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
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|
(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.
|Senior Secured Debt||$400||47|
|Second Lien Debt||$135||16|
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|