Multiple worries

Kimberly Romaine
08 March 2011

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According to the man on the street, multiples nowadays stand at around 7x EBITDA for assets, up to 9x if it’s a ‘quality asset’ (meaning it stands at 9x, since I know of no GP willing to admit he buys low-quality assets). This is down markedly from the double-digits seen yesteryear when leverage was plentiful and Lehman Brothers still existed.

But now it's back. Mid Europa Partners has just paid EUR 400m, or 13.1x EBITDA, for Polish grocery store chain Zabka in a secondary buyout from Penta Capital. It had to pay a big sum: it was up against global heavyweight BC Partners, as well as global blue-chip Tesco (which, incidentally already bought Zabka's Czech operations for $53m).

Despite headlines to the contrary, multiples have been growing: Standard & Poor's Leveraged Commentary and Data puts multiples for large buyouts at 9.1x EBITDA on average for Q3 2010, up from 7.9x at the end of 2009. The only time multiples were higher was during the heyday of 2007 and 2008, according to Triago. This worries some.

But large purchase prices are only a worry if the buyer is incapable of selling it for more. Though many tut-tut at the thought of a 13x multiple on anything purchased in today's backdrop, it is important to remember who the buyer is. Mid Europa was once the most despised outfit in CEE, owing to its ability to write large cheques. Other deal doers in the region claimed that Mid Europa was responsible for driving up prices in the region from around 2003. Around that time, the same people said Mid Europa would therefore never achieve strong returns. But they were wrong. The outfit has made a handful of stellar exits, two in December alone. One was of a Polish cable company, which it paid a double-digit multiple for before doubling its money in the EUR 600m sale - the second time it cashed in on the business.

There are certain assets within certain sectors that warrant high prices. A handful of investors are capable of identifying these and monetising them. Until they lose money, the multiples are not too high.