Talking Deal Prices with Steve Gelsi
Bucking the trend, Thoma Bravo said on Sept. 2 that it would buy Compuware for $2.5 billion, or about 12.8x the Detroit technology company’s projected 2015 EBITDA of $195.07 million, according to analyst estimates compiled by Thomson Reuters.
Double-digit purchase price multiples are far from rare in the tech buyout space, but Compuware’s revenue is projected to be flat in 2015 and to drop by about 3 percent in 2016—not exactly a fast-growing company. The price of $10.92 per share delivered a premium of 17 percent for public shareholders over the stock’s closing share price on Aug. 29, but Compuware’s shares have been falling quickly since early 2014 against a sharply rising Nasdaq.
So while Thoma Bravo no doubt plans to wring growth and value from Compuware, it doesn’t seem as if the firm got the company on the cheap considering its recent headwinds. Thoma Bravo probably knows what it’s doing, but the PPM numbers may not make success any easier for the deal, which is scheduled to close in early 2015.
The deal environment that helped push up Compuware’s purchase price multiple have caused most sponsors to avoid the take-private arena, as cited by the Sept. 9 Goldman Sachs report, “Where Have All the LBOs Gone?” Nowadays, sponsors make up a paltry 20 percent of total U.S. mergers and acquisitions, near the lowest share in the past decade, according to the report.
Indeed, my Aug 29 Talking Deal Prices column flagged a big drop off in take-privates over the summer to only five smaller deals, down from 10 mostly larger deals in the year-ago period. Citing the same trend, Goldman Sachs documented zero take-private deals surpassing $5 billion so far in 2014, compared to four last year: Heinz, Dell, BMC Software and Neiman Marcus.
Most of the blame goes to a strategic buyer recovery that had been expected for some time given near-record cash levels, inexpensive financing and the need to enhance slow sales growth, Goldman pointed out.
Sponsors may be more likely to deploy their $450 billion in dry powder in overseas deals. The Goldman report pointed out that Kohlberg Kravis Roberts & Co and The Blackstone Group have said that at least half of their recent investments have taken place outside the U.S.
“We see the investment universe with blinking yellow lights—move slowly and carefully,” Ares Management CEO Anthony Ressler said on a recent earnings call, according to the Goldman report, which concludes that “a pullback in the equities market appears to be the most likely catalyst to drive an increase in activity.”
Meanwhile, purchase price multiples for LBOs moved up to more than 9x EBITDA in 2014, from the high 8x EBITDA range in 2013. That means Thoma Bravo’s PPM of 12.8x projected 2015 EBITDA for Compuware ranks well above the norm. Hopefully, the company will be worth it.
PE pro flags niche for lofty multiples
Select healthcare, energy and software-as-a-service companies remain in the spotlight as deals often demanding the highest purchase price multiples nowadays. But Joel Guth, CEO of financial adviser Gryphon Financial Partners, a member of the Hightower Network, said another hot category remains on the M&A scene: niche consumer discretionary.
“If you go to Whole Foods and there’s a hot brand in the store—those kinds of companies will demand a premium,” he said. While he didn’t provide any examples, at least one recent transaction seems to jump out.
West coast firm TSG Consumer Partners sold CytoSport Holdings Inc to Hormel for $450 million in a deal that closed in August, after growing sales at the maker of Muscle Milk protein powders by more than 4x in seven years. Of course, it’s a sponsor selling to a strategic. Is there any other kind of deal these days?