Leverage multiples hardly budged in the first quarter. But that didn’t stop buyout professionals from paying significantly higher prices.
Industry-wide, the average purchase price multiple for LBOs of U.S. companies rose by about one full turn of EBITDA in the first quarter of 2010, compared with the fourth quarter of 2009, and more than half of the difference was paid for with equity, according to an analysis of data compiled by Standard & Poor’s Leveraged Commentary and Data.
It appears that sellers have been demanding higher prices given the upward trajectory of the economy. On the buy-side, competition is steep as LBO shops—having been all but dormant for the better part of two years—are itching to tap into their war chests before their investment periods come to a close.
Overall, the average purchase price multiple for U.S. companies in the first quarter stood at 8.8x EBITDA, up nearly a full turn from the 7.9x average of the fourth quarter of 2009. Average senior debt multiples, however, only increased to 3.3x EBITDA from 3.2x EBITDA, while subordinated debt levels faired just a bit better in the first quarter, coming in at 1.0x EBITDA compared to 0.7x EBITDA in the fourth quarter, according to S&P LCD.
Equity fueled the increase in purchase price multiples. In the first three months of 2010, LBO shops funded their deals with equity checks averaging 4.5x EBITDA, (45 percent of the total purchase price). In terms of multiples, that figure is up more than a half-turn from the fourth quarter’s average equity multiple of 3.8x EBITDA (though as a percentage it’s roughly on par with the fourth quarter’s 46 percent), according to S&P LCD.
Broken down by size, sponsors of large-market LBOs in the first quarter paid north of half a turn of EBITDA more for their investments than their mid-market brethren, according to the ratings agency’s data.
Firms that acquired large market companies (those with EBITDA of more than $50 million) in the first quarter, paid an average purchase price multiple of 9.1x EBITDA, while their mid-market counterparts paid an average of 8.5x EBITDA for companies with EBITDA of less than $50 million. (Note: S&P LCD did not release fourth-quarter breakdowns by market size due to a limited number of observations during that period.)
Multiples of senior debt were higher at the large market (3.8x EBITDA) compared to the mid-market (2.7x EBITDA). But large market practitioners were still forced to invest more equity per transaction (50 percent) compared to those in the mid-market (40 percent).