High prices chill PE deal flow

The number of announced U.S. PE deals dropped nearly 8 percent to 278 as of June 11, according to data from Thomson Reuters. Volume, meanwhile, has plunged by more than half to $20.7 billion from the $45.7 billion produced last year for the same time period, Thomson Reuters said.

The number of overall U.S. mergers fell slightly to 4,371 from 4,477, Thomson Reuters said. More importantly, volume for general M&A rocketed nearly 46 percent to $802.5 billion from about $548.7 billion.

Why the difference? Private equity M&A has suffered this year from high prices. Many buyers have chosen to sit out auctions because companies are too expensive, sources said. For example, private equity was expected to dominate the auction of Russell Investments, but the unit’s high price tag, $1.5 billion, was considered too expensive for private equity.

The M&A market is littered with marginal assets expecting high prices, said Devin Mathews, a ParkerGale partner. “PE firms are putting the dogs up for sale and [they] want big multiples,” he said.

Slow and low

Every year, M&A typically decelerates as the sector hits the summer months. Deals wind down, especially in August, as investment bankers and private equity executives go on vacation.

Private equity M&A has also tapered off with some thinking the slowdown has come early. April and May were “pretty busy” for private equity deals, but June seems “slow,” a second PE executive said. “This seems normal for August, but we’re not in August yet. This is early,” the source said.

Sellers, despite the slowdown, are still seeking high prices for assets that many consider of low quality, executives said. There are “lots of startups, lots of high valuations, foreign deals, and a good smattering of VC-funded deals looking for large chunks of capital at up-round valuations that are scary,” said a third private equity executive.

A fourth PE executive blamed large buyout shops for fueling high prices. Big firms typically need to put from $100 million to $200 million to work and have many portfolio companies. These firms are doing secondaries, combining their portfolio companies or doing add-on acquisitions with the aim of taking out cost synergies later on. Big firms need to invest or they can’t raise funds in the future, the fourth source said. “What are they going to do, sit on the sidelines forever? No,” the person said.

For smaller companies, those with $25 million EBITDA or less, “the prices are lower,” the fourth PE executive said.

Yet another PE source, whose firm invests in the lower middle market, doesn’t think M&A has slowed down. Instead, transactions are just taking longer to complete, the source said. The leverage loan market for lower middle-market deals has also become more realistic and is requiring equity contributions of 45 percent to 55 percent, up from 30 percent. “Banks have lots of stuff out there,” the fifth private equity executive said. “If you find an auction it’s all about the highest prices. You have to be more resourceful.”

Top deals

Several big deals helped pump up valuations for general M&A this year. Charter Communication’s $78.4 billion buy of Time Warner Cable is the largest U.S. deal so far this year, Thomson Reuters said. H.J. Heinz’s $54.7 billion acquisition of Kraft Foods Group came in second, while Teva Pharmaceuticals Industries’ $46.3 billion buy of Mylan NV ranked third.

The largest U.S. PE deal so far this year was for Informatica, which is being bought by Permira and the Canada Pension Plan Investment Board for about $5.3 billion. The second-largest deal was  Leonard Green & Partners and TPG Capital’s $4 billion buy of Life Time Fitness.

Coming in third was the purchase of GE’s real estate assets for $23 billion by Blackstone Group and Wells Fargo & Co. The sale is comprised of five to six separate transactions, Bloomberg News has reported. Blackstone is buying GE’s U.S. holdings, mainly office buildings in Southern California, Seattle and Chicago, for $3.3 billion, Bloomberg said.