- Five deals of $5 bln or more close in Q1
- Highest dollar volume since Q3, 2008
- Sponsors close fewer deals overall
Megadeals in the relatively strong sectors of consumer products, technology and real estate stood out in the first quarter for sponsored M&A, with five transactions breaking the $5 billion mark.
But in the face of tighter credit markets, higher purchase-price multiples and uncertainty around commodity prices, overall deal count fell by almost a third.
Total disclosed dollar volume was $57.9 billion as of March 23, up 56 percent from $37.1 billion in the full first quarter of 2015 and 35 percent ahead of the $42.9 billion of deals closed in fourth-quarter 2015.
This year’s first-quarter dollar tally ranks as the richest for any quarter since the $62.7 billion total in the third quarter of 2008.
The largest deal to close in the quarter was the buyout of Keurig Green Mountain Inc for $14.2 billion by JAB Forest BV, Mondelez International Inc. and BDT Capital Partners LLC.
Blackstone Group spent $7.8 billion to buy BioMed Realty Trust Inc, followed by $7 billion for the Veritas unit of Symantec from Carlyle Group and GIC PTE Ltd of Singapore.
By comparison, in the fourth quarter three deals topped the $5 billion mark and none surpassed $10 billion.
But more difficult financing conditions played a role in the first quarter’s totals. At least one of the larger deals — Veritas — was pulled into the first quarter after running into financing issues in 2015, when it was originally expected to wrap up. In January, Symantec agreed to a roughly $600 million price cut to get the deal done after a debt and bond deal for the buyout was pulled.
Although the price fell, Carlyle kept the size of the equity check at $2.6 billion for Veritas, according to a February 10 conference call. “Despite some hurdles, we were able to complete this transaction with satisfactory terms for all parties,” Carlyle Group co-CEO Bill Conway said on the call.
All told, sponsors closed 329 deals as of March 23, down 32 percent from 484 for the full first quarter of 2015, according to Thomson Reuters data. Activity fell 26 percent from the 447 deals closed in the fourth quarter of 2015.
“In the past three years we’ve seen slower starts to the year than we had in prior cycles, and 2016 is starting off in a similar fashion,” said Chris Coetzee, head of Baird’s financial-sponsor group, a specialist in the middle market. “It’s a slower start but the fundamentals look good for the balance of the year.”
Higher deal prices may have thrown a bit of cold water on the urge to merge. The average purchase-price multiple increased to 10.5x EBITDA as of March 23, up from 9.57x EBITDA in the full year-earlier quarter, according to S&P Capital IQ. Leverage levels climbed to 5.66x EBITDA from 5.38x EBITDA.
“The biggest driver in the market when it comes to purchase-price multiples is the availability of quality assets,” Coetzee said.
“If you bring a quality asset to the market, you’ll have strategics that are looking for growth and they’re increasingly aggressive … You have family offices, which have really sharpened their pencils, and you have sponsors, with funds that have been raised — not just U.S. funds but international funds — with capital to put to work.”
Sponsors talk up the consumer sector
Among 12 industry groups tracked by Thomson Reuters, industrials ranked as the most popular with 46 closed transactions, followed by 42 each for consumer products and technology.
Coetzee said he saw a strong pipeline at Baird, reflecting good activity in its health-care practice from the smaller end to the upper part of the middle market, along with robust activity in the firm’s business-services clients. The firm’s consumer practice remains “about as active as we’ve ever seen it,” he said.
Among deals on the consumer front in the first quarter, a Perella Weinberg Partners fund, PWP Growth Equity, paid an undisclosed sum to invest in Black Bear Diner, a 75-unit family restaurant chain.
The firm also led a $32 million equity round in MOD Pizza. The latest investment came after the firm led a $45 million round in the company in March of last year.
Chip Baird, co-head of PWP Growth Equity, said the firm made these investments as part of its continuing effort to find companies with the potential to rapidly expand in the consumer sector. All told, the firm’s $600 million PWP Growth Equity is more than half-way committed after the firm closed it in late 2014, he said.
“We feel pretty good about the consumer economy,” Baird said. “The jobs data has been strong, with relatively low unemployment numbers, and wages have been relatively stagnant, which means people are in search of a great value. Lower gasoline prices have helped the average consumer and put more disposable income into peoples’ pockets.”
In terms of sourcing MOD Pizza, the firm entered into a direct dialog with the company founders and established fair valuation metrics, which provided a basis for its investment alongside existing shareholders, he said.
“We felt comfortable with management and we structured the deal to participate in a funding round with insiders,” Baird said. “The price was important, but that wasn’t the sole determinant. It was more about making sure they were bringing in the right partner.”
Brian O’Connor, managing director and co-head of Vestar Capital’s consumer group, said the rocky financing market played a role in the slower deal environment for sponsors in 2016.
A mix of causes for the slowdown included slower growth in China, an interest-rate hike by the U.S. Federal Reserve, and leveraged-loan distress in the energy sector, among other factors.
“People were hoping the financing markets would bounce back in the first quarter, but it got even weaker,” he said.
“We’ve seen a lot of processes that have been delayed, and people that would launch a deal have been pushing it out to the second or third quarter. The inbound calls I’ve gotten [for potential deals] have been fewer in the first quarter compared to the last couple of years.”
O’Connor said, however, that he’s seen things improve in the last few weeks of the quarter.
“The financing markets have stabilized and really started to turn,” he said. “I’m optimistic that’ll continue and that would result in a more normalized level of M&A activity.”
Correction: This story has been updated to correct the spelling of Chris Coetzee’s name.
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