Expect Activity to Accelerate in 2018


Expect Activity to Accelerate in 2018

Heading into 2018, the state of the mergers and acquisitions market looks strong. U.S. target middle market announced deal volume climbed 19.6% to 9,630 YTD 3Q17. Value grew 15.4% to $183.0 billion during the same period. And, purchase price multiples hit 7.5x EBITDA in 3Q17, raising the last twelve month average to 7.0x.

Debt and equity capital continue to be plentiful. M&A leveraged loan volume amounted to $249 billion through 3Q17, up 12% year over year. Dry powder available to private equity groups and cash held by corporations remain at or near record levels.

Overall, the economic variables that drive M&A continue to be sustaining.

  • The Conference Board Leading Economic Index® (LEI) for the U.S. increased 1.2% in October to 130.4 (2010 = 100), following a 0.1% pickup in September, and a 0.4% increase in August. The expansion of the LEI suggests that the U.S. economy will continue to grow through 4Q17 and into 2018.
  • According to the “second” estimate by the BEA, real GDP increased at an annual rate of 3.3% in 3Q17, following a 3.1% bump in 2Q17. Positive contributions from inventory investment, nonresidential fixed investment, and exports were partly offset by negative contributions from residential fixed investment and imports.
  • Total nonfarm payroll employment increased by 261,000 in October as the unemployment rate crept down to 4.1%, the U.S. Bureau of Labor Statistics reported.
  • The Consumer Price Index for All Urban Consumers increased 0.1% in October and 2.0% during the last twelve months. The Producer Price Index for final demand advanced 0.4% in October and 2.8% during the last twelve months, the sharpest increase since a rise of 2.8% during the last twelve months ended February 2012.
  • The Conference Board Consumer Confidence Index® stood at 125.9 (1985 = 100) at the end of October, its highest level in almost 17 years. Consumers’ more buoyant assessment of present-day conditions, the job market and business conditions were thought to be the primary drivers of the boost in confidence.

Taken together, our outlook for M&A activity in 2018 is positive. Retirement, concerns about the window closing, and shifts in strategy continue to bring sellers to the table. Aside from geopolitical risks, the lack of available, high quality targets is probably the greatest threat to another robust year.

For more information or to discuss how BlueWater Partners can help you evaluate your financial and strategic alternatives, please contact us.



Deal Volume

Source: Thomson Reuters

According to Thomson Reuters, U.S. target middle market announced deal volume increased 19.6% to 9,630 from 8,049 through the first three quarters of 2017 and 2016, respectively, and pushed last twelve months (LTM) September 30, 2017 volume to 12,270. This marks a continuation of the upward trend that began at least five years ago.


Source: FactSet

Technology Services was the most active sector during the last three months (L3M) ending September 30, 2017, according to FactSet. The next four most active sectors include Commercial Services, Finance, Consumer Services and Health Services. The top four have essentially remained the same during the last year or so.

Deal Value

U.S. target middle market announced deal value rose 15.4% to $183.0 billion from $158.7 billion during the first three quarters of 2017 and 2016, respectively, according to Thomson Reuters. At the same time, average deal value dropped 3.6% to $19.0 million from $19.7 million.

Source: GF Data

Purchase price multiples, which had dipped slightly in the first quarter of 2017, surged in the second and third quarters. According to GF Data, the average multiple for transactions with $10-250 million Total Enterprise Value (TEV) catapulted to 7.5x LTM adjusted EBITDA during 3Q17, the highest mark in the 15-year history of the database. The “size premium,” which is the spread between the lower middle market ($10-25 million TEV) and upper middle market ($100-250 million TEV), averaged 2.4x during 3Q17, down somewhat from the average of 2.8x during 2014-2016. During 3Q17, lower and upper middle market companies traded at 6.9x and 9.3x, respectively.

Debt and Equity

Source: GF Data

Middle market transactions were funded with 4.6x total debt/EBITDA on average during 3Q17, up from 4.0x in 2016. This reflected an increase in senior debt combined with a decrease in subordinated debt. Senior debt in 3Q17 rose to 3.8x from 3.0x in 2016. Subordinated debt decreased slightly to 0.8x during 3Q17 from 1.0x in 2016.

According to Thomson Reuters, leveraged loan volume expanded to $1.07 trillion YTD October 2017, 53% higher compared to the previous year. More specifically, M&A leveraged loan volume increased by 12% to $249 billion. After tightening for most of last year into this year, middle market yields tightened again in 3Q17 to 5.94%.



Source: GF Data

Equity contributions, which averaged nearly 50% in 2013, continued their retrenchment to 42.3% through YTD 3Q17. This trend has been aided by steady valuations and surging debt. As interest rates rise, either buyer or seller expectations will need to adjust.

The amount of cash held by corporations remains at or near a 10-year high, and the amount of dry powder available to private equity groups reached another all-time high. According to FactSet, S&P 500 aggregate cash positions (ex-Financials) have remained at about $1.5 trillion during the past few years. Similarly, Preqin reports global callable capital reserves (“dry powder”) of buyout funds rose to $608 billion in September 2017.



Knapp Energy, Inc. (“Knapp”), a leading distributor of fuel, lubricants and propane to commercial and residential customers, has been acquired by Crystal Flash, an employee-owned energy distribution company. The acquisition enabled Crystal Flash to expand its capabilities, footprint and talent. All employees of Knapp were retained.

BlueWater Partners acted as the exclusive financial advisor and Lewis Reed & Allen acted as the legal counsel to Knapp for this transaction.