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PE Loses Out to Strategics in Water Deal

M&A, in the third quarter, is shaping up to be as tough as 2009, according to a story in the Wall Street Journal.

One deal is showing how PE firms continue to be outbid by cash-rich strategics.

In early September, ITT Corp. closed its buy of YSI (the deal was announced in July). Yellow Springs, Ohio-based YSI develops and makes sensors, instruments, software and data collection platforms used for environmental water monitoring. The company has about $300 million in annual revenue.

The YSI auction began in first quarter and the company received about twenty first round bids, a source says. Several PE firms, including 3i, Warburg Pincus, General Atlantic and Lindsay Goldberg, were involved in the bidding, another source says.

The process was narrowed to roughly a handful of bidders, both strategic and financial, by the spring. The end result? The PE firms, some of which were offering 12x to 13x EBITDA, ended up losing and were outbid by strategics by “two to three turns,” a person says.

Sponsors were limited by leverage and the best deal was getting 5-6x total debt, the source says. “The valuation was too rich for private equity without an existing platform,” a second person says.

ITT Corp., a strategic, ended up winning the auction and paid $310 million or about 3.1x revenue. The deal is estimated to represent 14x to 18x 2010 EBITDA, according to a July research note from Michael Halloran, an analyst with R.W. Baird.

Joe Culley of Janney Montgomery Scott advised YSI while Thompson Hine provided legal advice. Evan Yellin of EuroConsult served as financial advisor to ITT. Sidley Austin was ITT’s attorney.