Deal Multiples Stay Steady –

After a dramatic climb in valuations in 2003, private equity investors have seen purchase price multiples basically hit a standstill during the past two years. Certain sectors have shown some volatility, moving either up or down, but as a whole, valuations have maintained.

Private equity groups continue to bulk up with larger funds, and strategic buyers, armed with continued stock gains, have long since returned to the M&A market. Together that has created enough demand to buttress valuations at their current lofty levels, but behind all of this, the financing market has endured. And as sellers well know, as long as the debt providers stay optimistic, there’s not much that can chip away at the purchase price multiples.

As is always the case, valuations are richer the higher up the food chain you go. According to Standard & Poor’s Leveraged Commentary and Data, the average purchase price multiple for deals exceeding $1 billion are slowly approaching 8x and currently stand at 7.78 x EBITDA. For deals between $500 million and $1 billion the average multiple was 7.11x; acquisitions ranging from $250 million to $500 million had a 6.95x average multiple; and transactions priced $250 million and lower had a multiple of 6.62x.

“The big jump in leverage ratios really came between 2003 and 2004, and that helped private equity groups expand out on what they can pay for companies,” S&P’s Managing Director Steven Miller tells Buyouts. “Between 2004 and 2005, there hasn’t been any huge increase in leverage ratios so it’s been relatively steady in terms of purchase prices.”

Meanwhile, even as debt has been the big driver, the steady stock market gains and ensuing M&A interest from the strategics has helped multiples stay firm. “If there’s been one difference over last year, it’s that the strategic acquirers have been much more aggressive this year,” Lincoln Partners Managing Director Robert Brown says. “It’s why multiples have been able to stay strong, and will be strong going forward; for at least the next 12 to 18 months.”

Buyouts subscribers can get the rest of the story — and charts — in today’s print edition of Buyouts.