May 2003 Small Deals Make Big Comeback in First Quarter, Private Equity Interactive
Private Equity Interactive, May 2003: Buyout firms that pursue smaller deals
came out of hibernation in the first quarter, capitalizing on the trends that
boosted large buyout firm activity at the end of 2002.
LBO firms took advantage of an improving debt market and a growing supply
of corporate spin-offs to close 37 deals valued at less than $250 million for
total deal volume of $3.36 billion, according to a deal-by-deal analysis by The
Private Equity Analyst.
Meanwhile, activity remained robust at the larger end of the market. LBO groups
closed four deals valued at more than $1 billion in the first quarter for total
deal volume of more than $9.1 billion.
All told, LBO firms completed 50 deals with disclosed transaction values in
the first quarter, for total deal volume of $17.3 billion.
On the small end of the market, general partners typically found themselves
capped at total debt financing packages of 3.5 times EBITDA. Still, a number
of firms have succeeded in pushing the envelope.
Chicago-based Wind Point Partners, for one, reportedly obtained debt financing
equal to roughly four times the trailing 12-month EBITDA of Air-Serv Holding
LLC, a Minneapolis-based operator of tire inflation machines. The firm acquired
the company in late March for $190 million.
Los Angeles-based Leonard Green & Partners landed a debt financing package
of nearly 4.5 times EBITDA in its $131 million agreement to acquire Varsity Brands,
a publicly traded maker of cheerleader uniforms it agreed to acquire last month.
Lower pricing at the small end of the market also drove deal-making. While
purchase price multiples increased throughout 2002 for buyouts valued at more
than $250 million, multiples actually dropped modestly for deals valued at less
than $250 million. On average, buyout firms paid a multiple of 5.8 times EBITDA
for companies valued at less than $250 million in 2002, compared to an average
of 5.9 times EBITDA the year before, according to New York-based Standard & Poor's
Leveraged Commentary & Data.
In some cases, buyout firms were able to buy divisions of publicly traded
companies for below average prices. Jordan Co., Chicago, paid $76 million, or
a multiple of roughly 5.4 times the division's trailing 12-month EBITDA, to acquire
an electrical products manufacturing division from publicly traded Cookson Group
plc.
In other cases, LBO firms bought small public companies that had lost favor
with public market investors. Thomas Cressey Equity Partners, Chicago, partnered
with LLR Equity Partners, Philadelphia, to buy software company Prophet 21 private
for $63 million. The offer of $16.30 per share was well below the company's per
share high of more than $24.
A return to the buy-and-build approach to investing also fueled deal volume
at the small end of the market. Of the 37 deals valued at less than $250 million,
22 involved either the launch of new platforms or add-ons to existing ones.
New Mountain Capital, New York, and Golden Gate Capital, San Francisco, both
acquired small companies in the first quarter that they intend to grow by acquiring
other companies.
New Mountain paid $87 million for CP Commercial Specialists, an Overland
Park, Kan.-based provider of property audits and surveying. Meanwhile, Golden
Gate Capital paid $40 million to acquire Lexicon Marketing Corp., a Los Angeles-based
a provider of English language courses for Spanish speakers.
Two Concourse Parkway, Suite
155 • Atlanta, GA 30328 • tel: (770) 395-9091 • fax:
(770) 395-9668
