Mid-cap valuations register modest drop – Argos Index

The median EBITDA multiple paid in European lower mid-cap private equity buyouts – here defined as businesses in the €15-150m range – fell to 7.4x for the six months to March 2012, according to the latest Argos Mid-Market Index. This is down slightly from the 7.7x median registered in H2 2011, and still above the 7.3x witnessed in the first half of last year.

Lower mid-cap LBO activity remained particularly subdued in Q1 this year. According to unquote" data, such transactions fell by a quarter in volume and a third in value compared to the last three months of last year – which already witnessed a sudden drop compared to the rest of 2011.

Argos Soditic partner Karel Kroupa notes that financing remains an issue hampering dealflow, but highlights another major factor: confidence. "Visibility on company performance remains poor in most cases," he says. "Even for healthy and growing businesses it remains tough to predict what activity will be like in six months' time. Investors therefore tend to remain cautious and highly selective."

That the median entry multiple only fell by 5.3% shows that the few assets that did change hands were deemed robust and promising enough to command substantial price tags. "Quite a few LBO players still have capital to put to work. Few deals get done, but those that do go through are for the very best assets," notes Kroupa. "This 'flight-to-quality' phenomenon – even though it is becoming less prominent – partly explains why multiples haven't dropped more while activity has clearly taken a step back."

For the fourth semester in a row, private equity players have also paid higher multiples than trade buyers: the median multiple in corporate M&A transactions fell to 7.2x EBITDA, compared to 7.6x in H2 2011. This is the first time for more than two years that multiples paid by trade players have decreased in the index.

But again, valuations have held up surprisingly well given that corporate M&A activity was just as lacklustre as private equity-backed buyout dealflow in the first quarter.

"Strategic buyers still enjoy decent reserves of cash and historically low levels of debt. We have witnessed them coming back to the market in recent weeks and displaying a strong appetite for acquisitions," explains Kroupa. "That said, it hasn't resulted in substantial dealflow yet, since corporate M&A also registered a sharp drop in Q1 this year."

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• Topics
• Buyouts
• Exits
• Argos Wityu
• Mid-market buyout