MCMASTER PRIVATE MARKETS - NOVEMBER 2018 - ISSUE THREE
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McMaster Private Markets November 2018 - Issue Three
Table of Contents
DISCLAIMER: ........................................................................................................................... II
JOIN US ...................................................................................................................................... 1
About Us: .................................................................................................................................... 1
Mackenzie Sesto, Third Year Associate ........................................................................................ 2
ONEX Acquires 42% Stake in Ryan LLC. ...................................................................................... 2
OMERS Ventures leads US $100 million Series D Funding of Hopper ......................................... 3
Mebby Mengele, Second Year Associate ...................................................................................... 4
Molson Coors Canada and The Hydropothecary Corporation Form a Joint Venture .................. 4
Michael Scott, First Year Associate ............................................................................................. 6
International Petroleum Corp. Acquires All Outstanding Common Shares in BlackPearl
Resources Inc. ................................................................................................................................. 6
Endnotes...................................................................................................................................... 8
I
DISCLAIMER:
This article is for presentation purposes only. This does not serve as an expert
recommendation to invest in any securities or other financial products. This only
represents the views of the authors and does not necessarily represent the views of the
DeGroote School of Business, The DeGroote Private Equity & Venture Capital
Association or McMaster University.
II
JOIN US
ADVANCE YOUR FUTURE
The DeGroote Private Equity & Venture Capital Association (PE | VC)
Bridges the Gap Between the Classroom and the Alternative Investment
Industry. We Aim to Develop the Future Generation of Private Equity &
Venture Capital Professionals at the DeGroote School of Business.
The PE | VC Three Pillar Approach
EDUCATION NETWORKING OPPORTUNITY
We provide the We harness our string We allow for endless
resources to succeed in alumni network to ways to further the
landing Internship and provide superior development of our
Full-Time positions in opportunities and members in the pursuit
the Financial advancement for our of excellence
Workplace members
About Us:
The DeGroote Private Equity & Venture Capital Association seeks to develop the future
generation of Private Equity & Venture Capital professionals at the DeGroote School of
Business through Education, Networking and Opportunity.
Inquiries: info@degrootepevc.com
1
Q4 Coverage
Writer ONEX Acquires 42% Stake in
Ryan LLC.
On October 17th, 2018, ONEX Corporation (“ONEX”)
officially announced its acquisition of a 42% stake in Ryan LLC
(“Ryan”) for US $317 million, valuing Ryan at US $1.1 billion.1
Mackenzie Sesto, Third Year Bank of America Merrill Lynch acted as the financial
Associate advisor, while Fried, Frank, Harris, and Shriver & Jacobson LLP
acted as the legal advisors to ONEX.2 Baker & McKenzie LLP
Mackenzie is in his 3rd year acted as the legal advisor to Ryan.3
of Commerce at the
DeGroote School of ONEX, through its ONEX Partners and ONCAP private
Business. Mackenzie is equity funds, acquires and builds high-quality businesses with
looking forward to learning talented management teams.4 ONEX has over US $32 billion of
assets under management including ONEX proprietary capital,
more about Private Equity
private equity and credit securities.5 ONEX boasts offices in
and developing the Toronto, New York, New Jersey and London, and is listed on the
Association's Private Toronto Stock Exchange under the stock symbol ONEX.6
Markets Article.
Ryan is the largest firm in the world dedicated exclusively
to business taxes and is an award-winning global tax services and
software provider.7 Ryan represents 96% of the companies
making up the Dow Jones Industrial Average and represents
many Fortune 500 clients in every industry.8 Ryan recovers more than US $2.5 billion in tax savings annually
for global clients, providing solutions for recovery, consulting, advocacy, compliance and technology.9 Ryan
is headquartered in Dallas, with other locations throughout North America, Europe, and Asia.10
ONEX’s investment is viewed as a long-term partnership, with Amir Motamedi, a managing director
with ONEX, stating that they are excited to work with Ryan for the years ahead.11 Ryan CEO, founder and
chairman, G. Brint Ryan, stated that ONEX is the ideal partner for Ryan due to their strong track record with
growing companies and their support for the management teams they invest in.12 ONEX’s growth equity
investment could be seen as a move for Ryan to use the capital for expansion. G. Brint Ryan stated that Ryan
has significantly expanded in recent years by adding new service lines, growing its premium client roster, and
increasing its total number of clients to over 14 000.13 Ryan posted revenues of US $470 million in 2016, and
US $500 million in 2017.14 The reason why most people don’t get it
Ryan utilizing new services towards technology, consulting, and more, could benefit ONEX, and many
of the world’s largest organizations.15 With the United States Tax Cuts and Jobs Act (TCJA) put into effect in
2018, not even one year old yet, Ryan can benefit greatly. Ryan can win over clients if they can provide
superior service and save the most in taxes for companies who have not taken full advantage of the tax
2
changes. Consulting will become important as companies operating in the United States are dealing with new
corporate tax rules towards offshoring, profit sharing, location of intellectual property, headquarters location,
and more16.
OMERS Ventures leads US saves users time, money and anxiety while
booking trips, making it possible to save money
$100 million Series D and travel more.29 Hopper predicts future prices for
flights and accommodations with their claim of
Funding of Hopper 95% recommendation accuracy.30 Hopper has over
30 million mobile installations, over 10 million
users, features hotels in over 20 markets, and is on
On October 3rd, 2018, it was announced that track to surpass US $1 billion in sales since
OMERS Ventures (part of OMERS) led the Series launching in 2015.31
D funding of US $100 million of Hopper, with
existing investors Caisse de dépôt et placement du The Series D funding will be used for
Québec (“CDPQ”), Accomplice/Atlas Ventures, international expansion and the development of
Brightspark Ventures, Investissement Québec, and their artificial intelligence (AI) software.32 The AI
BDC Capital participating.17 Citi Ventures also software has been important for Hopper as 25% of
joined the Series D funding as a new investor.18 bookings are trips the app knew to suggest, and
Citi is considered a strategic investor, who will conversion rates on AI-based recommendation
help with payments integration and advising on the notifications are 2.6 times higher than what users
company’s internationalization.19 The Series D searched
funding brings total funding to date to US $184 for.33
million, valuing Hopper at approximately US $780 Hopper
million.20 Hopper was valued at US $300 million plans to
in its last round, in 2016.21 build
access to airfare and hotels in many countries and
The deal has attracted some negative double their headcount to 400 employees by the
attention, with statements that it takes them a long end of 2019.34 Hopper has already added 47 low-
time to scale their products up, and that the cost airlines in Europe last year, committing to
company is overpriced based on funding.22 This growth of the company.35 Hopper will also remain
overvaluation excludes Hopper from being a unprofitable, as they have been reinvesting all
sought-after acquisition, except from large firms returns to fuel growth and hope to become
such as Airbnb.23 profitable by 2023.36
OMERS Ventures is the venture capital Hopper could have massive payoffs for
investment arm of OMERS (Ontario Municipal investors and users. For users, they will have
Employees Retirement System).24 Founded in access to better technology to plan and save on
1962, OMERS is one of Canada’s largest pension trips more efficiently. For investors, Hopper could
funds with over US $95 billion in net assets, while lead to a large exit for OMERS Ventures and other
OMERS Ventures is a multi-stage investor in financiers if Hopper can absorb more of the US
growth-oriented, disruptive technology companies $1.3 trillion travel industry.37 The online travel
across North America.25 OMERS has locations in industry is US $662 billion, while the mobile
Toronto, the United States, Europe, Asia, and travel industry is US $264 billion of that figure.38
Australia.26 The potential is huge, especially with mobile travel
growing 20% year over year.39 However, since
Hopper is a mobile travel booking investors want a multiple on their exit, Hopper
application and is ranked top 10 in travel apps in could be too expensive for potential buyers, other
the United States.27 Hopper was cofounded by a than a giant such as Airbnb, making Hopper a
former Expedia executive in Montréal.28 Hopper tough sell.40
3
Q4 Coverage
Writer Molson Coors Canada and The
Hydropothecary Corporation
Form a Joint Venture
In October of 2017, Constellation Brands (NYSE: STZ)
announced that they will be paying a 1.5% premium on
$12.59 for a 9.9% stake in Canopy Growth Corp (“CGC”)
(NYSE: CGC, TSX: WEED).41 This announcement has since
Mebby Mengele, Second sparked furious speculation and seen a growing interest in the
Year Associate Cannabis sector as other corporations begin to explore
opportunities in the industry as legalization becomes a
Mebby is in his 2nd year of certainty.
Commerce at the DeGroote
School of Business. The most notable of the current quarter is Molson Coors
Concurrently with PEVC, he Canada (“MCC”), the Canadian division of Molson Coors
is a Research Analyst at the Brewing Company (NYSE: TAP, TSX: TPX) and cannabis
McMaster Investment producer, The Hydropothecary Corporation (“HEXO”)
Council, the VP of Finance (TSX: HEXO) announcing on October 4th, 2018, that they
for McMaster’s PhaseOne have finalized an agreement to form an independent
Engineering. corporation, called “Truss”.42 MCC is North America’s
oldest brewer and the second largest brewer in Canada by
volume at one third of beer sales in Canada; HEXO is a
rapidly expanding Canadian Cannabis producer that
differentiates itself with its low-cost production and its popular Hydropthecary brand serviced to
medical clients.43
This joint venture intends to capitalize on the expected legalization of cannabis infused beverages in
Canada scheduled for 2019.44 They will utilize HEXO’s extensive R&D experience with cannabis to
pioneer the future industry, through non-alcoholic Cannabis infused beverages. By investing into the
cannabis market, MCC intends to continue its objective of driving disruptive growth through
building an expanding portfolio of extraordinary brands.45 If it is established as an industry leader
early, Truss has the potential of maintaining a large market share in an industry projected to grow to
$146 billion by 2025.46 With increasing sales generating large YoY growth ($704 million in FY2015
to $1.45 billion in FY2017) of free cash flow, MCC has the necessary capital to undertake an
investment of this size without diluting their equity or acquiring more debt.47
The most interesting aspect of this new arrangement is that Truss will be an entirely separate,
standalone company with a separate Board of Directors and an independent management team, that
will be led by Bretty Vye as CEO (A former MCC executive).48 Such an agreement makes the
arrangement extremely beneficial for both companies. It significantly limits MCC’s exposure to the
4risk of uncertainty in the volatile
industry while intending to
capitalize on above average
return potential. Concurrently, it
gives HEXO the opportunity to
work with the significant
resources of an established
brewing giant to innovate further
and faster than competitors.
MCC will retain a controlling interest of 57.5% in Truss, and HEXO will hold the remaining
ownership at 42.5%.49 It is our speculation, that MCC intends to use its more experienced management
for corporate guidance and navigation through all the potential legalities that precede legalization. This
is reflected in the Board of Directors, which will be compromised of Frederic Landtmeters (President
and CEO of MCC), Paul Holden (VP of Legal and Industry Affairs of MCC); Scott Cooper (VP of
Global Innovation of Molson Coors) and acting Chairman of the Truss Board), and Sebastien St-
Louis(CEO and Co-Founder of HEXO).50 To help facilitate the deal, HEXO issued to MCC 11.5
million warrants excisable to purchase one common share of HEXO at a price of $6.00 for a period of
3 years.51
As other companies such as Heinken International and Coca-Cola Company (NYSE: KO)
cautiously observe the industry, and Constellation Brands commits an additional $4 billion dollars to
CGC, we expect to see the value of cannabis companies driven even higher by retail and institutional
investors, creating excellent growth opportunities for patient stakeholders.52
5Q4 Coverage
Writer
International Petroleum Corp.
Acquires All Outstanding Common
Shares in BlackPearl Resources Inc.
International Petroleum Corp (TSX: IPCO) reached
an agreement with BlackPearl Resources Inc. (TSX: PXX)
to acquire all outstanding common shares at a ratio of 0.22
(IPCO/PXX). This is a 49% premium to the trailing 30-day
Michael Scott, First Year volume weighted average.53
Associate
BlackPearl is an upstream producer with operations
Michael is in his 1st year of in Alberta and Saskatchewan. BlackPearl posted a net loss
Commerce at the DeGroote of $7,159,000 or 2 cents per common share in their most
School of Business. He has recent quarterly report (Q2). These losses could partially be
completed the CSC, FLC attributed to light/heavy differential and their risk
and Certificate in management strategy.
Derivatives Market
Strategies at the Canadian The vast majority of BlackPearl’s oil is heavy.
Securities Institute. He is Heavy oil has a higher density (lower API), and also
also a CFA Level 2 produces lower value products and residuals than lighter oil.
candidate. BlackPearl’s oil is also sour, meaning a higher sulphur
content which is expensive to remove in the refining
process.54 In their MD&A they mention pricing should be
done relative to Western Canadian Select prices, which have a benchmark gravity of 20.5 degrees
API.55 WCS has been trading at larger than usual discount to WTI (40-degree API) partially due to
pipeline takeaway capability hurting WCS and WTI gains being largely a result of geopolitical
tensions.56 BlackPearl realized a $7,078,000 loss on their risk management activities in Q2 2018, and
have an unrealized loss of $13,436,000.57 Their primarily tool for managing risks has been collars on
WTI, in which they have 26,500 bbls/d outstanding58. A debt covenant required BlackPearl to have
50% of its projected working interest production hedged for the forward looking 12 months59. The
nonproportional gains of WTI
relative to WCS has caused losses
on these contracts which are not
offset by proportionally higher
prices on eventual sale.
International Petroleum
Corp stands to more than double
its 2P (Proved + Probable)
6reserves with this
acquisition60, and benefit
from economies of scale.
Post-acquisition (contingent
on shareholders vote), IPC
will have an enterprise
value of 1.36B USD, and
have their reserve life index
extended to 17.6 years.
They expect their market capitalization to increase to USD 1B on closing. This also further
diversifies IPC’s operations by geography, which as of the end of 2017 were predominately in
Malaysia and France (68% and 23% respectively). This acquisition should see the majority of their
production shift to Canada (est. 78%).
In closing, it appears both BlackPearl and International Petroleum stand to gain in this
transaction. BlackPearl’s assets will benefit from economies of scale and an expanded investor base,
and IPC significantly increases their asset base and increased diversification. The closing of this
transaction is expected in December, and contingent on ~66.6% approval on vote from BlackPearl’s
shareholders.61
7Endnotes
1
https://privatecapitaljournal.com/onex-partners-iv-acquires-42-of-ryan-for-us-317m/
2
https://globenewswire.com/news-release/2018/10/17/1623013/0/en/Onex-Invests-in-Ryan.html
3
https://globenewswire.com/news-release/2018/10/17/1623013/0/en/Onex-Invests-in-Ryan.html
4
http://www.ryan.com/about-ryan/press-room/onex-invests-in-ryan/
5
https://www.pehub.com/canada/2018/10/onex-acquires-stake-in-tax-specialist-ryan-for-317-mln/
6
https://www.pehub.com/canada/2018/10/onex-acquires-stake-in-tax-specialist-ryan-for-317-mln/
7
https://privatecapitaljournal.com/onex-partners-iv-acquires-42-of-ryan-for-us-317m/
8
http://www.ryan.com/about-ryan/why-ryan-/
9
http://www.ryan.com/about-ryan/why-ryan-/
10
http://www.ryan.com/locations/#United%20States
11
https://www.pehub.com/canada/2018/10/onex-acquires-stake-in-tax-specialist-ryan-for-317-mln/
12
https://www.pehub.com/canada/2018/10/onex-acquires-stake-in-tax-specialist-ryan-for-317-mln/
13
https://www.pehub.com/canada/2018/10/onex-acquires-stake-in-tax-specialist-ryan-for-317-mln/
14
https://privatecapitaljournal.com/onex-partners-iv-acquires-42-of-ryan-for-us-317m/,
https://www.bizjournals.com/dallas/news/2018/10/18/dallas-tax-companygets-1-1b-valuation-with-new.html
15
http://www.ryan.com/about-ryan/why-ryan-/
16
https://thehill.com/opinion/finance/412516-trumps-tax-cut-is-turning-1-and-its-not-a-happy-birthday,
https://www.accountingtoday.com/articles/trump-tax-law-fails-to-kill-off-corporate-americas-prized-dodge
17
https://privatecapitaljournal.com/hopper-secures-us-100m-series-d-led-by-omers-ventures/
18
https://privatecapitaljournal.com/hopper-secures-us-100m-series-d-led-by-omers-ventures/
19
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
20
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
21
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
22
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
23
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
824
https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-led-by-omers-ventures/
25
https://www.omers.com/About-OMERS, https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-
led-by-omers-ventures/
26
https://www.omers.com/About-OMERS
27
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
28
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
29
https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-led-by-omers-ventures/
30
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
31
https://www.omersventures.com/portfolio/hopper, https://skift.com/2018/10/03/hopper-raises-100-million-
more-for-airfare-and-hotel-rate-prediction/
32
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/,
https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-led-by-omers-ventures/
33
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
34
https://privatecapitaljournal.com/hopper-secures-us-100m-series-d-led-by-omers-ventures/
35
https://privatecapitaljournal.com/hopper-secures-us-100m-series-d-led-by-omers-ventures/
36
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
37
https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-led-by-omers-ventures/
38
https://www.pehub.com/2018/10/hopper-raises-100-mln-in-round-led-by-omers-ventures/
39
https://techcrunch.com/2018/10/03/hopper-raises-100m-more-for-its-ai-based-travel-app-now-valued-at-
780m/
40
https://skift.com/2018/10/03/hopper-raises-100-million-more-for-airfare-and-hotel-rate-prediction/
41
https://business.financialpost.com/commodities/agriculture/constellation-brands-to-acquire-9-9-per-cent-
stake-in-canopy-growth-for-245m
42
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-announce-agreement-to-create-
joint-venture
43
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-announce-agreement-to-create-
joint-venture
44
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-announce-agreement-to-create-joint-venture
945
https://seekingalpha.com/article/4204649-molson-coors-brewing-tap-presents-barclays-global-consumer-staples-
conference-slideshow (Pg. 9)
46
https://www.prnewswire.com/news-releases/legal-marijuana-market-worth-1464-billion-by-2025--cagr-346-grand-
view-research-inc-681217061.html
47
https://seekingalpha.com/article/4204649-molson-coors-brewing-tap-presents-barclays-global-consumer-staples-
conference-slideshow (Pg. 5)
48
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-launch-truss
49
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-launch-truss
50
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-launch-truss
51
https://www.molsoncoors.com/en/news/molson-coors-canada-and-hexo-launch-truss
52
https://www.forbes.com/sites/greatspeculations/2018/08/20/what-constellation-brands-massive-investment-
in-canopy-growth-corp-means-for-both-companies/#4b27f81273df
53
https://www.international-petroleum.com/ipc-to-acquire-blackpearl-resources-inc/
54
https://www.oilsandsmagazine.com/technical/western-canadian-select-wcs
55
http://www.blackpearlresources.ca/i/pdf/2018Q2.pdf (P12)
56
http://www.blackpearlresources.ca/i/pdf/2018Q2.pdf (P12)
57
http://www.blackpearlresources.ca/i/pdf/2018Q2.pdf (P15)
58
http://www.blackpearlresources.ca/i/pdf/2018Q2.pdf (P16)
59
http://www.blackpearlresources.ca/i/pdf/2017YE.pdf (P65)
60
https://www.international-petroleum.com/ipc-to-acquire-blackpearl-resources-inc/
61
https://www.international-petroleum.com/ipc-to-acquire-blackpearl-resources-inc/
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