M&A Outlook 2008: Small-to-Mid Market Deal Action
Two reports spell a strategic buyer comeback and jump in smaller acquisitions.
Media bankers Berkery Noyes released its 2008 Outlook and Strategies report this week with a concerted effort to dispel any misgivings about last year's credit crunch, particularly for small-to-mid market deals. The report predicts that multiples will stabilize after several years of increases, with strategic buyers making perhaps a more aggressive play for bolt-ons while private equity players continue to look for opportunities to bring what is a still a significant amount of capital to bear on the market.
However, in its annual Media Mergers and Acquisitions survey, AdMedia Partners finds that media executives are still pessimistic about this year's economic outlook and believe the credit fallout will indeed impact media M&A. So much so that strategic buyers will have the upper hand in a market that up to now has been defined by financial players.
The cutoff for deals that manage to escape the snags of a tighter lending market seems to be $500 million and lower, which is where the majority of deals in the magazine media market take place. Nevertheless, it's at this price point and below where Berkery Noyes predicts the real action for 2008 will be, thanks to a tightening down of leverage levels and remaining economic hurdles in the big-market landscape. "After several years of steep increases in valuations-where generous terms drove leverage multiples as high as 10.5 times [EBITDA]-we anticipate stable pricing for the foreseeable future, with companies valued under $500 million financed at multiples in the range of four to six times EBITDA," according to the report.
Berkery notes that private equity will remain a player, having collectively raised $300 billion in 2007, which is $46 billion more than in 2006. Terms and leverage might not be as easy as 2007, but Berkery says that private equity will still scratch that itch. "Granted, the amount of leverage and the attractive terms available in early 2007 will be harder, if not impossible, to find. Nevertheless, investing in acquisitions is a private equity fund's raison d'etre and invest they will."
But with leverage levels returning to earth, multiples will follow, says Berkery Noyes, perhaps to 2005-2006 levels. "We expect EBITDA multiples for the most appealing assets to remain in the double digits, with leverage multiples settling in at levels we saw in 2005-2006."
Transactions in the magazine space have been on a declining trend line, however, as measured by Berkery Noyes. Trade magazine deals shrank from 55 in 2006 to 38 in 2007 and consumer deals dipped slightly from 62 to 56. Digital media, though, saw a dramatic year-over-year increase doubling from 48 to 96 in 2007.
In its annual survey of 1,600 media execs, AdMedia Partners found that 71 percent of respondents believe the economy will be weaker thanks to the housing slowdown, subprime lending fallout and a weakening dollar. In what the report calls a "dramatic shift," 68 percent of respondents indicate that acquisitions by financial buyers will be down in 2008-an about face from the 72 percent who predicted the opposite for 2007. This, conclude the respondents, opens the door for strategic buyers in a year that is expected to be at least as busy-80 percent of respondents say they expect to complete at least one acquisition or divestiture this year.
Executives are agreeing on the valuation stabilization-"Valuation standards in most sectors, including online, which had been climbing steadily in recent years, have leveled off," says the report. Ranges for EBITDA multiples for online media, consumer magazines, b-to-b magazines and events were reported as 12x-15x, 7x-9x, 7x-8x, and 7x-8x respectively. Of these, only b-to-b and events slipped slightly from 2007 levels of 7x-9x each; the rest held steady.