How cheaper are companies being sold nowadays? After a long period of almost flat purchase price multiples, these are now falling significantly. The average purchase price multiple in Q3 2008 fell to 8.7x EBITDA, well below 10.5x EBITDA the quarter before. Psychological resistance for vendors to accept the new market conditions clearly changed and need to further change.
Average LBO debt multiples (if any …) declined markedly as compared to previous quarters, in line with the fall in purchase price multiples. The decrease in debt multiples is partly explained by more post crunch deals launched to the market this quarter, thus lowering the debt multiples. In Q3 the average total debt to EBITDA multiple had dropped to 4.5x, well below 5.5x for Q2.
What is interesting is that while debt multiples are now closely in line with 2004 levels, purchase price multiples have only decreased to 2006 levels. This discrepancy is due to the larger equity cheques now being written by sponsors.
Indeed, equity contributions at 3Q2008 ended the quarter at 43% (as compared to c. 34% a year ago). For the first time since S&P started tracking the leveraged loan market, private equity sponsors are contributing more cash to buyouts than senior lenders. In an average buyout launched in 2008, average equity contribution is c44% (2007: 34%) while first lien bank debt contributed 41.6% (2007: 49%).
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