Bullish on 2014 Deal Volume and Purchase Price Multiples

Jun 01, 2014
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Market Updates

Please be aware: More recent data has been published since the time of this post. To see current market trends, check out the most recent issues of Market Updates.

Per PitchBook, U.S.-bosed private equity deal making in 1Q 2014 dropped slightly from 4Q 2013 but remained in line with quarterly deal flow totals from the previous three years, in one of many indicators that PE investment in 2014 should continue to remain relatively strong.

The $108 billion invested and 589 transactions closed in the first quarter were both less than the $151 billion in capitol invested and 633 deals from 4Q 2013, but both 1Q figures put 2014 on pace for a year strikingly similar to 2013, when deal making was slow to get going in the first half and picked up in the second half.

"Deal making remained strong in the first quarter even though deal sourcing has become more difficult as purchase price multiples grow (the valuation-to-EBITDA multiple for platform buyouts hit a record 11.6x in the first quarter)," said Rich Martin, senior director of marketing for Merrill DataSite. "This may be because PE firms have increasingly turned to add-ons and growth rounds to make up for fewer opportunities among traditional buyouts . "

According to the Alliance of Merger and Acquisition Advisors, the value of midmarket mergers and acquisitions (M&A) targeting North American companies weakened in Q1 2014, falling 11% from USD $95,622 million in Q4 to USD $85,591 million. This is particularly disappointing given the improvement seen at the end of 2013.

Conversely, the volume of deals targeting companies based in the United States, Canada, and Mexico actually increased to 2,780 in the quarter under review, marking the second consecutive climb and the best result since Q4 2012, when 3,189 deals were recorded.

Valuation multiples for the first quarter of 2014, as reported by GF Data's 187 active data contributors, were largely unchanged from those of last year, averaging 6.4x trailing twelve months (TTM) adjusted EBITDA for the quarter, compared to 6.5x in 2013.

As GF Data reports, and we at WCF ore seeing also, this similarity obscures-as Paul Harvey used to say-"the REST of the story":

  • The first quarter showed continuing upward movement in valuations on deals in the $50-$250 million total enterprise value (TEV) range, propelled by unprecedented levels of debt on these transactions.
  • Average total debt multiples at $100- $250 million topped five times for the first time in the life of a data sample that goes back to 2003.
  • Deals in the $10-$50 million TEV range exhibited neither the jump in valuation nor the surge in debt support.
  • looking ot buyouts involving platform acquisitions only, the valuation spread between smaller and larger transactions historically overages about 1 .3x. In 2014 year to date, the spread was 3.8x-an average mark of 8.9x on deals at $50- $250 million TEV, 5.1x on transactions at $10-$50 million.
  • The "quality premium" -the reward in valuation given to selling businesses with above-average EBITDA margins and revenue growth-has remained at the benchmark levels reached last year. The premium for the first quarter was 20%, in line with the 18% recorded last year. The historic premium for above-par financial performance is 4%.
  • The market has never been more bifurcated, and never hungrier for quality properties of a certain size.

At Wipfli Corporate Finance Advisors, we also are seeing strong activity in deal flows and multiples. Financing terms are extremely favorable for buyers, which is facilitating an increase in both deal price and seller terms. Our expectations are for a strong 2014.

For additional industry data organized by NAICS code, contact a WCF representative. For optimal outcome regarding the sole of your business, capitol raise, or acquisition searches, consult experienced corporate finance advisors.

 


The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy. The content of this material was obtained from sources believed to be reliable, but neither Wipfli Corporate Finance Advisors, LLC nor RKCA, Inc., warrants the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice. This material should not be considered, construed or followed as investment, tax, accounting or legal ad vice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of Wipfli Corporate Finance Advisors, LLC or RKCA, Inc. Investing in the financial markets involves the risk of loss. Past performance is not indicative of future results.

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