08 April 2011

Buy & Build Increases by a Third

Buy and build activity across Europe increased by a third during 2010, according to an annual study released today (date) by Silverfleet Capital, a European private equity firm that specialises in this field.

Silverfleet Capital’s European Buy and Build Monitor, published in conjunction with mergermarket, found that during 2010 the volume of add-ons or builds increased by 33% from 230 to 305, and on average each build transaction was also larger. For deals where a transaction value was available the value increased by 7% from £14.3 million to £15.3 million, albeit that this increase was slightly flattered by the depreciation of sterling.

Add-on activity during the fourth quarter of 2010 remained strong and highly correlated to the wider volume of European mid-market M&A (as illustrated in the graph below). Commenting Neil MacDougall, managing partner of Silverfleet Capital said: “As the trends in the M&A market and debt market appear favourable for buy and build, and with many sponsors still needing to exit their older investments, it is likely that buy and build activity levels will continue to rise in 2011”.

An analysis of the level of buy and build activity by the vintage of the platform company showed that all comparable vintages of platform companies were more active in 2010 than they had been in 2009. Due to exits there is generally a reduction in the level of buy and build activity of a vintage of platform company as they mature. Silverfleet Capital’s analysis therefore compares similarly aged vintages to try and remove this bias.

It is noticeable that compared to the high water mark of 2007, activity levels in 2010 remained subdued, although activity has clearly risen across all platform vintages compared to the low point of 2009.

MacDougall continues: “We were surprised to see the pick-up in older vintages. One particularly interesting feature that emerges is that a number of these platform companies completed add-ons shortly before exit; presumably to enhance the equity story. As several of these platform companies have since been sold, the new owners must have been able to get comfortable with the risk that they were taking, as there would have been very limited evidence that these acquisitions had been successfully integrated prior to sale. In other cases, some of these older vintage platforms recently gained a new minority private equity shareholder in lieu of an exit, which seems to have given them a new lease of life when it comes to buy & build activity.“

Experience of a Silverfleet Capital Portfolio Company

In December 2010 Silverfleet Capital’s portfolio company, Kalle, a world leading manufacturer of sausage casings, completed a significant bolt-on or build transaction, with the acquisition of California based Jif-Pak Manufacturing Inc. Kalle’s experience illustrates how the financing of such add-on or build transactions became noticeably easier in 2010 compared to 2009, when the original investment in Kalle was made.

The purchase of Jif-Pak was financed using a combination of cash that Kalle had generated since its buyout by Silverfleet Capital together with a $39 million ‘C’ tranche of senior debt.

No additional equity was required. Only 18 months earlier it had proved impossible for Kalle to obtain debt financing in Europe in US dollars despite the company’s need to put in place a natural hedge against its US dollar earnings. The greater flexibility shown by the lenders, as well as the choice of currency and structure of the additional loan is indicative of the currently more favourable conditions in the debt market. Kalle’s pro-forma leverage after the Jif-Pak acquisition remains below three times historic EBITDA, which no doubt also helped.

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