Favorable conditions for 2019, wavering optimism for 2020
Let the good times roll!
As year-end rapidly approaches, M&A activity remains strong through the remainder of 2019. GF Data reported that valuations for transactions closed averaged 7.4x EBITDA for the second straight quarter, buoyed by larger deals in the $100M to $250M enterprise value range.
For the year-to-date 2019, the average EBITDA multiple for all deals also remained consistent with last year at 7.2x. Multiples in all deal size categories except one rose in 2019 over 2018. With a steady deal count and valuations remaining relatively strong, 2019 is turning out to be a great year.
Taking a deeper quarterly look, multiples peaked in the second quarter in three of four valuation ranges, with Q3 multiples dropping 0.5x to 0.7x EBITDA in all but the largest of deal sizes. This may be timing or a sign of caution.
"With a steady deal count and valuations remaining relatively strong, 2019 is turning out to be a great year."
At an industry level, a few key players have been able to capitalize on the positive 2019 valuations. Business services, healthcare services, retail and technology currently lead the pack in the GF data and have seen YTD 2019 growth in comparison to the 2018 valuations.
According to PitchBook, PE deals by sector show materials & resources and B2B with the highest dollar volume, followed by B2C, IT, healthcare, energy and financial services.
"...employment growth doesn’t show signs of stopping."
Some key externalities affecting M&A activity remain, including inverted yield curves, trade wars, tariffs and the maturing U.S. economy. Core inflation has stayed put at a stable rate of around 2%, and employment growth doesn’t show signs of stopping.
In November, law firm Dykema Gossett PLLC released their 15th annual M&A survey of senior executives and advisers (taken in September and October). U.S. economic conditions were listed as the greatest driver of U.S. M&A activity this year, ahead of availability of capital, which was the top choice in the previous six surveys. About one-third of respondents had a positive outlook toward next year, one-third neutral and one-third negative.
Macroeconomic conditions did not vary much in the third quarter. Uncertainty persists with trade, tariffs and the yield curve inversion that occurred earlier this year.
"Unemployment has plateaued at 3.2% the past two months."
Fortunately, unemployment has plateaued at 3.2% the past two months. The Federal Reserve has also cut interest rates by 25 basis points.
Pricing spreads on senior and subordinated debt were maintained at high levels through the third quarter in the GF data. Senior debt price rose to 3.4%, and the 90-day LIBOR decreased 2.08%, portraying a cautious optimism from lenders.
We have recognized that the debt market continues to thrive through 2019. Debt availability and utilization essentially are unchanged at 4.1x EBITDA. A favorable lending market should help to maintain valuations for the remainder of the year. This can also contribute to an opportunity in more diverse quadrants of the market.
"A favorable lending market should help to maintain valuations for the remainder of the year.
Now is the time — and it’s better than ever
With less than one month to go in 2019, Wipfli Corporate Finance Advisors anticipate valuations and deal activity to stay on pace with their positive trajectory. We continue to convey that the U.S. economy is maturing, so the opportunity to sell is better than ever. Contact us for more information.