2015 m&a conference market update: current deal activity, valuations and outlook moderator: mike...
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2 0 1 5 M & A C O N F E R E N C E
Market Update: Current Deal Activity, Valuations and OutlookModerator: Mike Abbott, Partner, Faegre Baker DanielsMike Clausman, Hormel Foods CorporationAdam Claypool, Bridgepoint Merchant BankScott Hebbeler, Lincoln InternationalMelanie Wadsworth, Faegre Baker Daniels
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Conference Information
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DISCUSS#MACon15
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Middle-Market M&A Overview
Average EV/EBITDA in U.S. Middle-Market Transactions
Market multiples now exceed peak levels while M&A volume continues to build
Middle-Market M&A Transaction Count
Source: Factset MergerstatNote: Reflects deals up to $500mm with disclosed values
Source: Factset MergerstatNote: Reflects deals up to $500mm with disclosed values
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
LTM
Ma
...
0
500
1,000
1,500
2,000
2,500
1,797
2,0472,107
1,845
1,279
873
1,4151,625
1,4881,494
1,7681,804
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
9.4x 9.5x9.9x
7.9x9.0x 8.9x
10.0x 9.6x10.2x
9.7x 10.1x 9.9x 10.2x
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Middle-Market M&A Valuations
Source: GF Data, M&A Report May 2015*Note: middle market is $10 -$250mm
► The chart illustrates valuation multiples of private equity-sponsored, middle-market* M&A transactions by transaction size since 2011.► Transaction multiples are at their highest levels since 2011, with the $100-250mm transaction size range leading the way at 8.3x.
2011 2012 2013 2014 1Q 20155.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
5.3x
5.7x5.9x
5.4x
5.9x
6.0x6.1x
6.9x
6.3x
7.7x
7.2x
6.8x6.7x
7.5x
7.9x
7.5x7.4x
7.1x
7.6x
8.3x
Valuation Multiples by Transaction Size
$10-25mm $25-50mm $50-100mm $100-250mm
TEV/
EBIT
DA
4
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Middle-Market M&A Valuations by Industry
2011 2012 2013 2014/1Q 20154.0x5.0x6.0x7.0x8.0x9.0x
10.0x11.0x12.0x
Manufacturing
$10-25mm $25-50mm$50-100mm $100-250mm
TEV/
EBIT
DA
2011 2012 2013 2014/1Q 20154.0x5.0x6.0x7.0x8.0x9.0x
10.0x11.0x12.0x
Business Services
$10-25mm $25-50mm$50-100mm $100-250mm
TEV/
EBIT
DA
2011 2012 2013 2014/1Q 2015 4.0
6.0
8.0
10.0
12.0
Healthcare Services
$10-25mm $25-50mm$50-100mm $100-250mm
TEV/
EBIT
DA
2011 2012 2013 2014/1Q 2015 4.0
6.0
8.0
10.0
12.0
Distribution
$10-25mm $25-50mm$50-100mm $100-250mm
TEV/
EBIT
DA
► The charts below illustrate valuation multiples of private equity-sponsored, middle-market* M&A transactions by industry and transaction size since 2011.
Source: GF Data, M&A Report May 2015*Note: middle market is $10 -$250mm
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M&A Drivers
Corporate Cash On Hand Private Equity Buyout Fundraising / Investing
Source: PitchbookSource: Federal Reserve, represents the S&P 500 companies
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$0
$100
$200
$300
$400
$500
$600
$117
$192
$293 $269
$128$91 $114 $129
$220$189
$535
PE Capital Raised Cumulative Dry Powder
$0
$500
$1,000
$1,500
$2,000
$2,500 $2,100
($ in billions) ($ in billions)
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M&A Drivers
Source: Pitch Book & Renaissance Capital*YTD 2015
Private Equity U.S. Fundraising by Quarter
Private Equity U.S. Investments-to-Exits Ratio
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q2011 2012 2013 2014 2015
$0
$25
$50
$75
$100
0102030405060708090
$34
$32
$25
$21
$33
$37
$26
$32
$36
$78
$31 $78
$43
$52
$41
$61
$38
Capital Raised ($B) # of Funds Closed
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*0
500
1,000
1,500
2,000
2,500
0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x
3.2x
3.1x
3.6x
3.7x
2.6x
2.3x
1.9x
2.1x
1.9x
1.6x
Investments/Exits # of Investments (excl. add-ons) # of Exits
► Private equity capital raised has increased from a total of $112B in 2011 to $223B and $197B in 2013 and 2014, respectively.
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Midwest M&A transaction volume in Q2-15 rebounded nearly 20% from Q1-15
Midwest M&A transaction volume has been very stable 7 of the last 10 quarters
Midwest activity doesn’t necessarily track national activity over the same time period represented by this chart
Bridgepoint Midwest M&A Quarterly Update, Q2-15
Q1-
11
Q2-
11
Q3-
11
Q4-
11
Q1-
12
Q2-
12
Q3-
12
Q4-
12
Q1-
13
Q2-
13
Q3-
13
Q4-
13
Q1-
14
Q2-
14
Q3-
14
Q4-
14
Q1-
15
Q2-
15
0
50
100
150
200
250
300
350
400
262
288271
281293
274
303
369
329
269
328318 312 307
284
309
261
312
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Quarterly Midwest M&A Transaction Volume
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Midwest M&A deal size grew to $19.0mm in Q2-15, up from $16.5mm in Q1-15
After recording one of the lowest median deal size in Q1-15, Q2-15 saw Midwest deal sizes increased to above average level of the past 4 years
Q1-
11Q
2-11
Q3-
11Q
4-11
Q1-
12Q
2-12
Q3-
12Q
4-12
Q1-
13Q
2-13
Q3-
13Q
4-13
Q1-
14Q
2-14
Q3-
14Q
4-14
Q1-
15Q
2-15
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$11.5
$13.0
$10.0
$20.5
$12.0
$14.9
$17.6
$29.8
$9.7
$13.8
$17.5
$31.4
$22.7
$22.9
$15.3
$20.6
$16.5
$19.0
Me
dia
n T
EV
($
mm
)
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Quarterly Midwest M&A Median Deal Size
Bridgepoint Midwest M&A Quarterly Update, Q2-15
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Median Valuation (TEV/EBITDA) in Q2-15 was significantly higher than both the prior sequential quarter and the year-earlier quarter
Q2-15 multiples are at historically strong levels, the highest since Q2-13
Corporates and sponsors have shown a willingness to pay a premium to close deals
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Q1-
11Q
2-11
Q3-
11Q
4-11
Q1-
12Q
2-12
Q3-
12Q
4-12
Q1-
13Q
2-13
Q3-
13Q
4-13
Q1-
14Q
2-14
Q3-
14Q
4-14
Q1-
15Q
2-15
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
7.6x
10.8x10.1x
8.5x
5.4x
8.5x
9.7x10.4x
13.6x
14.6x
10.8x
7.0x
9.1x8.5x
11.3x
8.4x8.0x
12.4x
Quarterly Midwest M&A Median Valuations (TEV/EBITDA)
Bridgepoint Midwest M&A Quarterly Update, Q2-15
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Quarterly M&A transactions with Midwest buyers increased from 145 in Q1-15 to 166 in Q2-15
The number of transactions with Midwest targets increased as well with 135 announced or closed transactions in Q2-15 vs. 97 in Q1-15. The figures reiterate the strong buyer appetite for Midwest companies
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Q1-
11
Q2-
11
Q3-
11
Q4-
11
Q1-
12
Q2-
12
Q3-
12
Q4-
12
Q1-
13
Q2-
13
Q3-
13
Q4-
13
Q1-
14
Q2-
14
Q3-
14
Q4-
14
Q1-
15
Q2-
15
50
70
90
110
130
150
170
190
210
230
Midwest Buyers Midwest Targets
Quarterly Midwest M&A Buyers & Sellers
Bridgepoint Midwest M&A Quarterly Update, Q2-15
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Core industries (including Industrials, Materials and Consumer) accounted for 39% of total Midwest M&A transaction volume in Q2-14, a slight 1% decrease from Q1-14
The Consumer sector rebounded with the biggest increase in Q2-14, up 3% from Q1-14. The Material and Industrial sectors saw the biggest decreases in Q2-14, down 2% from Q1-14
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Financials28%
Consumer24%
Industrials16%
Healthcare9%
Info Tech9%
Energy7%
Materials4%
Telecomm / Utilities4%
Q2-15 Midwest M&A Transaction Volume by Sector
Bridgepoint Midwest M&A Quarterly Update, Q2-15
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2 0 1 5 M & A C O N F E R E N C E
Borrowers with less than $15mm EBITDA Borrowers with at least $15mm EBITDA
Pricing Multiples Pricing Multiples
Asset Based Senior L + 175 – 275
LIBOR Floor: none N/A
L + 150 – 250
LIBOR Floor: none N/A
Cash Flow Senior L + 475 – 575
LIBOR Floor: 100 2.75x – 3.25x EBITDA
L + 425 – 525
LIBOR Floor: 100 3.00x – 4.00x EBITDA
Senior Stretch Unlikely N/A L + 500 – 600
LIBOR Floor: 100 3.75x – 4.75x EBITDA
Unitranche L + 750 – 850
LIBOR Floor: 100 4.00x – 5.00x EBITDA
L + 700 – 800
LIBOR Floor: 100 4.00x – 6.00x EBITDA
2nd Lien Loans Unlikely 4.00x – 5.00x EBITDA L + 850 – 1000
LIBOR Floor: 100 4.00x – 6.00x EBITDA
Sub Debt
Cash of 11.0% – 13.0%
PIK of 1.0% – 2.0%
All-in of 12.0% – 14.0%
4.00x – 5.00x EBITDA
Cash of 10.0% – 11.0%
PIK of 1.0% – 2.0%
All-in of 11.0% – 13.0%
4.00x – 6.00x EBITDA
Equity N/A Approximately 35% N/A Approximately 30% – 35%
Overview of U.S. Middle Market Debt Pricing and Terms
As regularly published in:
Lincoln’s View on Pricing and Terms
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Current Trends in Senior Debt Structure
Pre 2008 2008 - 2009 2015
Hold Levels $50 million $25 million max $50 million +
Stretch Pieces Aggressive Nonexistent Yes
Term Loan Amortization Little or none Nearly a prerequisite Little or back-end loaded
Covenants Limited to 1 or 2 and loose Full package, much tighter 1 to 2 covenants; looser
Advance Rates Aggressive (ABL-Lite) Conservative (ABL-Heavy) Aggressive (ABL-Lite)
Rate Floors Rare Standard Rare
Rate Protection Language Minimal Robust and complex Robust and complex
Prepayment Penalties Rare Standard Rare
Bank Commitment Fully underwritten Best efforts Best efforts
Market Flex Language Limited, if any Required Required
Bank Group Syndications Relationship driven "Club Deals" Syndications
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1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
Favorable Debt Financing Environment
Middle-Market M&A Loan Volume
Source: Standard & Poor’s Leveraged Commentary and Data
Middle-Market Leverage Multiples
2009: $1.42010: $4.42011: $6.32012: $5.62013: $4.82014: $9.5
Competition among lenders have driven the strongest lending markets since 2007
($ in billions)
2007 2008 2009 2010 2011 2012 2013 2014 Q1'150.0x
2.0x
4.0x
6.0x
4.1x3.3x
2.5x3.2x 3.6x 3.5x 4.0x 4.3x 4.4x
5.6x
4.5x
3.3x
4.2x 4.3x 4.5x4.8x
5.3x4.9x
Sr. Debt Other
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Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Since 1949, the average length of bull markets has been 42.5 months
The current bull market has lasted 47 months to date
Historically, bull markets end due to:
High equity valuations
Tight monetary policy
Unforeseen geopolitical events
Historical S&P 500 Index Relative to Federal Funds RateBull vs. Bear Markets
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Historical S&P 500 Index Relative to M&A TransactionsPresidential Election Years
Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com
Since the 1968 election, 6 out of 12 election years were followed by a bear market within one year
Average M&A transactions during Republican terms are 20,346
Average M&A transactions during Democratic terms are 8,553
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