Mid market valuations take the plunge

According to Argos Soditic's H1 Mid-Market Index 2009, the valuations of unlisted mid-market companies in the Eurozone have fallen for the fourth consecutive semester to its lowest level since the index was launched in December 2004. In H1 2009, valuations for the mid-market recorded a 16.7% decline falling to 6.2x EBITDA from 7.6x in the previous semesters. The 1.4x EBITDA drop is the largest ever recorded by the index and far from the 9x EBITDA valuations at the top of the market in H1 2007, representing a 30% decline. According to the statistics, the LBO mid-market domain has recorded what can best be described as a lifeless first half to 2009, with corporate M&A transactions not faring much better. The acquisition multiples paid by buyout funds in the LBO market fell 18% to 6.1x EBITDA compared with the H2 2008 statistics, after four years at a relatively stable and high level, averaging about 7.7x EBITDA.

"Mid-market deal activity was low in France as well as further afield in Europe so far this year," states Gilles Mougenot, president of Argos Soditic. In the context of the financial crisis, a number of explanations can be provided for the deterioration of the prices in the LBO sector. On the sell side, many target companies saw their performance suffer while there was still no medium to long-range visibility. Subsequently, potential vendors have been forced to reduce their price expectations in order to attract buyers. "The fall in the price was aided by sellers unwilling to put off divestments in the hope of a higher price," explains Mougenot.

On the buy side, many GPs whose portfolio companies were struggling focused on managing and propping them up rather than doing deals. Funding operations in the mid-market sector has also become increasingly difficult for LBO funds. Finding senior debt to finance transactions has become a lengthy process involving pools of banks and complicated terms. "A debt of 3x EBIDTA is now the norm and it affects the deal volume. The deals going through are equity heavy or sometimes debt-free making the process far more complicated, thus affecting the number of deals completed," explains Mougenot.

The pricing outlook for the remainder of the year doesn't look much more encouraging. Mougenot says, "We can expect the mid-market valuations to continue to drop in the second half of the year, albeit less substantially." However, deal flow has seen an increase recently, with a number of corporates looking to sell their assets as well as spin-offs, "where a lower asking price is envisigable". He adds: "A number of restructuring deals are also in the works." Whether buyers and sellers will agree on the valuations of companies remains to be seen.

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