Mid-market pricing - Unquoted prices hold out

01 April 2009

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According to Argos Soditic's mid-market H2 2008 Barometer, listed mid-market companies have lost significantly more value than their non-listed counterparts. The survey, which takes into account over 800 European transactions in small- to mid-sized companies, shows a 41% decline in volume and 51% decline in value between the first and second semester of 2008.

When comparing the pricing for non-listed and listed companies, the Barometer shows that they had valuations of 8.3x and 8.4x Ebitda in H2 respectively. However, while the non-listed companies fell to 7.6x in H2 2008, listed companies plummeted in valuation to 5.2x. The reasons given for the disparity is that foreign buyers are still interested in purchasing private companies and are willing to pay a strategic premium for them (10% for eurozone buyers, 27% for buyers outside the eurozone). Strategic buyers have been historically been paying far higher prices than the LBO market for their acquisitions, nearly 1x more in 2007.

Although only representing a small cross section of the total survey, pricing variations for non-listed LBO transactions appear far more resilient. While mid-market LBO activity fell from 57 deals in H1 to 36 in H2 2008, representing a 57% drop in volume and a 68% drop in value, the prices of LBO deals have been far more rigid, dropping only from 7.5x Ebitda to 7.4x over the same period. While the pricing demonstrates stability, it may simply just be lagging behind the average multiples paid for listed and non-listed companies.

Vendor price expectations

Non-listed vendors' price expectations have not yet aligned themselves with the current market pricing. Many vendors believe that current prices do not reflect the true value of their firms and would rather wait for better market conditions. The decline in the volume of deals would therefore not automatically signal a fall in price. Another reason offered is that LBO funds are exercising far more caution and therefore there is a lack of deals. Funds are focusing on their current portfolio, anticipating covenant breaches, the need for refinancing and a focus on adding value and build-up acquisitions. As a result, the deals which are completed are in solid, quality companies which warrant the price paid.

As the economic outlook for companies deteriorates, vendors' price expectations are expected to fall, subsequently realigning quoted and unquoted pricing. As the credit market lies in tatters the investment houses will welcome a reduction in price, since their equity contributions per deal have had to increase an average 43.9% in Q1-Q3 2008, according to Standard & Poor's.