Talking Deal Prices with Steve Gelsi: Rising valuations cause take-private slump

Pay a premium with the Nasdaq up about 18 percent over the last year (through August 1), and the S&P 500 up 13 percent? Forget it.

Only five take-privates took place between June 15 and August 15, according to a review of Thomson Reuters M&A data. That’s half the number of deals that closed during the summer of 2013.

In the biggest of those five, GTCR’s platform company Sterigenics International Inc bought Nordion Inc, a manufacturer of medical isotopes, for $517.3 million. The price came to about 9.6x annualized adjusted earnings of $53.9 million, based on Nordion’s most recent quarterly figures. Nordion’s shares were traded both in the U.S. and Canada, although the company is based in Ottawa.

The second biggest take-private was the $338.9 million acquisition of Roland Corp, the Tokyo-traded instrument and electronics company, by a consortium led by Taiyo Pacific Partners and Roland CEO Junichi Miki. The purchase price marked multiple of about 4.7x EBITDA based on Japan-based Roland Corp’s last 12 months EBITDA of $72 million, according to data from Thomson One.

Kohlberg Kravis Roberts & Co led the third biggest take-private of the period with the $308.6 million acquisition of Atlanta-based Cbeyond Inc, a provider of cloud, network, voice and mobile services for small businesses. KKR’s platform company Birch Communications Inc paid about 4.57x the company’s annualized EBITDA of $67.6 million, based on its first-quarter results.

While these deals reflect some resourceful moves to find attractive multiples, they’re much smaller than the year-ago summer crop of take-privates.

Weighing in at a meaty $3.9 billion, the take-private deal for Gardner Denver Inc by KKR took the crown in the summer of 2013. The Wayne, Pa., manufacturer was valued at about 8.7x the midpoint of its annualized, projected adjusted EBITDA of $443.2 million, based on the company’s second-quarter outlook.

Next came the $1 billion LBO of National Financial Partners Corp by Madison Dearborn Partners for a purchase price multiple of about 7.8x adjusted annualized EBITDA of $130.8 million.

Rounding out the top three take-privates in the summer of 2013, Vista Equity Partners acquired Websense Inc for $905 million, or about 7.9x its annualized net cash from operating activities of $116.8 million. (No EBITDA figures were included in the company’s public disclosures.)

While take-private deals slowed dramatically this summer, overall mergers and acquisitions by U.S. sponsors fell less drastically, to 232 closed deals between June 15 and August 15, down from 275 deals during the same period in 2013.

So sponsors did fairly well at finding deals this summer, but big take-private LBOs remain rare for now.

Lower middle market deals beckon

When it comes to purchase price multiples for middle-market deals, it depends which part of the middle market you’re looking at, according to at least one lender in the LBO industry.

Middle-market targets above $25 million EBITDA tend to command pretty lofty multiples of 8x to 9x EBITDA or higher. Senior leverage for these deals often runs at 3.5x to 4x EBITDA, with total debt of 5.5x to 6x EBITDA.

These prices and leverage levels may prove a bit daunting to your value-oriented private equity investor—a description used by nearly all general partners despite these frothy times.

But not to despair. The lower middle market beckons with purchase price multiples of a turn or as much as two to three turns lower, according to ballpark estimates from GE Antares Capital, the middle-market LBO lending arm of General Electric Co. That translates to more classic middle-market buyout multiples of 7x to 8x EBITDA, with 3x senior leverage and 5x total leverage.

Smaller companies pose offer more risk and PPMs vary considerably depending on the industry and whether the target companies remain in growth-mode.

For now, however, lower-mid-market companies often draw fewer bidders than larger deals, and those bidders pay more reasonable prices.

GE Antares Capital for one is convinced of the opportunity. It has added four executives to take aim at buyouts in the $10 million to $20 million EBITDA range, Buyouts recently reported.