Business Services & Manufacturing
Market Insight
The last half of 2007 was a time of assessment for many business service and manufacturing companies. And with a potential credit crunch in the offing, a backlog of unsold corporate loans totaling nearly $400 billion, and leveraged financing on Wall Street screeching to a halt, many of these companies are evaluating their options for achieving liquidity and fueling growth.
The good news is that so far these companies have been unaffected by the turmoil in the credit markets. With favorable economic conditions, relatively low interest rates, debt providers still lending and an abundance of equity capital, borrowing remains fairly inexpensive and equity valuations havenÕt been impacted yet. Indeed, excess private capital and competitive sponsored auctions have pushed purchase price multiples to historic highs.
The numbers speak for themselves: between 2001 and 2006, EBITDA multiples rose from 6.3x to 8.7x. Leverage ratios are also sitting at record levels. Total debt ratios increased from 3.7x to 5.5x during the same five-year-period. More specifically, recent research shows that debt multiples for companies with less than $15 million of EBITDA actually increased between Q3 2006 and August 2007—moving from 4.19x to 4.63x.
Trends to Watch
- We expect a tightening of credit for business service and manufacturing companies sometime in the next 6 to 12 months and—as always—there is a clear correlation between equity valuations and the amount of available credit in a leveraged transaction.
Financing the Future
The key questions for many forward-thinking business service and manufacturing companies over the next 12 months will remain the same: how to diversify wealth without selling the whole business, and how to grow without losing control or burdening the business with too much leverage.
A thoughtful and prudent plan for 2008—at least from our vantage point Š is to be proactive in weighing all financing alternatives in an effort to take advantage of the still receptive capital markets that can help set business service and manufacturing companies on the right course for the future.
The traditional options donÕt necessarily resolve the issues and decisions now facing business service and manufacturing companies.
A full-scale majority recap, for example, may reinforce strong valuations but may also result in loss of control; a public offering may boost liquidity but may also require unacceptable transparency and corporate governance strictures.
We suggest consideration of a minority recap. Owners of business service and manufacturing companies can sell less than 50 percent of their shares at solid valuations and still retain control; they can receive cash for their shares; they can use debt, as well as equity, to enhance returns; they can keep equity for a second exit; and they can pursue an aggressive and ongoing business plan designed to stimulate growth
Current conditions in the credit markets do not require immediate action, as we believe that a window of financing opportunity will stay open in early-to-mid 2008.