By Megan Tompkins
SAN DIEGO, CA—Peter Hurley gets a phone call once a week from someone looking to broker a merger or acquisition deal. It’s been a noticeable change in the past three months from the previous three years when investment activity came to a grinding halt.
“We didn’t get calls from anybody unless they were really looking for a lifeline,” said Hurley, chief executive officer of American Bicycle Group. “We’re just seeing the market start to pick up over the last six months. We’ve seen more M&A opportunities be presented in front of us and at the same time seen capital loosen up.”
Hurley, who joined ABG as part of a private equity investment, has not aggressively sought out acquisitions. “We’re taking the philosophy of focusing on the Quintana Roo and Litespeed brands. We, in fact, sold Merlin to make sure we were concentrating on these two,” he said, referencing ABG’s sale of Merlin to Competitive Cyclist last month.
But Hurley participated in mergers and acquisitions as a partner in a boutique investment firm for 15 years and has followed market activity.
Indeed, the time could be ripe for companies to broker deals as M&A activity bounces back from recession lows.
According to Laurence Levi, president of investment firm VO2 Partners, total U.S. market transactions between $250 million and $750 million increased by 70 percent in 2010. Middle-market transaction volume under $750 grew 46.5 percent and dollar volume grew 52 percent last year.
“The market has really roared back in the last 12 months,” said Levi, while moderating a panel at the Triathlon America conference in San Diego last month. “It was the strongest year in 10 years in terms of the number of deals. Aggregate dollar volume was also strong. It suggests 2011 could be the best year ever in aggregate deal volume and aggregate deal value.”
Levi attributed most of the recent growth to a rebound in private equity investment, which is very dependent on economic cycles. During the recession, private equity activity cratered due to lack of access to capital and problems with existing portfolio companies.
Nathan Pund, who runs the outdoor and active lifestyle group for investment bank D.A. Davidson & Co., said 2007 was the high point for outdoor and cycling brand acquisitions. “2007 was our Internet bubble. I could have dressed you up in a North Face jacket and Zipp wheels and sold you for $100 million,” said Pund.
Pund said mergers and acquisitions in the outdoor space fell off sharply in 2008. Strategic buyers who owned brands had to refocus on their own businesses. Private equity and institutional investors saw their own portfolio companies struggle and turned their focus inward.
ABG experienced some of that retraction, according to Hurley, who said that the recession put ABG in a bind after it brought on new financial partners in 2007. “Investment opportunities in that period of time were very bullish,” he said. “Unfortunately who could have foreseen the deep recession that was about to rear its head? We came in on the high end of the market and had to weather this recessional storm.”
As the recession subsides, Hurley sees more capital becoming available, which will seed investment deals. “A couple of banks who were not lending at all to anybody from late 2008 turned those loans back on in September of last year,” he said. “In our case, our own bank is allowing us more generous terms in borrowing. We see other people more interested in looking at opportunities for investment into our company as well.”
Pund agreed that people are interested in making deals again as the economy has recovered and lending is coming back. “The Jarden’s and Dorel’s of the world are being lent money at obscenely low rates. They’re saying I can go out and buy brands again,” said Pund, referencing the owners of K2 and Cycling Sports Group, respectively.
He said large companies have benefited from lending opportunities as banks perceive them as less risky. Smaller brands still may not have access to working capital they need and may be more apt to sell.
“Jarden raised $50 million in a note offering. Meanwhile I have a growing company with $20 million in sales doing exceptionally well, and the bank has withdrawn its revolver. They’ve had to go out and raise money just for working capital,” said Pund.
Limited access to cash is pushing some company owners to consider selling now that prospective buyers are active again. “Young emerging companies are just struggling to grow and are finding it tough to get the capital,” said Pund. “They can’t get financing and they’re going to sell because they’re exhausted.”
Pund sees a second type of deal now as buyers look for strong brands that are doing well and have a deep connection with consumers. Brands with that cachet can command good multiples from strategic buyers.
“People want to buy into brands that have a relationship they don’t have,” said Pund, citing the purchase last year by action sports giant Billabong of RVCA. “Billabong buys into RVCA because it commands this following,” he added.
Historically a strategic buyer would typically pay more than a financial buyer like a private equity group because of potential synergies from merging companies, said VO2 Partners’ Levi.
Generally, Levi said, a strategic buyer wants to build scale, gain geographical advantage or plug a product gap, such as when SRAM Corporation bought Zipp Speed Weaponry in September 2007. In such a case purchase value is based on brand fit.
Valuations are also based on other deals in a similar market, just as housing comps affect homes for sale on the same street. And in the last decade financial buyers got aggressive. “The market got very frothy. It ended up driving valuations up,” said Levi.
Companies generally use multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) as a standard to compare and determine purchase prices. Levi cited multiples from the acquisition heyday averaging 10 times EBITDA, with purchases as high as an estimated 18 times EBITDA for the Luxottica purchase of Oakley in June 2007.
Valuations bounced back late last year from recession lows. While multiples for sporting goods transactions aren’t available, all global transactions in the consumer sector last year saw average valuations rebound to around 7 times EBITDA, Levi said.
“In the M&A business timing is everything,” he said. “If you sell at a bad time, you’ll get a mediocre valuation. But you could go gangbusters if the timing is right.”