This month’s issue of the monthly executive brief providing M&A market insight for C-level management and their professional advisors.
Corporate acquisitions include three typical capital components: equity, senior debt, and mezzanine capital. Mezzanine capital has some features of debt (such as a payment of interest or dividends) and some features of equity (such as a higher rate of return than debt and being unsecured). These funds sit between debt and equity on the balance sheet, hence the name mezzanine.
Last year’s data indicated that while multiples and mezzanine levels had remained fairly constant over the previous six years, the equity and senior debt contributions had varied, and this variance had a profound impact on overall deal valuation. As equity contributions ticked higher, so did the deal valuation. We saw that same phenomenon again in 2012, with valuations increasing at a greater rate than the debt levels. The average equity contribution ticked slightly higher to ~47%, still well under the 50% plus levels we saw in the aftermath of the market collapse and recession of 2008–2010.
So what will the remainder of 2013 bring? In all likelihood, equity contributions and therefore deal values will continue to be on the rise. Still recovering from the credit meltdown caused by the recession, the banking industry have fortified their balance sheets and have ample lending capacity, and they are looking to participate in deals.
Let’s not forget, however, that large exposure to leveraged credit caused problems for many banks when liquidity evaporated in 2007 and 2008. This represents a grave risk that today makes the banks cautious lenders. During this cautious period, deals have been getting done with alternative combinations of equity and subordinated debt, and we are likely to see this continue throughout 2013.
For more information contact:
Douglas Nix, CA | Vice Chairman CFA
905 845 4340 ext. 211