The economic siege that’s choking off business at corporations across virtually all industry sectors has turned into a significant source of acquisition opportunities for buyout firms. As these companies look for relief, they’re spinning off non-core and money-losing divisions at attractive valuations.
Buyout firms have begun snapping up these assets in increasing numbers.
Corporate carveouts as a percentage of all deal activity grew more than four-fold in the past three months from the previous quarter, and have more than doubled from levels in recent years. At least 14% of the deals that closed in the second quarter of 2009 were corporate carveouts, compared to just 3% in the first quarter and 6% in full-year 2008.
“A lot of corporate sellers were holding out for a market rebound, and I think now everybody understands that we’re in this for the long-haul,” said Scott Honour, a senior managing director at The
In May, Gores Group invested $75 million to acquire a 51% stake in Stock Building Supply, a bankrupt division of Wolseley PLC. A month earlier, Sagem Communications, a portfolio company of Gores Group, acquired the broadband business of Gigaset Communications for an undisclosed amount.
“There’s a new value paradigm that’s out there, and people are somewhat resigned to it, especially in the corporate seller world,” Honour said. “I’m not sure that the individual company owners, the family businesses and whatnot, have had the same realization.”
Other firms involved in corporate carveouts in the second quarter include American Securities, which acquired the Iowa and Ohio-based tire-recycling businesses of GreenMan Technologies Inc. in May. The sale freed up GreenMan Technologies to focus on growth opportunities for its remaining subsidiaries.
Elsewhere, Marwit Capital Corp. bought the Guardtop Asphalt Coating Division of Vulcan Materials Co., a New York Stock Exchange-listed company that has recently been looking to enhance its financial flexibility.
Overall in the second quarter, deal volume continued its downward slide.
Firms last quarter closed 101 control stake transactions, a quarter-over-quarter decline of more than 15% from the first quarter’s 120 U.S.-sponsored buyouts, according to Thomson Reuters (publisher of PE Week).
Year-over-year, the second quarter’s deal closure rate marks a 57% slowdown from the 236 deals that closed in the second quarter of 2008. The most active quarter on record in terms of closed LBOs was the second quarter of 2007, when U.S. sponsors closed 375 control-stake deals.
While there’s no shortage of companies looking for an acquirer, the quality of most opportunities is down significantly compared to a year ago as earnings continue to evaporate in the arid economy, many deal pros say. That, combined with a dearth of financing options, has stunted deal activity over the last three months.
“We’ve had a couple of cases this year where companies that we’ve had under letter of intent either saw, or were expecting to see, 25% to 30% declines in EBITDA from the levels we bid on,” said Bob Fitzsimmons, a managing partner at New York-based
Buyout shops, meanwhile, hope to shore up their portfolio companies through consolidation and grow them at a time when the competition is weakened.
Add-on acquisitions can also be used a tool to de-leverage platform companies, which can be an important element in the survival of businesses that were acquired in the peak period at historically high leverage multiples. Such transactions are often financed with up to 100% equity from the buyout fund itself rather than by issuing new debt through the portfolio company. Once the add-on is completed, the cash flow from the now-larger portfolio company can be used to pay down debt on an accelerated basis.
New York-based buyout shop American Securities is among the busier firms today on the add-on front, having closed three bolt-on deals in the second quarter and a total of 11 within the last year.
“We have seen a substantial, substantial increase in add-on activity,” said David Horing, a managing director at American Securities. “I would say it’s better now than it’s ever been in our history.” —Ari NathansonA longer version of this story previously appear in Buyouts, an affiliated publication to PE Week.