Buyout activity accelerated in the second half of 2010, as the economy stabilized, lending markets warmed and sponsors, looking more and more to one another for deal flow, found no shortage of opportunities. Meantime, sponsors enjoyed a rebound in recapializations that let them collect big dividends without having to sell at all.
“I think 2010 represented an extremely important step back toward normalcy,” Mark Bradley, global head of financial sponsor coverage at Morgan Stanley, told Buyouts.
All told, U.S. buyout shops had closed some 745 deals by Dec. 15, well ahead of the 530 deals closed by the same time in 2009, according to data supplier Thomson Reuters, publisher of Buyouts. Last year’s disclosed deal value clocked in at $77.3 billion, up more than 50 percent from $34.7 billion the prior year.
Deal activity was actually fairly tepid in the first half the year, dropping to 193 deals announced in the second quarter from 210 deals in the first quarter. But investment bankers were already seeing signs of a strong second half. “Our business activity shot through the roof in February, March and April,” said Rob Brown, managing director of the Chicago-based investment bank Lincoln International LLC. In fact, activity spiked in the third quarter, with 279 deals announced with a disclosed value of $34.9 billion. The fourth quarter was even stronger, with $44.9 billion in disclosed value through Dec. 15.
Add-on acquisitions accounted for the highest percentage of transactions last year, as they did in 2009, as sponsors continued to build out portfolio companies. Add-on deals accounted for 41 percent deals closed by Dec. 15, compared to 48 percent by that point in 2009. By sector, companies in high technology, consumer products and services, and industrials, respectively, garnered the most attention from sponsors. In 2009, the order was industrials, high technology, and consumer products and services.
So-called secondary transactions accounted for 11 percent of deals in 2010, according to Thomson Reuters, up from 4 percent the prior year. Sponsor-to-sponsor deals were even more prevalent in the middle market, defined as companies valued at less than $500 million. By Dec. 8, they had accounted for close to 45 percent of mid-market leveraged buyouts in the fourth quarter, according to Thomson Reuters LPC.
Some prominent examples from last year include
Not surprisingly, such deals often took place when the investment was getting long in the tooth for the original sponsor. That was the case in April, when
As for the market’s most active players, the Carlyle Group took full advantage of improving market conditions last year. Two of Carlyle’s deals made the list of the ten largest deals closed during the year, while three are included in the 10 largest pending deals.
The firm, among the most active investors of 2010, invested $7 billion over the course of the year in more than 50 investments around the world. That was up from the roughly $5.2 billion it put to work in 2009. The firm also sold 13 portfolio companies, brought six companies public, and distributed $7.5 billion to its limited partners—about 3x the amount of capital it distributed to its investors in 2009. Among its largest deals last year was the firm’s $3.8 billion take-private of nutritional supplement maker NBTY Inc., and its agreement to take communications equipment maker CommsScope Inc. private for $3.7 billion. (See table, p. XX).
“In part based on the data we see from 200-plus portfolio companies, we have a more optimistic view on the global economic outlook than what seems to be the consensus,” Carlyle Group’s Marchick said.
Other active firms included
Many expect the momentum of these and other U.S. sponsors to spill over to next year. “2010 has been a great year and 2011 is shaping up similarly,” said David Marchick, managing director and global head of external affairs at Carlyle , the Washington, D.C.-based firm that was particularly active during the year.
Financing, Financing, Financing
If Buyouts has recorded one thing in its insitutional memory over the years it is the importance of the debt markets to fueling transactions.
Debt financing for new deals continued to improve throughout the year, with large companies and fast-growing companies having the easiest access. The strong high-yield market and improving bank debt market “allowed liquidity for our transactions and also the ability to make some of these buyouts more actionable,” an executive at
In the mid-market, sponsors have been recently able to secure debt-to-EBITDA ratios in the 4x range, although Lawrence Golub, a founder of the mid-market lender
That said, lenders remain wary of taking on too much risk on deals. The amount of equity sponsors need to put up continues to remain high relative to historic levels. In the mid-market last year, sponsors typically fronted about 40 percent to 50 percent of purchase prices with equity, according to sources. Large market firms had it a bit easier, typically supplying about 35 percent to 40 percent of purchase prices with equity. That both debt-to-EBITDA and equity-to-EBITDA ratios are high suggests that overall pricing in the market has firmed considerably. The prospect of a rise in capital-gains tax rates probably motivated some sellers to complete transactions in 2010. (In the end, of course, President Barack Obama and incoming Congressional Republicans agreed to continue tax cuts set under the Bush Administration, which leaves the capital gains tax rate at 15 percent.) But most sources believe tax-related motivations didn’t fundamentally change the market’s overall dynamics last year. Said Justin Abelow, a managing director at the investment bank Houlihan Lokey Howard & Zukin: “The real drivers are that PE firms want to buy and PE firms want to sell, because the economics of their business—the time on carry calculations—are ticking regardless of what the tax rules are.”
Clearly an improving economy also played a large role in the second half’s buyout boom. Golub of Golub Capital said that the more stable EBITDA growth demonstrated by many companies gave comfort to buyers, because they could more accurately estimate how a target company would perform over the next few years. In the summer of 2009, EBITDA in many target companies had risen by 15 percent to 20 percent over 2008 levels, Golub said. But that growth left many buyers uneasy. They could only compare it to performance in 2008, an anomalous year given the financial crisis that came to a head that year. By the summer of 2010, buyers could compare with confidence the more sober EBITDA growth of a target to its growth at the same time in 2009.
“This led to some stability among buyers and sellers,” Golub said.
A robust high-yield market also allowed firms to return cash to investors after a two-year drought in the credit markets. As of Dec. 8, $3.3 billion of dividend recapitalizations of mid-market companies had closed, and another $3.9 billion were in the pipeline, according to Thomson Reuters LPC. By contrast, there were no mid-market dividend recaps in the market at that time in 2009. Further, mid-market dividend recap financings actually out-paced LBO financings in the fourth quarter, the first time that’s happened in five years, according to Thomson Reuters LPC.
Some of these financings provided sponsors with a lucrative alternative when a sale of the company failed. In December, for example, Wise Foods completed a $48 million credit facility to pay its shareholders, including
Sidebar: Looking Ahead
Many sources believe the extension of the capital gains rate at 15 percent and improved company performance will continue to encourage momentum on the sell-side well into the new year.
“Many business owners thought they missed the window of opportunity to sell their business at the lowest capital gains rate in decades,” said Troy Templeton, managing partner at
“As long as we have stable and slightly strong growth, and the financing markets remain strong—not robust, but strong—we think there will be healthy amount of buyout activity in the U.S. and worldwide,” an executive at the firm said.