Steven Miller, managing director of Standard & Poor's Leveraged Commentary and Data unit and a frequent Deal contributor, lays out his forecast for the next 12 months of lending for the buyout crowd in the latest issue of The Deal newsweekly.
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Companies going from public to private drove buyout activity last year -- $275.8 billion in deals, or 64% of LBO volume, from $127.6 billion in 2006, or 55% of volume, he notes. But the math doesn't quite work anymore, he explains, with some help from S&P's Capital IQ:
The median ratio of total enterprise value-to-Ebitda for midcap companies, those worth $5 billion to $20 billion, stood at 10.2 times in mid-December, down from 10.7 times in June. Applying this half-a-turn decline to the 11.2 times average purchase multiples of large P2P LBOs structured last year before the correction suggests that a typical deal today would cross in the 10.7 times area.
Although the purchase price multiple is only half a turn lower, the average multiple at which private equity firms can borrow has come in far more. The numbers are still fluid, but where the average large P2P LBO in the second quarter cleared at 7.3 times debt-to-Ebitda, arrangers put the number more in the 5 times to 5.5 times range today. That means the equity contribution now required to execute a deal in general would be 49% to 53%, compared with 31% pre-correction.
Looking at 2008, it's hard to say what sort of LBO will run the landscape, he says. But, using two examples -- Hellman & Friedman LLC's $2.7 billion LBO of heating and A/C systems maker Goodman Global Inc., as well as Vestar Capital Partners' $1.1 billion buyout of Radiation Therapy Services Inc., which offers healthcare services to cancer patients -- suggest "that the souped-up, Hummer-sized 2006 and 2007 models will be replaced by modestly appointed compacts. Both deals, in fact, are a throwback to the pre-hyperliquid days of 2004 and 2005."
Vestar, he notes, is buying Radiation Therapy for 11.7 times estimated Ebitda for the year ended June 30 and with the debt multiple capped at 5.2 times, 58% of the purchase price will come through equity.
"These deals suggest Henry Kravis' predicted golden age of private equity may be morphing into a golden era for lenders, at least those with money to lend." - Carolyn Murphy
Recent Miller columns:
Loan markets circa November 2007
Making sense of July 2007's leveraged loan losses
Covenant lite circa April 2007
See TheDeal.com story on H&F-Goodman Global
See TheDeal.com story on Vestar-Radiation Therapy
