Private equity-related M&A activity in the middle market – transactions valued at $10 million to $250 million – remains strong, with debt available to support deals and valuations climbing for large, high growth/high margin companies, according to a report out this week from Houston-based investment bank the GulfStar Group.
Citing numbers from research firm GF Data, GulfStar said there were 52 private equity deals nationally in the first quarter, down from 69 deals in the fourth quarter of 2017.
But valuation multiples for all enterprise ranges in the first quarter were higher than in the same period last year and the long-term average for 2003-2017, pointing to the continuation of a strong seller’s market.
“Think about what you need to have a good deal: Good numbers, a good outlook and an active M&A market,” said GulfStar managing director Colt Luedde. “We have all three of those things right now, so prices are being bid up.”
The value gap for large deals over smaller deals continues to exist, with companies in the $10 million to $25 million valuation range selling for an average of 5.7 times Ebitda in the first quarter, versus 6.4 times last year, while those in the $100 million to $250 million range sold at an average of 8.6 times Ebitda versus 9.2 times in 2017.
Likewise, Luedde noted, the upcycle in middle market M&A has lengthened to eight-plus years versus the norm of five or six years. “It continues to be an interesting time,” he said.
Some of the activity is being driven by the resurgence of oilfield service companies – some of which are performing better than their 2014 peak.
Debt availability is continuing to drive purchase price and transaction structures, and there’s an active financing market on the debt side with good availability and a lot of capital, according to Luedde. “People are looking to do transactions,” he said. “Almost all of our clients have positive trends.”
Luedde said some of the activity is being driven by the resurgence of oilfield service companies – some of which are performing better than their 2014 peak – with some companies coming to market to sell themselves or their assets. “A lot of them don’t want to miss this cycle,” he said.
The limiting factor on pricing for those companies, however, is the availability of debt for deals. “The banks are still pretty skittish about energy service,” he said.
Luedde notes work done recently by the investment bank’s new debt advisory group for Corinthian Capital-backed Renegade, a provider of repair and maintenance services that sought to refinance its senior and subordinated debt.
The GulfStar advisory group, headed by Brian Lobo, identified a commercial lender – The Woodlands-based Woodforest National Bank – that didn’t have the same energy exposure as its competitors and was willing to provide the “asset-light” client with a cash flow-based lending solution.
The result significantly reduced Renegade’s cost of capital and will save it nearly $2 million per year in interest expense, GulfStar said. GulfStar claims the cash flow loan was the first in the oilfield service sector since the crude oil downturn in 2014.
What could slow down middle market M&A activity? Luedde said a geopolitical event external to the market, an economic threat or a material increase in default rates, which could cause lenders to pull back. But he doesn’t see a recession next year or in 2020, as some are predicting.
Absent one of those situations, Luedde thinks the impact of tariffs also could hurt the M&A market. “Will the government persist with these tarrifs? Or is it just a strategy?” he said. “If it persists into the long term, you’ll see a global slowdown.”
GulfStar, which is partially owned by International Bancshares, does deals in energy as well as industrial and manufacturing, distribution, consumer products and services, software, technology and IT services and healthcare.
Most of the transactions it handles are auction situations, Luedde said. His clients have used such law firms such as Foley Gardere, Thompson & Knight, Boyar Miller and Ewing & Jones on deals.
Luedde’s recent deals include the sale of Maine fuel distributor PitStop Fuels to Stone Road Energy; Houston-based Perennial Environmental Services on its sale to First Reserve-backed Applied-Cleveland Holdings; and the sale of an asphalt terminaling facility in Oklahoma owned by Frontier Terminal to publicly traded Blueknight Energy Partners.
“We’re really much busier than we were last year,” he said. “Right now, 2018 will be a good year and 2019, if the market holds, will be a phenomenal year.”