Leveraged Buyouts – Valuation Update

Leveraged buyout transactions (LBOs) provide good valuation guidelines for those companies that fit the general profile of an LBO candidate. The profile’s main attributes are:

  • Low tech business
  • Steady earnings and positive cash flow through the business cycle
  • Low debt-to-equity ratio so the LBO candidate can take on extra debt

LBO transactions often are included in a corporate valuation analysis, along with three other methodologies. The four methodologies frequently used are:

  • Discounted cash flow
  • Comparable public companies
  • Comparable M&A deals
  • Leveraged buyouts

LBO Valuations

FOCUS examined the LBOs of publicly traded companies over the last two-and-a-half years. The transactions took place within a modest range of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples. The median EV/EBITDA range was 8.7x to 12.0x, as shown in this table.

Publicly Traded Companies--Leveraged Buyout Valuations

January 2013 to August 2015
Year Number of Deals Median EV/EBITDA Ratio
2013 26 10.5x
2014 8 8.7
2015(1) 7 12.0
(1)Includes announced deals.

As indicated, the median pricing fell within a range of 8.7x to 12.0x. As most of the public deals were large in size (i.e., over $300 million), this range provides a useful tool for valuing a sizeable company as an LBO target.

However, smaller firms tend to trade at lower multiples than larger ones, so a discount of 20 to 30 percent off the public multiple is appropriate for a small-sized operation. Thus, a reasonable range for a $50 to 200 million LBO transaction might be 7x-10x EV/EBITDA.

Industry Concentration for Public LBOs

Of the 41 public transactions, eight fell into the retailing/restaurant space. Retailing and restaurants are low tech businesses, and, for buyout lenders, they have an added attraction--in some cases--of owning the real estate on which their facilities are located. The LBO lenders can thus be partially secured through mortgages on land and buildings, which is considered a safer option than loaning to a firm based on its own future cash flow.

By way of example, Frisch’s Restaurants--an operator of “Big Boy” casual eateries--accomplished in August 2015 an LBO through a $150 million sale-leaseback of its facilities. Like debt, a sale-leaseback saddles the LBO with high fixed costs--in this case, higher rents. This part of the transaction provided upwards of 80 percent of the finance package, with private equity providing the remainder.

The second most popular industry sector for LBOs is software and services. Many firms in this sector are considered by lenders to be vulnerable to rapid technology changes, but certain players have stable cash flows from repeat licensing and servicing activities that are less exposed to new entrants. The number of software and services deals shows that LBO lenders consider selected participants to be capable of handling large debt loads.

An LBO Capital Structure Illustrated

As an illustration of an LBO capital structure, consider Quality Distribution’s LBO. The firm operates a large chemical bulk tanker fleet and related logistical facilities. Apax, the private equity firm, agreed to buy the business for $776 million plus transaction expenses, and its financing for the new LBO indicated a high degree of leverage (63 percent), as shown in the chart here. The deal closed in August 2015.

Case Study: Quality Distribution, Inc.

  Millions %
Senior Secured Debt $400 47
Second Lien Debt $135 16
Equity $322 37
  $857 100

 Public LBO Deals

Announced Date Target Industry Classification  Enterprise Value Enterprise Value/EBITDA
Jun-16-2015 Metalico Inc. Environmental and Facilities Services   105.2 14.5x
Jun-01-2015 OM Group Inc. Specialty Chemicals   1,037.0 12.0x
May-22-2015 Frisch's Restaurants, Inc. Restaurants   172.8 7.3x
May-06-2015 Quality Distribution Inc. Trucking   776.9 11.3x
Apr-30-2015 OmniVision Technologies, Inc. Semiconductors   1,375.3 12.0x
Apr-14-2015 Dover Saddlery, Inc. Specialty Stores   73.1 17.2x
Apr-08-2015 Zep, Inc. Household Products   700.3 14.9x
Mar-16-2015 Life Time Fitness, Inc. Leisure Facilities   4,062.7 10.9x
Dec-15-2014 Riverbed Technology, Inc. Communications Equipment   3,468.4 18.7x
Dec-14-2014 PetSmart, Inc. Specialty Stores   8,756.4 9.0x
Oct-23-2014 Digital River Inc. Internet Software and Services   645.8 18.1x
Sep-29-2014 TIBCO Software Inc. Application Software   4,159.3 24.8x
Sep-25-2014 Mechanics Bank Regional Banks - -
Sep-02-2014 Compuware Corporation Application Software   2,090.9 24.5x
Aug-04-2014 Pike Corporation Construction and Engineering   584.5 8.4x
Jan-16-2014 CEC Entertainment Inc. Restaurants   1,308.9 7.9x
Jan-10-2014 American Pacific Corporation Specialty Chemicals   393.1 6.8x
Dec-20-2013 Arden Group Inc. Food Retail   364.0 9.9x
Dec-19-2013 Nine West Holdings, Inc. Apparel, Accessories and Luxury Goods   2,200.9 9.8x
Nov-14-2013 Innotrac Corp. Diversified Support Services   108.4 12.1x
Nov-04-2013 Anaren, Inc. Communications Equipment   331.2 12.0x
Oct-21-2013 NTS, Inc Integrated Telecommunication Services   164.8 13.9x
Sep-25-2013 Flow International Corporation Industrial Machinery   200.9 12.5x
Sep-11-2013 R.G. Barry Corporation Footwear   212.5 10.4x
Aug-26-2013 TMS International Corp. Diversified Support Services   972.8 6.7x
Aug-26-2013 Globecomm Systems Inc. Communications Equipment   267.5 7.7x
Aug-16-2013 National Technical Systems Inc. Research and Consulting Services   333.0 14.7x
Jun-24-2013 Keynote Systems, Inc. Internet Software and Services   340.8 23.1x
Jun-24-2013 PRA International, Inc. (nka:PRA Health Sciences, Inc.) Life Sciences Tools and Services   1,367.7 -
May-23-2013 rue21, Inc. Apparel Retail   1,000.3 9.8x
May-20-2013 Websense, Inc. Systems Software   971.1 17.9x
May-10-2013 True Religion Apparel, Inc. Apparel, Accessories and Luxury Goods   628.4 7.2x
May-06-2013 BMC Software, Inc. Systems Software   6,866.7 11.2x
Apr-29-2013 Telular Corporation Communications Equipment   252.8 12.3x
Apr-15-2013 National Financial Partners Corp. (nka:NFP Corp.) Insurance Brokers   1,609.0 11.0x
Mar-18-2013 Edac Technologies Corp. Aerospace and Defense   141.7 9.9x
Mar-08-2013 Gardner Denver, Inc. Industrial Machinery   3,885.5 8.4x
Mar-07-2013 Hot Topic Inc. Apparel Retail   548.5 8.7x
Mar-01-2013 AutoInfo Inc. Air Freight and Logistics   51.9 6.7x
Feb-26-2013 Assisted Living Concepts Inc. (nka:Enlivant) Healthcare Facilities   449.4 11.1x
Feb-14-2013 H. J. Heinz Company (nka:H. J. Heinz Corporation II) Packaged Foods and Meats   27,580.6 13.6x
Feb-05-2013 Dell Inc. Technology Hardware, Storage and Peripherals   20,963.9 5.5x
Jan-30-2013 BioClinica, Inc. Life Sciences Tools and Services   108.2 10.5x
Jan-07-2013 EnergySolutions, Inc Environmental and Facilities Services   944.8 4.5x