14 February 2011 16:32 [Source: ICIS news]
By Nigel Davis
Blackstone’s Chinh Chu heralded the best of times for private equity this month at a meeting in the
“Two to three years following the [economic cycle] trough has been the best time to do deals, so we see 2011 and 2012 being the ‘golden years’ for private equity where returns get into the mid-20-to-high-30% range,” he said.
Chu is well known for leading the Blackstone takeover of Celanese in 2004 and the cashing out three years later in what has been described as one of the most successful ever leveraged buyouts. Blackstone put $650m (€481m) of equity into the deal but walked away with six times that.
“Today the credit markets are favourable, making for a good environment for private equity. Nobody would have thought two years ago that it would recover this quickly,”
We are not quite back to where we were, so total deal values are likely to be lower than in the 2007 peak, and earnings multiples are unlikely to match the 2007 highs. Yet lending terms are easing and becoming more flexible. The fact that margins were largely sustained in the second half of 2010 is putting pressure on buyers and sellers alike.
The number of announced chemicals sector deals rose by 9% in the fourth quarter of 2010, while there was a rise of 36% for those valued at more than $50m, business advisers PwC said on 10 February.
“The general improvement in the economy, the increased profitability in the sector, and the trend to focus on growing core operations via bolt-on and complementary acquisitions have continued to drive M&A activity," the company said. “We expect this trend to continue in 2011.”
PwC said it saw a change in the pace of the deal process in the fourth quarter, “which may be an indication that companies are able to move more quickly through [due] diligence with an additional quarter of ‘post-downturn’ results and/or an increase in the level of competition in the bidding process”.
Due diligence was more difficult than normal coming out of the downturn. The cutback in business activity and costs at the start of the slump meant that more margin was being created per unit of output.
During the recovery, some producers were able to hold on to higher margins for longer than might have been expected, a fact that has made it more difficult to determine baseline earnings in valuations, PwC says.
“This faster pace will require that companies enter the bidding process well prepared and prioritise their diligence issues and requests to be able to move quickly with limited information.”
The consultancy expects more financial investor activity on the sell side as the economic environment improves, as players seek to divest the assets they were forced to hold through the downturn.
“We continue to recommend that companies analyse the portfolio of private equity investors for potential acquisition candidates. It can be assumed that all of the companies will be available for sale in the foreseeable future,” it adds.
More, smaller-sized deals appear to be on the cards as companies seek bolt-on investments and to divest the parts of the portfolio they were constrained from selling during the downturn. The big deals may just have to wait.
It is currently possible to borrow 6-6.5 times earnings before interest, tax, depreciation and amortisation (EBITDA) in a leveraged buyout, compared with seven times at the peak of chemicals M&A activity in 2007, according to
The real difference is that it might only be possible to borrow up to about $8bn, compared with the $20bn that was possible at the peak.
($1 = €0.74)
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