Sponsors chalk up huge M&A year in 2016

Private equity firms drove up combined dollar volume for buyouts, carve-outs and take-privates in 2016 to levels not seen since 2007. But the number of individual transactions fell in the face of higher purchase-price multiples.

The disclosed value of sponsored M&A for the fourth quarter totaled $28.3 billion as of Dec. 12, down a third from the year-earlier quarter’s figure of $42.9 billion, according to Thomson Reuters data compiled by Buyouts.

For the three previous quarters, M&A volume in 2016 far outpaced 2015. Full-year 2016 dollar volume grew to $163 billion in closed deals as of Dec. 12, already 39 percent ahead of the full-year 2015 tally of $117.5 billion. And the last couple of weeks of the year often see a number of deals close.

The year’s total of $163 billion also ranks as the largest since 2007’s record $597.4 billion. The M&A tally for 2016 eclipsed 2008’s total of $156.5 billion.

Among the larger deals to close in Q4 2016: Riverstone Holdings acquired Talen Energy for about $4.3 billion and Apollo Global Management took Rackspace Hosting private for about $4.1 billion. Platinum Equity acquired Emerson Network Power for $4 billion.

Closed-deal count for the fourth quarter dropped to 322 as of Dec. 12, down a third from the full Q4 2015 figure of 482. Total deal count for 2016 through Dec. 12 fell 14 percent to 1,728 from 2,006 for full-year 2015.

Prices this year climbed from lofty year-ago levels. Purchase-price multiples for U.S. buyouts in the three months ended Nov. 30 rose to 9.85x EBITDA from 9.59x in the year-earlier period, according to LCD, an offering of S&P Global Market Intelligence. Leverage levels for that period increased to 5.55x EBITDA from 5.41x.

While modest economic growth provided a tailwind for the year, sponsors doubled down on trying to find as much value as possible even when paying lofty prices. Add-on acquisitions remain a favorite way to accomplish this.

“At these multiples, everyone has to try to drive down their total cost of ownership through relatively meaningful add-ons at lower multiples,” said David Felts, managing director at investment bank TM Capital. “Plus, the cost or other synergies that fall out from integrating those add-ons can be argued as having a purchase multiple of zero. So the impacts up and down the food chain are huge.”

In the middle market, sponsors not only contend with a shortage of good acquisition targets. They face challenges from larger firms expanding their playbooks to dip down for smaller deals.

“Net-net, it seems to me the sponsor business today is more manually intensive than ever to successfully achieve desired returns in this hypercompetitive environment,” Felts said.

Along with add-ons, certain M&A sectors stood out in the fourth quarter. High tech, industrials and healthcare drew the highest deal count among the 12 sub-sectors tracked by Buyouts.

With its many add-on deals for its Hub International insurance platform, Hellman & Friedman topped the list of most acquisitive sponsors with 11 deals, followed by eight for Blackstone Group and seven for Vista Equity Partners.

During the fourth quarter, One Equity Partners, the middle-market firm that spun out of JP Morgan Chase in 2015, worked with its portfolio company All Metro Health Care to close the acquisition of Multicultural Home Care, a provider of home healthcare services.

Brad Coppens, managing director at One Equity, said the firm worked with management at All Metro to source the deal. The firm has been working to create one of the largest home-care players in the country and the region, currently reaching into Florida, Massachusetts, New Jersey, New York and Pennsylvania.

Prices in the healthcare sector remain expensive, leading One Equity to rely on its own network to source deals outside of traditional auctions as it deploys equity checks of $50 million to $150 million on deals, he said.

The firm has been building its expertise in healthcare, industrials and technology.

“Over a long period of time, we’ve developed a core competency and capability from a network and execution standpoint in those three verticals,” Coppens said. “In healthcare, we have both in-house domain expertise and through a broad network of executives and professionals we’ve worked with.”

Looking ahead, the firm is keeping an eye on expected changes in the Affordable Care Act in Washington, among other measures.

“How [healthcare changes] play out during a budget-reconciliation process in January, and what impact that has on sentiment, will determine how aggressive people are. We’re no different,” Coppens said. “We’re monitoring the economic and political environment to see what opportunities may come up.”

With several large deals yet to reach completion as 2016 draws to a close, M&A activity appears on solid footing. Strong dollar volume indicates healthy activity, at least in the near future.

Among announced deals that hadn’t closed as of Dec. 12, Blackstone led with the $5.9 billion buyout of Team Health Holdings. Quad Gas Group plans to pay about $4.6 billion for National Grid Gas Distribution. And Kohlberg Kravis Roberts announced the acquisition of Calsonic Kansei for $4.3 billion.

Among take-privates late in the quarter, Golden Gate Capital agreed to acquire Neustar for about $2.9 billion and HIG Capital set plans to buy Lionbridge Technologies for about $369 million.

As of Dec. 12, pending and closed deal dollar volume stood at $74 billion in the fourth quarter, ahead of the second and third quarters but down from the first-quarter total of $93.6 billion. In the full fourth quarter of 2015, pending and closed deal dollar volume totaled $85.5 billion.

For its part, One Equity sees lot of opportunities across the board, but the firm remains patient.

“One of the happy consequences of developing a pipeline outside the auction- community environment is you tend to have access to differentiated opportunities,” Coppens said. “It takes a long time, however, to execute those investments. We’ve had a strong pipeline for quite some time and a lot of things are tilting our way.”

Action Item: Q4 2016-Deals-Charts 12262016

Photo of David Felts courtesy of TM Capital

 

Additional Data

10-largest-announced-and-pending-deals-by-u-s-sponsors-q4-2016

2006-2016-pending-and-closed-deal-number-and-disclosed-deal-volume

deals-closed-in-q4-2016 q4-2016-deals-by-industry

q4-2016-deals-by-type

the-most-active-lbo-dealmakers-of-q4-2016

top-10-u-s-sponsor-deals-closed-in-q4-2016

u-s-based-disclosed-deal-value-for-closed-deals-by-quarter-in-billions