Private equity is struggling in its battle against strategics to buy companies, according to executives who spoke at the Mergermarket Consumer M&A Forum earlier this month.
Strategics, armed with a massive war chest, have a cash advantage in deals, said Eric Roth, a Lazard managing director and head of the firm’s Consumer Retail Group. U.S. non-financial companies were sitting on $1.73 trillion of cash as of year-end 2014, Moody’s Investors Service said.
“It’s a seller’s market in consumer,” Roth said.
The U.S. M&A market is on track to produce its best full-year since Thomson Reuters began recording data back in 1980, said Matt Toole, director of Deals Intelligence for the company. So far this year, U.S. strategic transactions account for nearly 96 percent of the overall M&A market. U.S. private equity-backed LBOs, meanwhile, comprised 4.1 percent, Thomson Reuters said.
There have been 7,601 U.S. strategic mergers as of October 27 valued at $1.6 trillion. This compares to 547 U.S. PE M&A deals this year, totaling $70.4 billion, Thomson Reuters said.
“Everyone is buying everything,” one banker said. “You see plenty of strategics in processes now. The M&A market is strong.”
With their huge cash holdings, strategics are even competing with buyout shops down-market. Strategics in the beauty sector have shifted down in terms of M&A and are targeting deals as small as $50 million, Roth said.
Jeff Kuhr, a managing director at Sawaya Segalas & Co LLC, said most deals in consumer are in the middle market. Corporates have bid on deals between $25 million to $100 million, he said. “Multibillion-dollar deals aren’t coming around all that often,” Kuhr said.
Both Roth and Kuhr appeared October 13 on the Mergermarket Consumer M&A Forum panel called “Consumer M&A: A changing tide?”
Buyout shops are always competing with strategics, said Robert Profusek, a partner with law firm Jones Day. Deals “may be harder now, but private equity isn’t out,” he said at the event. “Private equity is by no means on its back.”
Like corporates, PE firms are also still sitting on a large cash pile. Private equity dry powder stands at $1.34 trillion, according to Preqin. The prices in the M&A market have made private equity firms “very picky,” a lender said. GPs are trying to come up with justifications for paying high prices, the lender said. Some PE firms are doing small add-on deals that boost the EBITDA of a platform company. “For those who do the work, it can be a successful way to grow the [platform] business,” the lender said.
PE firms also are under pressure to spend their funds or risk losing the money when the investment period runs out, the lending source said. Firms can go back to their LPs and ask for fund extensions. But, the source said, “It’s a little embarrassing to go back to the LPs and say, ‘We missed the market and didn’t invest when we should have. And now we need to ask for more time.’”
|Top sponsor-backed acquisitions year to date|
|Target||Target business description||Acquiror||Ranking value $mln*|
|Oncor Electric Delivery Co LLC||Electric utility company||Investor group led by Hunt Consolidated Inc, including Anchorage Capital Group, Arrowgrass Capital Partners, Avenue Capital Group, Teacher Retirement System of Texas, GSO Capital Partners, BlackRock Inc, and Centerbridge Partners.||$12,600.00|
|Qihoo 360 Technology Co Ltd||Internet service provider||Investor group comprised of CITIC Securities Co, Sequoia Capital China, Hongyi Zhou, Golden Brick Capital Private Equity Fund, and China Renaissance Holdings.||$10,306.41|
|Symantec Corp-Veritas Business||Computer facilities management services||Investor group led by Carlyle Group, including GIC PTE Ltd of Singapore and other investors.||$8,000.00|
|BioMed Realty Trust Inc||Real estate investment trust||Blackstone Real Estate Partners VIII LP||$7,692.83|
|Solera Holdings Inc||Data processing services provider||Vista Equity Partners LLC||$5,966.71|
|Strategic Hotels & Resorts Inc||Real estate investment trust||Blackstone Real Estate Partners VIII LP||$5,554.05|
|GE Capital Finance Australasia Pty Ltd||Financing services provider||Investor group comprised of Varde Partners|
Inc, KKR & Co,
and Deutsche Bank AG.
|SolarWinds Inc||Network management software provider||SolarWinds Inc SPV||$4,228.05|
|LeasePlan Corp NV||Car leasing services provider||LP Group BV||$4,065.04|
|Obligo Investment Management AS-Real Estate Portfolio||Lessors of nonresidential buildings||Blackstone Real Estate Partners Europe IV LP||$2,696.61|
|*Ranking value includes net debt of target|
|Data includes announced and closed deals. Current as of November 2, 2015.|
|Source: Thomson Reuters|
Download table: Top 10 sponsor-backed deals year to date