Middle Market M&A Review 2nd Quarter 2021 - BlueWater ...
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Middle Market M&A Review 2nd Quarter 2021
Trends and Insights M&A activity moderated but remained steady in Q1 2021 ü While deal volume declined on a sequential QoQ basis, activity remained in line with a year ago ü Total middle market deal value continued to climb in Q1 2021, setting a record for any first quarter ü Valuation multiples eased as more sellers looked to exit ahead of anticipated tax hikes in 2022 The availability and cost of capital continue to drive deal making ü Debt issuance skyrocketed in Q1 2021 and interest rates remain at or near multi-year lows ü Companies in the S&P 500 ended 2020 with $2.7 trillion in cash and equivalents, up nearly 20% ü PE dry powder will remain high as total AUM is expected to reach $9.1 trillion by the end of 2025 The economic recovery is building momentum, but concerns remain ü GDP growth accelerated in Q1 2021, raising expectations of a faster and sustained economic recovery ü The Leading Economic Index® (LEI) improved for the second consecutive month in April ü Consumer confidence slipped in May 2021 as optimism was tempered by a softening labor market The strength in M&A activity is expected to continue through 2021 ü The universe of buyers and investors continues to swell which presents more alternatives to sellers ü Companies are exploring divestitures so they can focus on and invest in their core business ü The pandemic and trade tensions are causing companies to consider deals that shorten their supply chains Risks to our view ü Labor shortages and supply chain issues continue to delay the post-pandemic recovery for some companies ü Faster than expected inflation leads to higher interest rates and lower deal activity ü Buyers and sellers may struggle to agree on COVID-19 adjustments and decide to wait for more certainty Middle Market M&A Review – Q2 2021 2
Macroeconomic Indicators
USA GDP Growth Rate • According to the “second” estimate from the
33.4% BEA, real GDP expanded by 6.4% in Q1
2021, up from the 4.3% recorded in the
2.5% 3.5%
2.9%
1.1% 3.1% 2.0% 2.1% 2.1% 4.3%
6.4% preceding quarter.
-5.0%
• The increase in real GDP in Q1 2021 was
driven by increases in personal consumption
-31.4%
expenditure, non-residential fixed investment,
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
and local/state and federal government
2018 2019 2020 2021
spending, and partially offset by decreases in
private inventory investment and exports.
Conference Board Leading Economic Index® (LEI) • The Conference Board Leading Economic
111.5
113.3 Index® (LEI) for the U.S. improved by 1.6% in
108.4 109.2 109.9 110.2110.1 April 2021 to 113.3, marking the second
106.7 107.6
103.0
105.1 consecutive increase since declining in
100.0 February.
97.0
• LEI gains continued to accelerate in recent
months, suggesting improved expectations
for economic recovery in the coming
quarters, even though employment and
Feb-21
Jun-20
Jan-21
Jul-20
Nov-20
Dec-20
Apr-20
Oct-20
Apr-21
Ma y-20
Aug-20
Sep-20
Ma r-21
production levels have yet to return to pre-
pandemic levels.
Source: BEA, US Bureau of Labor Statistics, The Conference Board
Middle Market M&A Review – Q2 2021 3Macroeconomic Indicators
USA Unemployment Rate • The unemployment rate inched up marginally
14.8% to 6.1%, ending 11 consecutive months of
13.3%
decline. Nonfarm payroll employment
11.1%
10.2% increased by only 266,000 in April 2021.
8.4%
7.8% Unemployment remains well above the pre-
6.9% 6.7% 6.7% 6.3%
6.2% 6.0% 6.1% pandemic level of 3.5%.
• Notable job gains in leisure and hospitality,
other services, and local government
education were partially offset by declines in
Jul-20
Feb-21
Jun-20
Jan-21
Ma y-20
Aug-20
Sep-20
Nov-20
Dec-20
Apr-20
Oct-20
Apr-21
Ma r-21
temporary help services and couriers and
messengers.
CPI-All Urban Consumers, seasonally adjusted • The Consumer Price Index for All Urban
0.8% Consumers (CPI-U) increased by 0.8% in
0.6% 0.6%
0.5%
0.4% 0.4% April 2021, on a seasonally adjusted basis,
0.3%
0.2%
0.1%
0.2% 0.2% marking the sixth consecutive month of
-0.1%
growing inflation.
• The index for all items less food and energy
-0.8%
rose 0.9% in April, its largest monthly
increase since April 1982, as nearly all major
Feb-21
Jun-20
Jan-21
Jul-20
Apr-20
Oct-20
Apr-21
Ma y-20
Aug-20
Sep-20
Nov-20
Dec-20
Ma r-21
component indexes increased.
1-Mo nth % Change
Source: BEA, US Bureau of Labor Statistics, The Conference Board
Middle Market M&A Review – Q2 2021 4Macroeconomic Indicators
Consumer Confidence Index • The Conference Board Consumer
114.9
117.5 117.2 Confidence Index essentially held steady in
®
May, declining nominally to 117.2 following a
sharp rebound during the three months
98.1
101.8 100.9 ended April 2021.
96.1 95.2
92.6
88.6
• Consumers’ assessment of current
87.1
86.6
84.8 conditions improved, in line with robust
economic growth in Q2. However, short-term
optimism deteriorated amid a softening labor
Feb-21
Jun-20
Jan-21
Jul-20
Nov-20
Dec-20
Oct-20
Apr-21
Ma y-20
Ma y-21
Aug-20
Sep-20
Ma r-21
market and perceived headwinds to
sustained economic recovery.
Effective Federal Funds Rate • The Federal Open Market Committee
("FOMC”) in its April 2021 meeting voted
0.1%
0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% unanimously to keep the federal funds rate
0.1%
0.1% 0.1%
unchanged at a range of 0.00% to 0.25%.
0.1% 0.1%
• Although the Committee reiterated its
intention to maintain a loose stance on
monetary policy, strong economic activity
triggered speculation around a possible
tapering of the Fed's crisis-fighting bond
Jul-20
Feb-21
Jun-20
Jan-21
Apr-20
Oct-20
Apr-21
Ma y-20
Aug-20
Sep-20
Nov-20
Dec-20
Ma r-21
purchases. But weaker than expected jobs
growth in April made that less likely.
Source: US Census Bureau, The Federal Reserve Bank of St. Louis, The Conference Board, Forbes
Middle Market M&A Review – Q2 2021 5US M&A Transactions Market
US Target Mid-Market M&A (# Deals, Last 3 months) • According to Refinitiv, U.S. target mid-market
M&A announced deal volume was up 3.3% at
3,543
3,173
3,353
3,178 12,053 during TTM 3/31/21, compared to
2,789 2,832 2,876 11,670 during TTM 3/31/20.
1,979 • Deal activity for the quarter ended March 31,
2021 held steady on a YoY basis as 3,178
transactions were completed compared to
3,173 in the prior year. Deal activity declined
10% on a sequential QoQ basis in Q1 2021
following a record in Q4 2020.
6/2019 9/2019 12/2019 3/2020 6/2020 9/2020 12/2020 3/2021
US Target Mid-Market M&A ($ billion, Last 3 months) • Deal value during TTM 3/31/21 reached
$294.1 billion, an increase of about 20%
87.9
81.5
84.9 over the TTM 3/31/20 period.
60.3 59.0 60.0
65.1 • Q1 2021 saw continued resurgence in deal
value to $87.9 billion, beating the high set in
39.8 the preceding quarter. This represented an
increase of about 35% on a YoY basis.
6/2019 9/2019 12/2019 3/2020 6/2020 9/2020 12/2020 3/2021
Source: Refinitiv
Middle Market M&A Review – Q2 2021 6US M&A Transactions Market
Purchase Price Multiples ($10-250 million TEV) • Valuations dipped marginally to 6.8x TTM
7.3x adjusted EBITDA during Q1 2021, continuing
7.2x
7.1x 7.1x the modest pullback over the last three
TEV/LTM Adj EBITDA
6.9x quarters from the 7.0–7.2x range seen since
6.8x 6.8x 2017.
6.6x
2018 2019 2020 YTD 2Q20 3Q20 4Q20 1Q21
2021
TEV/EBITDA
Purchase Price Multiples across TEV ranges • The size premium or spread between the
Total Enterprise Value (TEV)/EBITDA
upper middle market ($100-250 million TEV)
and lower middle market ($10-25 million
TEV
2003-
2017 2018 2019 2020
YTD
Total TEV) contracted further to 1.9x in Q1 2021,
(in $m) 2016 2021
the lowest level in the last four years.
10-25 5.6x 6.3x 5.9x 6.1x 5.9x 6.0x 5.7x
• Two segments of the market saw an increase
25-50 6.2x 6.6x 6.8x 6.9x 6.8x 6.9x 6.4x
as $10-25 million and $25-50 million TEV
50-100 6.9x 8.2x 8.8x 7.5x 8.1x 7.4x 7.3x
multiples expanded slightly to 6.0x and 6.9x,
100-250 7.7x 9.1x 8.7x 9.4x 8.6x 7.9x 8.1x respectively.
Spread between
$10-25 m & 2.1x 2.8x 2.8x 3.3x 2.7x 1.9x 2.4x
$100-250 m
Source: GF Data
Middle Market M&A Review – Q2 2021 7US M&A Transactions Market
Leverage Multiples ($10-$250 million TEV) • Total debt to EBITDA increased to 4.0x from
3.8x in Q4 2020. Senior debt to EBITDA
4.2x
3.8x
4.0x
3.7x 3.8x
4.0x increased sharply to 3.7x from 3.2x, crossing
3.7x
Total Debt/LTM Adj EBITDA
0.9x
0.8x
0.8x
0.6x
3.3x 0.6x
0.3x pre-COVID levels, while subordinated debt to
1.0x
0.5x EBITDA contracted significantly to 0.3x, the
lowest level in the last five years.
3.7x
3.3x 3.0x 3.2x 3.1x 3.2x
2.8x 2.7x
• Q1 2021 debt utilization reflects a reversion to
pre-COVID capital structures. The increase in
2017 2018 2019 2020 2Q20 3Q20 4Q20 1Q21 senior debt is consistent with the higher
Senior Debt/EBITDA Sub Debt/EBITDA
proportion of add-on transactions, which are
traditionally more leveraged.
Equity Contributions ($10-$250 million TEV) • With valuations easing and total debt on the
49.1%
rise, equity contributions declined sharply to
48.9%
44.6% in Q1 2021, the lowest level in the last
% of Purchase Price
five years.
46.1%
• Transactions in the $100-250 million TEV
44.7% 44.6%
range witnessed an increase in equity
contributions to 50.7% in Q1 2021 from
46.2% in 2020 because of competition, while
2017 2018 2019 2020 YTD 2021 those in lower TEV ranges saw a decline.
Equity
Source: GF Data
Middle Market M&A Review – Q2 2021 8Other Market Indicators Leveraged Lending Volume • According to S&P Global, total leveraged loan issuance in the U.S. skyrocketed to $225.2 billion in Q1 2021 (about 57% of the total annual issuance in 2020) before slowing down in April and May • Institutional loan volume surged to $169.9 billion in Q1 2021 (through March 24), which was the second- highest quarterly figure of all time after the record $171.4 billion recorded in Q1 2017 • Low interest rates and significant competition among banks and other lenders continued to fuel leveraged loan issuance growth against the backdrop of the possibility of rising Treasury rates Cash Held by Corporations • Companies in the S&P 500 ended 2020 with $2.7 trillion in cash and equivalents, nearly 20% more than they had at the end of 2019. 15 non-financial companies accounted for more than $1 trillion (or almost 40%) of total cash and equivalents • More cash is expected to be used for share buybacks this year. As investor pressure mounts, analysts estimate buybacks will increase more than 30% YoY in 2021, reaching $674 billion • Cash is also likely to be deployed to increase scale, improve productivity, and mitigate concentration in supply chain risk Private Equity Dry Powder • According to Preqin, global private equity dry powder reached a record $1.6 trillion in Q3 2020, approximately double the combined value of all buyout and venture capital deals over the past 12 months • North America-based private equity firms accumulated a record $976 billion in dry powder in Q3 2020 • Although dry powder levels are very high, their proportion to total AUM (32.5%) remains in line with the 10-year historical average (32.6%) Source: S&P Global, Preqin Middle Market M&A Review – Q2 2021 9
Contact Matthew J. Miller Managing Partner P: (616) 988-4796 E: matt@bluewaterpartners.com BlueWater Partners is a middle market investment banking and consulting firm. As strategic advisors to business owners and management, BlueWater Partners works with companies to create, manage and realize business value, frequently before or through a sale or acquisition. BlueWater Partners’ services include advice on mergers and acquisitions, divestitures, capital sourcing, performance improvement, restructuring and turnaround. This document is intended to provide an overview of certain information relating to middle market transactions, and we are not soliciting any action based upon it. The material presented herein is based on certain data and sources we consider to be reliable; however, we make no representations as to its accuracy or completeness. The information presented is as of the date provided herein, and we have no obligation to update the information. This document is intended for the private use of the recipient for informational purposes only, and the material is for general information only and should not be construed as containing any specific advice or recommendation. No part of this document may be copied, photocopied, or duplicated in any form by any means or redistributed without the express written consent of BlueWater Partners, LLC. Middle Market M&A Review – Q2 2021 10
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