While most buyout pros aren’t wearing big smiles these days, first quarter deal volume could at least keep frowning in check.
Despite the economic travails of 2001, which clearly spilled into 2002, last quarter’s numbers look strikingly similar to the year-ago period. During both quarters, firms closed between 30 and 40 deals with combined transaction values that did not exceed $4 billion, according to Buyouts. To be specific, there were 32 deals for a combined total of $3.7 billion in Q1 2002, although some deals had undisclosed values (but are not likely to have accounted for more than $300 million.)
To be sure, that doesn’t come close to average quarterly volume over the last five years, where it was common for one period to host $7 billion to $10 billion of LBOs with little difficulty.
And while Q1’s numbers don’t guarantee that better days are around the corner, sources say the first quarter might be the last of doom and gloom for awhile.
LBO firms certainly have enough capital to deploy. While it’s difficult to calculate the exact amount of dry powder in the market at any one time, consider the fact that buyout funds have raised more than $30 billion every year since 1997 – they even topped $60 billion in 2000 -yet less than $25 billion worth of deals closed in 2001. Thus, there’s a lot of money that hasn’t been spent, and GPs are feeling some pressure to put it to work.
So what’s the end result? For many, it means paying higher prices but expecting lower returns, says Jeff Turner, managing partner at U.S. Bancorp Piper Jaffray.
“Lower return expectations have evidenced themselves in the last three to six months,” Turner says. “It has started to show in terms of the way firms are looking at capitalizing their transactions with a high level of equity while still willing to pay a high price.”
As a result, Ebitda multiples are on the uptick, especially among strong companies that have held their own during the downturn. Turner declined to provide specifics on the three or four “high-quality” companies his group has on the selling block, but says they’re attracting tremendous interest from private equity firms willing to pay multiples that reflect levels seen in 1999. Even the banks are stabilizing a bit, he adds.
With valuations plummeting in 2001, recent deals have been on the small side. Only one deal, The Carlyle Group and JPMorgan Partners’ purchase of Korea’s Kumho Industrial Co., brought in more than $1 billion, marking the largest deal of the quarter. Coming in second was GTCR Golder Rauner’s TSI Telecommunications Services buy – a former Verizon Communications company – for $800 million.
In fact, telecom LBOs ruled the first quarter, accounting for four transactions. In addition to GTCR’s TSI deal, Investcorp, Texas Pacific Group and Sun Capital Partners put faith in the future of telecom. TPG’s Paradyne Networks, based in Florida, bought its competitor, Elastic Networks, for almost $30 million, while Investcorp purchased the assets of Executive Conference, a business telephone conferencing company, for $60 million from bankrupt Teligent. Similarly, Sun Capital’s purchase of Solunet, which sells network supplies, was also a distressed telecom company buy.
One reason the industry was popular last quarter was because so many telecom companies are distressed, thus offering turnaround opportunities. Rodger Krouse, a partner at Sun Capital, says telecom companies, failed rollups and those in cyclical industries stood out on his radar screen in the first quarter.
Sun Capital, which only looks at operational turnaround opportunities, pushed out three deals in the first quarter, all under $50 million.
Indeed, the abundance of distressed deals has more traditional buyout firms tiptoeing around the space (Buyouts March 18, p. 1) and others pledging to increase their new fund commitments to almost-bankrupt companies. Most notably, The Carlyle Group is raising a $500 million turnaround fund, said a source close to the firm.
Does Green Mean Green?
One rather interesting aspect of deal flow in the first quarter was the concentration of environmental business acquisitions. Nautic Partners, Lincolnshire Management and Cambridge Capital Partners all cited the growth prospects in this area as promising.
For their part, Lincolnshire and Cambridge Capital put money in recycling companies. Even though Cambridge is relatively new on the buyouts front, its purchase of RLI Inc., which specializes in the cleaning and reselling of industrial bulk containers, marks its second deal in the area. RLI is an add-on acquisition for National Container Group, which has facilities in Chicago, Cleveland, Houston and Charlotte, to refurbish used plastic drums and containers. The company has plans to operate on a national scale much like U-Haul operates its moving truck business, says David Posner, a partner at Cambridge Capital.
“In the business of plastic industrial containers, the biggest cost is the transportation of the empty drum,” he says. “Now National Container has multiple locations throughout the country, so they’re able to keep the drums in inventory at the local level and re-use them.”
The noncyclical aspect of recycling companies drew Lincolnshire to try its hand in the area for the first time last quarter. The firm bought NexCycle Inc., which has three recycling business lines: beverage containers, plastics and glass. Lincolnshire is depending on growth opportunities within the recovery and recycling industry that NexCycle covers which are being driven by several things: an increase in the number of consumer beverage containers being recycled, a growing acceptance of the use of recycled products and the energy savings that result from recycling aluminum and glass.
High-tech deals were absent from the deal list for Q1, while Old Economy companies made a strong showing. Almost 19% of the deals closed last quarter involve manufacturing, including deals by Wind Point Partners and Baird Capital Partners.
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