- Q4 multiples dip but remain lofty after credit rockiness
- Deal-maker sees lofty valuation for Group Dekko
- Vista Equity pays less than rivals, source says
Average purchase price multiples dipped during the fourth quarter to about 10x EBITDA, compared to the previous quarter, in the face of rockiness in high-yield credit markets. Multiples remain above year-ago levels as buyout firms look toward 2016.
As 2015 drew to a close, purchase-price multiples finally blinked as risk returned to credit markets and debt deals. For example, the buyout of Veritas got pulled in the face of waning appetite for first- and second-lien debt in the broadly syndicated loan market.
Another warning sign came as mutual fund Third Avenue Focused Credit said it would liquidate, sparking another wave of volatility in the high-yield market. There’s no sign yet the trouble in those shops will result in any systemic risks, however.
All told, the average purchase price multiple fell to 10.06x EBITDA as of November 30 from 10.8x EBITDA in October, according to S&P Capital IQ. In the year-ago period, purchase price multiples came in at 9.68x EBITDA.
Although purchase prices appear to have eased back from historic highs last seen in 2007, they often remain in double-digit territory. That is still a troubling sign for future returns, one deal-maker said.
An 11x EBITDA purchase price implies a typical equity contribution of 5x to 6x EBITDA nowadays, because most lenders typically avoid more than 5x EBITDA of leverage on a deal.
“A lot has to go right for a PE shop to earn a 15 [to] 20 percent return when you put that much equity in a deal in a slow-growth economy,” one middle-market GP said. “The math just doesn’t work. People paying 10x to 12x for assets these days are going to rue that day when they try to sell. There is now just too much PE capital chasing too few deals.”
Even middle-market buyouts for solid companies in less-enamored sectors are going above the typical 5x to 8x EBITDA range, the GP said.
Electronic components maker Group Dekko drew a purchase price multiple of 8.5x EBITDA in its recent buyout by Graham Holdings Co, the GP said. GSO Capital Partners, the credit arm of Blackstone Group, was the seller on the deal.
The price for Group Dekko may be below average, but it’s still more aggressive than the typical range for its sector, the GP said. Graham Holdings declined to provide any financial metrics on the deal.
The Group Dekko deal marked the first for Graham Holdings since Tim O’Shaughnessy, co-founder of LivingSocial, became CEO in November.
Vista Equity pays less than rivals, on balance
While it’s been greatly increasing the size of its buyout funds, Vista Equity apparently maintains its discipline in one of the priciest parts of the buyout market: software deals.
The firm prides itself on spotting carve-outs and other value-creating opportunities that others with less software expertise may miss. While it doesn’t shy away from paying competitive prices for deals, it appears to be more restrained than some of its peers.
On balance, Vista Equity has paid a mean price of about 12x EBITDA for its portfolio companies, according to a source. That’s less than the 13x to 14x EBITDA paid by competing private equity firms in the software space.
In his keynote appearance in December at Buyouts Insider’s PartnerConnect conference in Dallas, Vista founder Robert Smith said the firm may bid up deals to make rival firms overpay. Such a strategy forces generalist firms pay too much, thus bringing down returns a few years down the line and ultimately discouraging “tourists” from working in the enterprise software space, he said.
Avon valuation rises on reported Cerberus move
Although take-privates remain rare, Cerberus Capital Management’s December 17 announcement to buy the North American arm of Avon Products bucks the trend, sort of.
About 10 days after rumors of the deal initially surfaced, Cerberus said it would take Avon’s North American unit private, while the remainder of the beauty care products remains a publicly-traded stock.
Cerberus will pay $170 million and assume $230 million of long-term debt, offset by a $100 million cash contribution from Avon, for the North American unit. In return, Cerberus gets control of a business that saw its revenue fall to $230 million in the three months ended September 30, from $276.7 million in the year-ago period.
Cerberus will also make a $435 million equity investment in Avon Products Inc., bringing its total investment in the company up to $605 million.
Avon Products Inc dipped to trade at about $4 a share the day of the deal announcement. The shares had traded at $3.50 prior to December 7, when reports of the transaction first surfaced.
As of press time, Avon Products’s market cap stood at nearly $1.8 billion, or about 4.5x its 2014 operating profit of $400 million. The company also carries a debt load of more than $2 billion, according to Reuters.
Avon’s latest quarterly results show a business under pressure, making it a suitable match for Cerberus, which plans to continue the company’s traditional focus on direct sales.
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