systems ("ES") division and Connectivity division. ES division provides an integrated suite of business applications to municipalities and school districts that serve their needs for revenue, finance and operations management. Solutions are delivered as customer installed solutions or supplied in a Softwareas-a-Service format. Connectivity division provides software to private and public sector customers that allows easier for integration between enterprise systems, mobile and custom applications.

TANTALUS SYSTEMS HLDG INC

Velan Inc.

Velan is engaged in designing, manufacturing and marketing on a worldwide basis a range of industrial valves for use in industries applications including power generation, oil and gas, refining and petrochemicals, chemicals, liquefied natural gas and applications, pulp and paper, and shipbuilding.

XYBION DIGITAL INC

Provider
Atrium Research Corporation
Atrium Research Corporation

Atrium Research provides institutional quality issuer paid research on North American public equities using deep fundamental analysis. Our research reports are disseminated through Bloomberg, FactSet, Capital IQ, Reuters and many more, as well as through our social media and email distribution lists. 

Analysts
Nicholas Cortellucci, CFA

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