Prices paid in large-market LBOs last year dropped by more than one-and-a-half turns of EBITDA from the prior year. Unfortunately, record-high equity checks offset the discount.
Buyout shops in 2009 paid an average purchase price multiple of 7.9x EBITDA to acquire companies generating EBITDA of more than $50 million, according to Standard & Poor’s Leveraged Commentary & Data. Though still high compared to the 6.1x EBITDA average of 2001 (the trough of the previous recession), 2009’s average purchase price multiple fell 1.6x EBITDA from 2008’s average purchase price of 9.5x EBITDA, and it’s nearly two full turns below 2007’s 9.8x EBITDA average.
But as the average senior debt multiple dropped to 3.2x EBITDA last year from 4.4x EBITDA and 5.6x EBITDA in 2008 and 2007, respectively, equity contributions for LBOs in the larger end of the market rose significantly—a factor that’s bound to hurt returns down the road. In 2009, firms pursuing companies generating EBITDA of more than $50 million capitalized their deals with a record-breaking average equity contribution of 46.5 percent, well above the 38.3 percent average for 2008 and the 30.3 percent average for 2007, according to S&P LCD.
Despite its declining availability, senior bank debt was by far the most utilized source of financing for large-market LBOs last year. In 2009, bank debt made up 32.9 percent of the average capital structure for large LBOs, down from 37.1 percent in 2008 and 51.1 percent in 2007, according to S&P LCD.
The use of bridge loans—short-term financings made available while longer-term debt is being arranged—rose in 2009, as the credit crunch continued to disrupt the buyout market. Such temporary financings last year made up about 6 percent of the average capital structure of all large LBOs, up substantially from 0.6 percent in 2008 and 0.5 percent in 2006, according to S&P LCD.