M&A, DEBT & EQUITY CAPITAL MARKETS: 2015 UPDATE March 11, 2015
M&A, Debt and Equity Capital Markets: 2015 Update Welcome Bob Rubino Executive Vice President – Head of Corporate Finance & Capital Markets Today, our panel will discuss trends, insights and ideas we hope you can use to create value for your companies, focusing on M&A and the Capital Markets in 2015. We’ll highlight a few topline findings of our annual middle market M&A Outlook research Why both the number and the focus of middle market firms in acquisition mode has grown substantially How seller motivations are shaping the market today What changing demographics of middle market owners means for the M&A landscape Our research also shows that smaller cap businesses are taking on an increasingly important role in M&A and affecting the balance of deal supply and demand. We’ll also share our perspectives on the state of M&A, equity and debt capital markets, and implications for middle market corporate finance strategies in 2015. March 11, 2015 1
M&A, Debt and Equity Capital Markets: 2015 Update Buyers have reached a tipping point The number of middle market firms currently involved in an acquisition or actively seeking opportunities is up — particularly among larger firms. The right acquisition offers acceleration over today’s slow, but steady, market growth. The number of buyers who have decided to put off acquisitions for at least a year has also increased. Formerly passive buyers have moved decisively to either postpone or pursue M&A. Source: Citizens Commercial Banking Middle Market M&A Outlook 2015 March 11, 2015 2
M&A, Debt and Equity Capital Markets: 2015 Update Sellers are less engaged today…but demographics forecast a change In contrast to buyers, sellers are less active in pursuing transactions; only 1 in 8 sellers are currently involved in or actively seeking opportunities today compared to more than 1 in 3 buyers —now shifting the balance from a buyer’s to a seller’s market. However, the cresting wave of baby boomer retirement will dramatically increase the number of companies looking to sell over the next several years — enabling buyers to become more selective, and requiring sellers to be thoughtful in packaging and planning to achieve the best valuations. . CURRENT SELLER ACTIVITY BOOMER IMPACT ON FUTURE SALES 2013 2014 2015 My expected retirement timeframe has had a Be acquired by or 6% 7% 69% 9% significant impact on the timing of the sale of merge with another firm 6% 7% my company (for Owners) 6% Currently involved 21% 24% 28% The expected retirement timeframe(s) of my Actively seeking company’s leader(s) has had a significant opportunities 40% impact on the timing of the sale of the Passively receptive business (for Non-Owner Executives) to opportunities Not likely to consider 64% 62% I believe M&A activity in my industry will 60% in the next 12 months increase in 2015 as a result of a growing 38% number of industry leaders nearing retirement Source: Citizens Commercial Banking Middle Market M&A Outlook 2015 March 11, 2015 3
M&A, Debt and Equity Capital Markets: 2015 Update Our Panel Jim Kuster Doug Cameron Ted Swimmer Managing Director, Managing Director, Executive Vice President, Head of M&A, Corporate Finance Head of Equity Capital Markets Head of Debt Capital Markets March 11, 2015 4
The State of M&A in 2015 Jim Kuster Managing Director, Head of M&A, Corporate Finance Jim joined Citizens in August 2012 as the Managing Director of the M&A, Corporate Finance practice. Prior to Citizens, Jim was the Head of Corporate Finance Americas at RBS Securities Inc. for 8 years, advising primarily multinational clients of RBS on numerous successful cross-boarder transactions. Before joining RBS, Jim was a partner of Crest Advisors, LLC for 5 years where he worked with domestic middle market companies on mergers, acquisitions, divestitures and capital raises. He also served on the board of directors of several public and private companies as a result of Crest’s investing activities. Before Crest, Jim spent 13 years at Chase Securities, Inc. where he was responsible for corporate finance and advisory transactions for many prominent companies in the Telecom, Media and Technology sectors. March 11, 2015 5
The State of M&A, Debt & Equity Capital Markets in 2015 Macro Themes in M&A Economic Factors Influencing M&A Activity On February 24 th , Federal Reserve Chairwoman, Janet Yellen, Continued favorable credit markets are enabling ample leverage levels addressed the U.S. Senate not only highlighting significant and critical Historically low interest rates with a long, gradual upward movement progress made in the U.S. economy but also commenting on projected underemployment, stagnant wage growth and low inflation expectations A large number of private equity portfolio companies may seek liquidity as critical issues given strong prevailing market conditions Consumer spending has been lifted by the slight improvements in the Healthy stock market performance - the S&P 500 is up nearly 16% labor market as well as by the increase in household purchasing power since 1Q 2014 resulting from the sharp drop in oil prices Many industries are facing stagnant revenue growth but strong earnings Oil prices have declined by more than 50% driven by global supply growth, highlighting that growth is being delivered through cost cutting growth coupled with moderating demand and margin expansion rather than through top line expansion Sales of new and existing U.S. single family homes fell 0.2% and 4.9%, respectively in January but were offset by a 1.7% increase in pending Shareholder Activism Driving Activity home sales. Sales were likely held back by poor weather in the U.S. Shareholder activism continues to be a theme, increasingly occupying Northeast and shortage of supply headlines in recent years and will continue to be a factor influencing Continued rising consumer confidence and declining unemployment M&A could help return positive momentum in housing “Constructivist” investing is a recent theme adopted by activists as they Fed policy and market communication is evolving under Janet Yellen, as focus more on stimulating growth opportunities for target companies, as she has reiterated that the central bank will be “patient” on raising was seen with the Bill Ackman-backed Valeant /Allergan proposed interest rates transaction Political Deal Activity After the 2014 mid-tem elections, the Republicans now control both the U.S. M&A activity recorded its best performance in 5 years, there were House and Senate, and with both parties focused on 2016, it is unlikely 4,795 deals announced worth $1.4 trillion, a 22% increase in deal any major legislation will pass impacting economic or financial markets volume and a 57% increase in value 2014 witnessed 35 deals worth more than $10 billion Financial Private equity exit values reached a five year high, as PE funds took full Debt markets remain accommodative, with low rates persisting, but advantage of the U.S. M&A rebound in 2014. Investors sold 962 investors are becoming more selective on the edges companies worth $261.8 billion, an increase of 31% in volume and 70% Pressure on banks to reduce risk and improve capital positions is in value compared to 2013 continuing to benefit non-bank lenders, and shift the landscape of capital markets Equity markets have continued to reach new highs and remain generally bullish and open to new issuance March 11, 2015 6
The State of M&A, Debt & Equity Capital Markets in 2015 Deal Statistics and Examples Middle Market M&A 1 $Volume (billions) Middle Market Sector Split Median Transaction Multiple 7% $400 $377 17% 14.0x 10% 12.5x $337 $337 $350 12.0x 10.9x 10.6x $291 $298 $312 10.2x 9.8x $300 12% 10.0x 21% $255 13% $250 8.0x $200 6.0x 10% $158 11% $150 4.0x Business Services Consumer Energy & Minning Mining Financial $100 2.0x Healthcare Industrials 2007 2008 2009 2010 2011 2012 2013 2014 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Real Estate TMT Commentary Selected 2014 Notable Transactions John Reiss, Global Head of M&A January 2014: XPO Logistics acquisition of Pacer International ($336 million) February 25, 2015 May 2014: Genstar Capital’s acquisition of Pretium Packaging “Something has changed for buyers and sellers. The ($500 million) buyers are through their restructurings. They have done June 2014: Endo International’s acquisition of DAVA what they can on the cost side. Now they have lean, Pharmaceuticals ($600 million) growing business operations, and they are ready to June 2014: Bay Valley Foods’ acquisition of Flagstone Foods transform through acquisitions. The thing that has ($875 million) changed for sellers is that buyers are now willing to meet July 2014: E.W. Scripps’ acquisition of Journal Communications their price expectations – and when you have ($687 million) enthusiastic buyers (even at high prices), you get willing December 2014: Irving Place Capitals’ acquisition of American sellers and a highly charged M&A Market.” Apparel ($500 million) Sources: Dealogic, Thomson One, S&P Capital IQ, White & Case; 1. Deals valued at $50MM - $1BN March 11, 2015 7
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