The average public company price/earnings multiple rose by 78% to 15.1 times, between the end of Q1 and Q4 2009 and by 22% in the final quarter alone, according to our Private Company Price Index (PCPI). The 78% rise saw the multiple rise to its highest level since Q1 2007, the peak of the M&A boom in terms of transaction pricing.
PCPI, which tracks price/earnings (p/e) multiples paid by trade buyers for private companies rose to 11.9 times, its highest level since Q1 2008, and an 18% increase over the last three quarters. This is broadly consistent with the Private Equity Price Index (PEPI), which shows comparable multiples on sales to private equity. The PEPI was 12.0 times at Q4 2009.
It should however be noted that the number of transactions completed declined for the eighth successive quarter to 445 acquisitions – a 20% fall on both Q3 2009 and the same period in 2008.
We’ve seen a pretty dramatic recovery in public market multiples, particularly during the second half of 2009, as well as a mini-recovery in private company valuations. This recovery is due to rising public company valuations giving buyers greater confidence to pay higher prices; a lack of supply of quality assets; and a pent up supply of private equity capital. At the same time, although availability of credit has improved during 2009, it is still only available for the very best assets, and even then, at significantly higher margins.
PCPI indicates a return to normality, with the FT Non-Financial Index trading at a premium to the PCPI by around 30 per cent, reflecting greater liquidity within the public markets. At the same time, the PCPI highlights that trade buyers will be able to pay similar or even higher prices for businesses (due to their ability to extract operational synergies from acquisitions) than their private equity counterparts who are no longer able to rely on raising as high a level of bank debt to support acquisitions as was possible in the past.
During the debt-fuelled boom period, the PEPI raced ahead of the PCPI, and in 2010 we expect to see broad consistency between them as they pick up the pace of recovery. Buyers might be faced with election uncertainty, cuts to public spending and tax increases and their impact on the pace of recovery, but there are plenty of positives. Improvements in the debt markets are likely to continue, and there will be a degree of catch up following destocking during 2009. Also, stability in pricing will help marry up the expectations of buyers and sellers. Finally, many private equity houses, which in most cases have funds with predetermined investment periods, have lost 18 months of deal activity. They will be looking to invest and make up for lost time, as well as realise some of their more mature investments.
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