Q1 exits: No reason to panic amid uncertainties in M&A market

  • $9.5 bln exit of Energy Future Holdings leads in value
  • U.S.-based PE-backed M&A: 164 Q1 deals, $28.8 bln
  • Industrials lead by count, 23.8 percent of all exits

Private equity M&A exit activity kept churning in 2018’s opening quarter, even as the value of transactions fell from last year.

In Q1 2018, 164 U.S.-based PE-backed exits totaled $28.8 billion — a step down in value from the two preceding quarters. There’s still room for that sum to grow, however, as the numbers are current through March 20.

Even without the final 11 days of Q1 accounted for, the deal volume and value exceeded the six-year quarterly averages of 147.1 deals and $25.8 billion.

Of the quarter’s 164 exits thus far, 37 had disclosed values, eight of which cleared the billion-dollar hurdle.

Curt Moldenhauer, U.S. deals solutions leader at PwC, said the headwinds suggest 2018 will be a robust year for M&A. However, there are issues to parse, including international trade tariffs, tax reform and regulations.

“One thing we’re seeing rising to prominence in the regulatory environment is the overall stance of the administration on antitrusts,” Moldenhauer said.

“There’s a lot riding on the AT&T merger case. If it’s allowed to go through, we anticipate a very large wave of consolidation and dealmaking in entertainment and media. I think there’s a lot of conversations being had, but a lot is on hold because folks want to figure out where the government is sitting on that whole thing.”

He continued: “I’ve been doing this for 25 years, I can’t remember a time when the U.S. corporate and PE investors had as nebulous a regulatory environment as they do today. It’s gotten a lot tougher for them to figure out where things are headed.”

Of transactions with disclosed value, Dallas electric utility provider Energy Future Holdings was head and shoulders above the rest. It was acquired by Sempra Energy, a natural gas holding company, from a consortium of firms including Kohlberg Kravis Roberts and TPG Capital for nearly $9.5 billion.

Next up, Onex Corp dealt American Medical Response, a leading medical transporter, to an investor group of Ardian, KKR, Koch Equity Development and Air Medical Group Holdings for $2.4 billion.

The third largest was GI Partners and Oak Hill Capital Partners selling its interest in Wave Broadband, a U.S. provider of cable, internet and telephone services, to TPG and RCN Corp for just under $2.4 billion.

Industrials led all industries by exit count in the first frame of 2018. The sector accounted for 39 (23.8 percent) of the 124 deals. Consumer Products/Services followed closely with 36 deals (22 percent) and healthcare placed third with 26 deals (15.9 percent).

Many investors say the market is in the eighth or ninth year of an economic recovery. Even Leon Black, chairman and CEO of Apollo Global Management, said during a recent keynote speech the recovery has gone on longer than usual.

But even in a downturn, asset value may not drop as precipitously as has been the case in the past, Moldenhauer said.

“That might be true around the edges but that ignores one of the fundamental drivers. Quite simply, that there’s more demand for deals than supply for deals. Underlying that demand is this huge amount of available capital. Frankly, it’s likely to survive any economic downturn,” he said.

“Last year was an epic year for PE fundraising. There’s certainly low-cost financing available and corporates have a ton of cash in their balance sheet. Even if there’s a lower economic growth, there’s still all this capital out there that’s going to bid up any assets that come to market.”

IPO count nearly triples

PE-backed IPOs almost tripled from the previous quarter. Q1 2018 saw 11 companies make their debuts on the public market. The combined size of these offerings was $3.9 billion, the highest total since Q2 2015.

The largest offering came from ADT Inc, one of the country’s biggest providers of security systems, going public for about $1.5 billion. ADT is backed by Apollo.

Gates Industrial Corp, sponsored by Ardian and Blackstone Group, followed. The maker of power transmission and fluid power products entered the marketplace for $731.5 million.

As the accompanying “PE-Backed IPO Exits by Quarter” graph shows, IPOs are an erratic industry, accompanied by a history of sharp fluctuation without much, if any, correlation.

Download exit data and charts here: Q1 2018 Exits

Photo courtesy of RapidEye/E+/Getty Images


Additional Data

Buyout M&A Exits By Quarter

PE-Backed IPO Exits By Quarter

Q1 2018 Buyout Exits Through M&A

Q1 2018 M&A Exits Industry Breakdown

Select Q1 2018 Buyout Exits Through IPO