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— Analysis —
"For the last 12 months, we've seen a steady increase in the amount of equity capital lenders are requiring [buyers] to put into deals," says Churchill Financial LLC's Randy Schwimmer. In some cases, financing is shunned altogether. "There are situations we've seen where the firms are willing to do an all-equity deal with a view toward financing later on," says Howard Lanser, director of mergers and acquisitions and investment banking at Robert W. Baird & Co.
-- See related lending stories: -- Critical, if improving At issue are valuation concerns. "The problem is not knowing if a company is worth 4 to 5 times Ebitda or 3 to 4 times Ebitda," says James Rybakoff, the CEO of New York middle-market investment bank Akin Bay Co. LLC. With the economic turmoil taking its toll on companies of all shapes and sizes, he says, "every plan now is a restructuring plan." According to Rybakoff, industries that are struggling, such as retail and apparel, can expect even lower multiples of 2 times to 3 times Ebitda. These uncertainties often originate with the target companies themselves. "Corporations are having a very difficult time forecasting 2009," says Lanser. This makes banks less willing to provide deal financing, to say nothing of leverage capital. "Ebitda is discounted by lenders, so to make sure they aren't overextending credit, leverage is being brought in," he adds. "For middle-market buyouts, that number is approaching $1 of equity for $1 lent," Schwimmer says. This comes out to total debt-to-Ebitda ratios between 3 times and 3.5 times, in Schwimmer's view. Rybakoff believes total debt is a little lower at 2 times to 3 times. Lanser still sees total debt at 4 times Ebitda, down from a peak of 5.5 times. Availability of senior credit remains an issue. Lanser says the senior part is still the most difficult to fill. "Rates continue to remain high," he says. "LIBOR floors plus the spread on that are resulting in very attractive rates on senior basis." These LIBOR floors are generally in the 3% to 4% range. The economic uncertainty has also prolonged deal closing times, though that is the least of dealmakers' worries these days. "Very few new deals will happen," says Rybakoff. At least some in the middle market are beginning to see the light at the end of the tunnel. "We haven't seen deals fly out the door yet [in 2009], but we are
seeing a better foundation for M&A than what we had in November and
December," says Lanser. "The general feeling is that we've weathered
the storm. Waters are calm. Who knows what will happen down the road,
but as long as there's stability and there isn't volatility, M&A
will pick up again." Comments |
With the economic recession now in its second year, it's no surprise that middle-market deals are being done at lower multiples, with more equity and less leverage than even a year ago. Back then, 30% to 40% equity was generally enough to get a deal done. Now, most middle-market deals require at least 50% equity, with one industry observer saying deals in the pipeline will take as much as 60% equity.
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It will always be easier to buy than start and build a business. The last client that I sold in January, 2009 received a somewhat lower multiple than perhaps he would have 12 months ago but he is getting tremendous re-investment value. He is creating a diversified portfolio of public companies and real estate at 50% discounts off of the recent highs. In my view, business valuations and investment valuations must be considered in relative terms.
Submitted by: Brenen Hofstadter, MBA, CM&AA