Deal Volume Drops For First Time In Years

The numbers are in, and the trend is clear: Deal volume is down, and it’s not just a summer swoon.

For the first time in five years, the number of announced deals by U.S.-based buyout firms for the two-month period of July and August has fallen, dropping to its lowest level since that same two-month period in 2003, according to Thomson Financial, publisher of Buyouts. For the two-month period ended Aug. 31, Thomson Financial counted 128 announced deals, down 33 percent from the same period last year. The July/August announced deal total also lags those of 2005 and 2004, which weighed in at 170 and 138 respectively.

Disclosed deal volume also fell significantly. The 19 announced deals in July and August 2007 with disclosed values only added up to $4.1 billion, compared with 58 disclosed deals in the same period last year, which totaled $74.6 billion.

The credit crunch that began to chill the market at the end of June also showed up in data outlining the number of announced deals by U.S. sponsors for the first half of 2007. While the number of deals announced between January and June 2007 rose above the number announced during the same period in 2006, the year-over-year percentage increase, at 5.5 percent, was the smallest in four years, according to Thomson Financial.

What’s more, the mega-market has been virtually nonexistent since The Blackstone Group announced its $26 billion take-private of Hilton Hotels in early July. No buyout deal larger than $1 billion was announced in August in the United States, shocking for an industry that fired off 11 in April and 12 in May. Worldwide, there were only three buyouts valued at more than $1 billion announced in August, down from five in July and 11 in June, according to Thomson Financial. According to Standard & Poor’s, there were only four new junk-bond issuances in July, vs. an average of 38 new high-yield issuances per month in the first half of 2007.

That said, the drop in deal activity may not indicate that the entire market is ill. While the large market has ground to a halt, a number of participants in the middle market told Buyouts that they have seen no evidence of a slowdown in their sectors. “If the market’s going at 110 percent and finally slows to 100 percent, can you really call that a slowdown?” said Dan Reid, a principal at Grant Thornton, an accounting and management consulting firm, and head of the firm’s transaction advisory business.

Reid, who advises on due diligence for transactions ranging from $80 million to $500 million, said the only change he’s seen has been a flight to quality assets by both sponsors and lenders. General partners are more aware of the need to get their bank lenders involved earlier on in their processes, while EBITDA forecasts need to be more accurate. “There is a renewed vigor on due diligence,” Reid said.

Ned Valentine, a managing director at mid-market investment bank Harris Williams & Co., told Buyouts that his firm’s year-over-year transaction numbers are up for July and August of 2007. “In the middle market [less than $1 billion], deals are continuing to get done, and lenders continue to be open for business,” Valentine said. Nonetheless, he added, the number of lenders has dwindled, loan terms are tighter, and leverage multiples are lower—all factors that threaten to lower returns for LBO firms.

The fact that mid-market firms are still announcing new buyout deals draws attention to the chasm in deal value that has formed over the past two months. Smaller deals not dependent on the public markets for financing can get done, while larger deals that need to drum up investor support for their debt tranches are getting stuck in the pipeline.

Throughout the first half of 2007, the lending market didn’t seem to blink before committing financing to the biggest LBOs in history, including the buyouts of utility TXU Corp., Canadian phone giant BCE and credit-card processer First Data Corp. Now those same deals have come back to haunt the banks that underwrote the debt packages, since investors have shown little appetite for buying up the loans the banks were expecting to unload from their balance sheets through syndication.

Perhaps most cruel of all is that no one is sure whether this is a long-lived slowdown in the debt market or a several-month blip. The near-daily gyrations of the stock market attest to this uncertainty, said Joe Bondi, a managing director at Alvarez & Marsal who leads the firm’s turnaround advisory and crisis management services.

“How great the impact of the credit crunch will be is something that people are struggling to understand,” he said. “That’s why you’re seeing these massive daily fluctuations in the stock market. Firms just have to be mindful of their current portfolio companies and pick their spots carefully.”