Paul Burton Investment Dealers Digest – Vol.76, No.43
— The volume of middle-market mergers and acquisitions continued to accelerate in the third quarter and likely will maintain its hectic rate into next year, according to a data provider focused on that market.
Not only has the number of transactions being completed increased, but prices also have inched up.
“What jumps out is the extent of improvement in the volume of deals and the pricing,” said Andrew Greenberg, chief executive and co-founder of GF Data Resources LLC.
“We expect that deal volume will continue to expand heading into 2011, though we would stop well short of saying the market has strengthened enough to be impervious to backsliding.”
His West Conshohocken, Pa., firm tracks companies with enterprise values of $10 million to $250 million that are owned by private-equity firms.
According to a survey of 151 financial sponsors GF Data released Thursday, deals closed in the third quarter for such companies rose 10% from the second quarter and 65% from a year earlier, to a two-year high of 33.
The average deal’s overall valuation in the third quarter was six times the seller’s earnings before interest, taxes, depreciation and amortizations for the previous 12 months, versus roughly five times for each of the previous four quarters, according to GF Data.
“More companies are doing better,” said Greenberg.
“And certainly the financing markets, while still conservative, are beginning to provide more capital. Also, there is very significant pressure on the part of private-equity firms to push their funds out there.”
He called the third-quarter numbers “by all measures, the cool drink of water that a parched middle market had been waiting for.”
In its report, GF Data said financing has loosened up for companies with more than $20 million of Ebitda.
Arthur Roselle, a partner in the Charlotte private-equity firm Pamlico Capital, told IDD this week that he, too, believes the landscape for middle-market transactions has improved.
“Beginning in the second quarter, we began to see the volume of opportunities pick up,” said Roselle.
“That doesn’t mean to say those deals are easy to get, but the financing markets are stronger. Firms have the ability to finance the kinds of transactions that were hard if not impossible to finance 18 months ago.”
Pamlico, which spun off from Wells Fargo & Co. in March, announced this week that it had acquired the Ajax, Ontario, communications equipment provider ATX Networks Corp. from Trivest Partners LP.
The price was not announced, though Roselle said his firm made the purchase through its Pamlico Capital II fund, which bore the Wachovia Capital name before the spinoff.
Pamlico raised about $1.1 billion for the fund in 2007, and about half that money has been invested, he said.
Pent-up demand is driving middle-market M&A, Roselle said, but he downplayed possible changes in the tax landscape as a major reason for the sales.
“I don’t think it’s obvious that it’s that big of a deal.”
He expects mergers and acquisitions in the communications equipment sector to remain active. “Cable networks still need to evolve,” and they will need bandwidth to accommodate consumer demand for such offerings as high-definition content, video on demand, digital voice and high-speed data.
Greenberg struck a cautionary note, saying developments such as debt problems for European Union members could trigger a downturn in the markets.
“Excessive government spending, too much of a concentration of ownership of U.S. businesses by foreign firms, or home real estate values that are artificially propped up – any of those also could have a negative effect.”
B. Graeme Frazier IV, principal and co-founder of GF Data, said valuations have increased steadily this year, but the amount of available leverage for deals has moved in a “stutter-step” fashion that reflects a cautious credit environment. GF Data said in its report that M&A transactions that took place in the first nine months of the year were financed at an average of 2.7 times Ebitda.
The survey also found that equity contributions to acquisitions have fluctuated throughout the year; in the first three quarters, the average equity contribution was 54.2%, versus the 60%-plus level for all of last year.
“Health care is a good business to be in,” said Greenberg.
“Medical practices are under a lot of stress. There are a lot of baby boomers out there, and the cost of health care continues to rise.”
On the other hand, the media and retail sectors remain sluggish in terms of deal activity and valuations.
The media sector “has had an OK year, but not great,” Greenberg said. “Companies are starting to recover, but the investment community has been slower to bounce back.
“And given the extent of the recent difficulties by media companies, I don’t see a whole lot of new businesses maneuvering to get into it.”
The wariness over acquiring a retail business reflects concerns about consumer spending on goods and services, Greenberg said.