It's Beyond A Bubble: Median LBO Multiple Soars To Mindblowing 11.6x

Tyler Durden's picture




 

While we have extensively discussed the emergence of the M&A bubble in recent months, with merger and acquisition activity in 2014 set to match or surpass the previous, 2007, record...

... driven exclusively by the record high stock prices of acquiring companies, which, together with the overabundance of cheap debt, has made the purchasing decision virtually a no-brainer, manifesting itself in the lowest purchasing cash consideration since 2001...

... one thing that has stood out is that while M&A has exploded, LBO transactions by volume, remain in the doldrums:

Why this glaring discrepancy?

Simple. Recall that while for M&A resulting cash flow is a secondary concern, primary being fooling equity analysts over the impact of potential "pro forma" synergies many years down the line (and just repeating "accretive, accretive, accretive" over and over), LBOs are and always have been about cash flows (and, of course, debt-funded dividend recaps). And in the new normal where it is all about Non-GAAP numbers, it is legitimate cash flow that has solidly refused to rise (why? hint: lack of capex).

Not only that, but since the acquiror has to fund the non-debt portion with cash, P/E shops don't have the benefit of irrational exuberance pushing the acquiring currency to berserk levels.

But the biggest reason LBOs - which after all are a product of the "smartest guys in the room" spotting value which they want to then take private - is the following:

According to just released data by Murray Devine, the Median Ebitda multiple for buyouts has exploded to nosebleed levels, rising by over one full turn of EBITDA since 2013 alone, and at 11.5x in the first half of 2014 is nearly 2x higher than during the last LBO bubble peak in 2008, when the average company was taken private at a conservative 9.6x EV/EBITDA.

Further from the report:

Cheap credit is having a significant impact on the deal-making environment. As mentioned previously, the median debt percentage for 2014 deals has hit 72%, a six percentage-point jump from 2013’s 66%. Leverage use has skyrocketed since 2011, when the median debt percentage for PE deals was around 55%. Median debt percentages in 2013 and the first half of 2014 both outpaced the percentages seen during the buyout boom; for context, the median only reached 63% in 2007.

 

Analysts have noted recently that PE firms, armed with cheap debt financing, have been pushing purchase price multiples beyond what many strategic acquirers are willing to pay. Danaher (NYSE: DHR), for instance, came up short twice against PE bidders in 1Q, first with Ashland’s water technologies business, which CD&R agreed to carve out for $1.8 billion in February, and later with Johnson & Johnson’s diagnostics unit, which Carlyle agreed to buy for $4 billion in March.

 

To win those deals, PE investors have pushed valuations (11.5x) to historically high levels and have added an extra turn of debt to their transactions. Last year’s median debt-to-EBITDA multiple ballooned to 6.9x, a big jump from the 4.9x median in 2012. Through the first two quarters of 2014, debt multiples are even higher at 8.2x. Part of those high debt multiples, according to some, is tied to a resurgence in cash-flow lending in the industry. Equity-to-EBITDA multiples, on the other hand, have been muted. This year the median has shrunk to 3.3x, down from 3.6x in 2013 and way down from the 3.9x median in 2011.

And here is where the crying will begin once the Fed's latest, and at this point last, credit bubble finally bursts.

So yes, there is a bubble, pure and simple. In fact, it's the biggest bubble ever. Anyone claiming otherwise is an idiot and/or an economist.

Let's move on.

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Wed, 07/09/2014 - 20:37 | 4941571 buzzsaw99
buzzsaw99's picture

i remember back in the 1970s some painting sold for like $13M (or some ridiculous shit that looks quaint compared to the crap the kleptocrats are doing now). The very next day the fed raised rates (again). they were assholes then but good god they are way beyond assholes now. let it burn.

Wed, 07/09/2014 - 22:03 | 4941820 Stackers
Stackers's picture

I know a guy that had worked for a medium sized construction company for 20+ years that just went through it's 5th LBO sale in 7 years. He walked with 8 figures for his small amount shares he was given by original owner 20 years ago. Wall St. LBO money has flooded into the construction and oil services industries in the last 6 years buying up medium sized family owned businesses and conglomerating them into an ever growing EBITDA monster that gets bigger and bigger with each change of hands.

 

Company gets sold. They go around buying up small and medium sized competitors, "growing" revenues by 20+%. Then turn around 18 months later to next Wall St. LBO money walking by and say hey look this company is on fire growing 20+% per year with huge revenue stream and sell for 7x earnings ..... rinse and repeat.... rinse and repeat

Wed, 07/09/2014 - 23:26 | 4942115 bunzbunzbunz
bunzbunzbunz's picture

Whatever. The dollar is getting replaced by bitcoin. Get some free at http://freebitco.in/?r=25727

Wed, 07/09/2014 - 23:32 | 4942143 Tall Tom
Tall Tom's picture

Spam Spam Spam...

 

Tyler Durden...Stop the spammers from hijacking your threads. Nip this in the bud.

Wed, 07/09/2014 - 23:52 | 4942201 bunzbunzbunz
bunzbunzbunz's picture

How often do you reply this way to the retards posting a link to their blog? Fucking Hypocrite.

Thu, 07/10/2014 - 04:29 | 4942450 Bernoulli
Bernoulli's picture

IMHO: A large part of this folly can be credited to simple accounting rules.

If they would be different (more conservative) and enforced accordingly, a lot of this shit wouldn't be possible.

So who makes/manipulates the accounting rules?

Wed, 07/09/2014 - 20:38 | 4941574 ZerOhead
ZerOhead's picture

It's Beyond A Bubble:

A zeppelin perhaps?

http://www.mypivots.com/site/uf/11384/hindenburg-omen.jpg

Wed, 07/09/2014 - 20:51 | 4941620 rtalcott
Wed, 07/09/2014 - 20:40 | 4941583 Rainman
Rainman's picture

Stupid banksters jump and the Google exec checks out on his yacht with hookers and smack. That's the way you do it.

http://www.nydailynews.com/news/crime/high-priced-prostitute-injected-google-exec-lethal-dose-heroin-cops-article-1.1860196

Wed, 07/09/2014 - 20:45 | 4941594 buzzsaw99
buzzsaw99's picture

good riddance

Wed, 07/09/2014 - 21:03 | 4941653 lotsoffun
lotsoffun's picture

too both.  excess.

Wed, 07/09/2014 - 21:03 | 4941654 disabledvet
disabledvet's picture

You mean "good hookers this time. Good blow."

This is the best series if threads in world history.

Everyone is bringing their A game!

Let's type MOAR!

Steve Wozniak is God!

Wed, 07/09/2014 - 20:53 | 4941622 yogibear
yogibear's picture

Looks like he won't be calling up any hookers again and she won't be injecting any victims.

Thu, 07/10/2014 - 09:26 | 4942908 Me.Grimlock
Me.Grimlock's picture

In Italy, this type of news would crash the GDP (even more).

Wed, 07/09/2014 - 20:55 | 4941634 rtalcott
rtalcott's picture

“Forrest will be remembered above all as a loving husband and father,” read his obituary, which was published in the Santa Cruz Sentinel.

Wed, 07/09/2014 - 21:00 | 4941646 fonzannoon
fonzannoon's picture

in all fairness I hope I go the same way.

Wed, 07/09/2014 - 20:57 | 4941637 centerline
centerline's picture

Nah.  Wimp.  Needs to be multiple hookers and dying from a massive heart attack during acrobatic manuevers while high on a less than lethal dose of something expensive - preferrably with sharks all around and explosives.

Wed, 07/09/2014 - 21:00 | 4941648 fonzannoon
fonzannoon's picture

Okay I take back what I just said and hope I go the way you said.

Wed, 07/09/2014 - 21:09 | 4941665 disabledvet
disabledvet's picture

I thought the ending was "he was kinda old and this has happened before."

The hooker dies?

That only happens when the director wants to draw the viewer IN. (Drama.)

If its an Action Flic "all of us here" (save Cougar) "die." But it was like...an accident. We just become a statistic.

Wed, 07/09/2014 - 23:23 | 4942106 garypaul
garypaul's picture

Hooker looks like a tranny to me

Wed, 07/09/2014 - 23:35 | 4942149 Tall Tom
Tall Tom's picture

It looks like Michael (Michelle) Obama?

Wed, 07/09/2014 - 20:43 | 4941591 Cognitive Dissonance
Cognitive Dissonance's picture

Cheap money promotes higher stock prices which in turn is used as money to purchase other companies. There is more than one way to describe 'liquidity'.

Wed, 07/09/2014 - 20:55 | 4941632 centerline
centerline's picture

it seems that "recursive" is one definition!

Wed, 07/09/2014 - 23:20 | 4942099 GooseShtepping Moron
GooseShtepping Moron's picture

And the definition of 'recursive' is...

recursive: (adj) See 'recursive.'

Wed, 07/09/2014 - 20:55 | 4941633 yogibear
yogibear's picture

At the trading firms it was common to have hookers and coke.

Wed, 07/09/2014 - 20:58 | 4941639 Yen Cross
Yen Cross's picture

  Look at the Japan Machine orders.

  FAIL, just like the China numbers last night. The markets are completely ignoring macro right now.

       JPY    Core Machinery Orders (YoY)     -14.3%     9.5%     17.6%      
       JPY       Core Machinery Orders (MoM)     -19.5%     0.7%     -9.1%      
       JPY     Tertiary Industry Activity Index (MoM)     0.9%     1.9%     -5.7%    

Wed, 07/09/2014 - 21:21 | 4941697 highly debtful
highly debtful's picture

Yes, I just read about that too: a drop of core machinery orders in Japan of 19,56 % in may. 19,5 %. In my book that still translates as nineteen and a half percent or about one fifth less of things.

WTF? Had to read it twice to believe it. Or is may statistically just a really bad month for Japan's core machinery orders?

Keeping all the balls in the air with that kind of data must be quite a feat. 

 

Wed, 07/09/2014 - 22:28 | 4941933 The Most Intere...
The Most Interesting Frog in the World's picture

Print currency, buy shares. Print currency, buy shares. Print currency, buy shares. Print currency, buy shares. Repeat...

Wed, 07/09/2014 - 21:00 | 4941645 Goldilocks
Goldilocks's picture

KerPlunk Game Commercial - 1993
http://www.youtube.com/watch?v=ZferXWMPjDo (0:15)

Thu, 07/10/2014 - 06:38 | 4942524 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

Unhinged capitalism.

Wed, 07/09/2014 - 21:06 | 4941657 stopthejunk1
stopthejunk1's picture

LBO = large bowel obstruction?

Wed, 07/09/2014 - 21:11 | 4941669 disabledvet
disabledvet's picture

"Wall Street meets Snownball and Coke." (The soda people. Nothing weird here people. We're only talking 180 billion.)

Wed, 07/09/2014 - 21:18 | 4941691 Oldwood
Oldwood's picture

Likely not for long. It will end up a big stinking turd for all to see. I think the whole point of a leveraged buy out is to buy something with other people's money, while taking a big slice of the pie in the process.

Wed, 07/09/2014 - 21:07 | 4941660 magne13
magne13's picture

I am confused if the equity market is so overvalued and these corporations are running at market caps of outrageous proportions, wouldn't it be the prudent thing for the corporation to dump all of its shares on these central banks, knowing that their business model cannot possible be worth these valuations? Meaning why aren't companies who know that their multiple is full of crap, dump all of its shares instead of taking on debt to buy it back at extreme levels, what am I missing, they all should be cashing out and leave these central banks holding the bag, for all the banks are doing is printing money and buying equities, basically counterfeiting their way to owning shares of companies, never to be sold, because, it doesn't have to sell when you can just print money.

Wed, 07/09/2014 - 21:13 | 4941674 disabledvet
disabledvet's picture

While singing "My Woman in Tokeeeeoooooo."

Deep Purple.
"The color of Royalty."

Wed, 07/09/2014 - 21:08 | 4941662 magne13
magne13's picture

I am confused if the equity market is so overvalued and these corporations are running at market caps of outrageous proportions, wouldn't it be the prudent thing for the corporation to dump all of its shares on these central banks, knowing that their business model cannot possible be worth these valuations? Meaning why aren't companies who know that their multiple is full of crap, dump all of its shares instead of taking on debt to buy it back at extreme levels, what am I missing, they all should be cashing out and leave these central banks holding the bag, for all the banks are doing is printing money and buying equities, basically counterfeiting their way to owning shares of companies, never to be sold, because, it doesn't have to sell when you can just print money.

Wed, 07/09/2014 - 21:43 | 4941762 Catullus
Catullus's picture

The prudent thing to do would be to come up with a great idea and issue shares to raise capital to pay for it. Instead, they borrow money and buy back the shares at ridiculous valuations

Wed, 07/09/2014 - 22:08 | 4941865 IANAE
IANAE's picture

If you're a c-suite-er and comp'd with stocks/options, would you choose to:

 

a) issue debt (cov-lite as possible) and buyback shares enabling you to receive top dollar for shares you hold and triggering higher incentive comp if EPS (or other stock performance) metrics are achieved, 

  or

b) anything else, including 'dump all of its shares on these central banks'?

Wed, 07/09/2014 - 22:25 | 4941928 The Most Intere...
The Most Interesting Frog in the World's picture

Yeah what he said.

Thu, 07/10/2014 - 06:18 | 4942513 Debugas
Debugas's picture

then what would you do with the pile of cash ?

Wed, 07/09/2014 - 21:23 | 4941701 QE49er
QE49er's picture

We have two choices to get from point A to point B:  The Titanic or The Hindenburg

Good Luck Kind Sirs & May God be with you.

Wed, 07/09/2014 - 21:40 | 4941756 Catullus
Catullus's picture

Accretive.

Wed, 07/09/2014 - 23:03 | 4942055 robertocarlos
robertocarlos's picture

Go long BBBY.

Wed, 07/09/2014 - 23:20 | 4942100 Shizzmoney
Shizzmoney's picture

This looks less like a bubble and more like theft.

It's pretty easy to buy Par Place and Boardway and all the Utilities if you simply just take money out of the bank out of turn and die results withstanding.

Wed, 07/09/2014 - 23:27 | 4942118 GooseShtepping Moron
GooseShtepping Moron's picture

Par Place and Boardway? Did you learn about Monopoly from Archie Bunker?

I'm just kidding with you, dude. Your point is actually a good one.

Thu, 07/10/2014 - 00:36 | 4942274 Kreditanstalt
Kreditanstalt's picture

The same bettors and punters buying some of these flakey tech outfits must be the greater fools others are looking for...

Thu, 07/10/2014 - 06:16 | 4942511 Debugas
Debugas's picture

existing companies can satisfy the whole world demand

no point in creating new ones

as more and more money gets printed it goes into existing capital inflation

so expect even higher ratios

It is a new norm

Thu, 07/10/2014 - 08:18 | 4942708 AdvancingTime
AdvancingTime's picture

Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place.

It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus? More on this subject in the article below.

http://brucewilds.blogspot.com/2013/05/cheap-money-more-and-more-and-mor...

Do NOT follow this link or you will be banned from the site!