2015 M&A CONFERENCE Market Update: Current Deal Activity, Valuations and Outlook Moderator: Mike...

2 0 1 5 M & A C O N F E R E N C E

2 0 1 5 M & A C O N F E R E N C E

Market Update: Current Deal Activity, Valuations and OutlookModerator: Mike Abbott, Partner, Faegre Baker DanielsMike Clausman, Hormel Foods CorporationAdam Claypool, Bridgepoint Merchant BankScott Hebbeler, Lincoln InternationalMelanie Wadsworth, Faegre Baker Daniels

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Conference Information

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2 0 1 5 M & A C O N F E R E N C E

Middle-Market M&A Overview

Average EV/EBITDA in U.S. Middle-Market Transactions

Market multiples now exceed peak levels while M&A volume continues to build

Middle-Market M&A Transaction Count

Source: Factset MergerstatNote: Reflects deals up to $500mm with disclosed values

Source: Factset MergerstatNote: Reflects deals up to $500mm with disclosed values

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

LTM

Ma

...

0

500

1,000

1,500

2,000

2,500

1,797

2,0472,107

1,845

1,279

873

1,4151,625

1,4881,494

1,7681,804

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

9.4x 9.5x9.9x

7.9x9.0x 8.9x

10.0x 9.6x10.2x

9.7x 10.1x 9.9x 10.2x


2 0 1 5 M & A C O N F E R E N C E Email Questions to [email protected]

Middle-Market M&A Valuations

Source: GF Data, M&A Report May 2015*Note: middle market is $10 -$250mm

► The chart illustrates valuation multiples of private equity-sponsored, middle-market* M&A transactions by transaction size since 2011.► Transaction multiples are at their highest levels since 2011, with the $100-250mm transaction size range leading the way at 8.3x.

2011 2012 2013 2014 1Q 20155.0x

5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

5.3x

5.7x5.9x

5.4x

5.9x

6.0x6.1x

6.9x

6.3x

7.7x

7.2x

6.8x6.7x

7.5x

7.9x

7.5x7.4x

7.1x

7.6x

8.3x

Valuation Multiples by Transaction Size

$10-25mm $25-50mm $50-100mm $100-250mm

TEV/

EBIT

DA

4


Middle-Market M&A Valuations by Industry

2011 2012 2013 2014/1Q 20154.0x5.0x6.0x7.0x8.0x9.0x

10.0x11.0x12.0x

Manufacturing

$10-25mm $25-50mm$50-100mm $100-250mm

TEV/

EBIT

DA

2011 2012 2013 2014/1Q 20154.0x5.0x6.0x7.0x8.0x9.0x

10.0x11.0x12.0x

Business Services

$10-25mm $25-50mm$50-100mm $100-250mm

TEV/

EBIT

DA

2011 2012 2013 2014/1Q 2015 4.0

6.0

8.0

10.0

12.0

Healthcare Services

$10-25mm $25-50mm$50-100mm $100-250mm

TEV/

EBIT

DA

2011 2012 2013 2014/1Q 2015 4.0

6.0

8.0

10.0

12.0

Distribution

$10-25mm $25-50mm$50-100mm $100-250mm

TEV/

EBIT

DA

► The charts below illustrate valuation multiples of private equity-sponsored, middle-market* M&A transactions by industry and transaction size since 2011.

Source: GF Data, M&A Report May 2015*Note: middle market is $10 -$250mm

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2 0 1 5 M & A C O N F E R E N C E

M&A Drivers

Corporate Cash On Hand Private Equity Buyout Fundraising / Investing

Source: PitchbookSource: Federal Reserve, represents the S&P 500 companies

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

$0

$100

$200

$300

$400

$500

$600

$117

$192

$293 $269

$128$91 $114 $129

$220$189

$535

PE Capital Raised Cumulative Dry Powder

$0

$500

$1,000

$1,500

$2,000

$2,500 $2,100

($ in billions) ($ in billions)



M&A Drivers

Source: Pitch Book & Renaissance Capital*YTD 2015

Private Equity U.S. Fundraising by Quarter

Private Equity U.S. Investments-to-Exits Ratio

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q2011 2012 2013 2014 2015

$0

$25

$50

$75

$100

0102030405060708090

$34

$32

$25

$21

$33

$37

$26

$32

$36

$78

$31 $78

$43

$52

$41

$61

$38

Capital Raised ($B) # of Funds Closed

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*0

500

1,000

1,500

2,000

2,500

0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x

3.2x

3.1x

3.6x

3.7x

2.6x

2.3x

1.9x

2.1x

1.9x

1.6x

Investments/Exits # of Investments (excl. add-ons) # of Exits

► Private equity capital raised has increased from a total of $112B in 2011 to $223B and $197B in 2013 and 2014, respectively.

7


Midwest M&A transaction volume in Q2-15 rebounded nearly 20% from Q1-15

Midwest M&A transaction volume has been very stable 7 of the last 10 quarters

Midwest activity doesn’t necessarily track national activity over the same time period represented by this chart

Bridgepoint Midwest M&A Quarterly Update, Q2-15

Q1-

11

Q2-

11

Q3-

11

Q4-

11

Q1-

12

Q2-

12

Q3-

12

Q4-

12

Q1-

13

Q2-

13

Q3-

13

Q4-

13

Q1-

14

Q2-

14

Q3-

14

Q4-

14

Q1-

15

Q2-

15

0

50

100

150

200

250

300

350

400

262

288271

281293

274

303

369

329

269

328318 312 307

284

309

261

312

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

Quarterly Midwest M&A Transaction Volume

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2 0 1 5 M & A C O N F E R E N C E

Midwest M&A deal size grew to $19.0mm in Q2-15, up from $16.5mm in Q1-15

After recording one of the lowest median deal size in Q1-15, Q2-15 saw Midwest deal sizes increased to above average level of the past 4 years

Q1-

11Q

2-11

Q3-

11Q

4-11

Q1-

12Q

2-12

Q3-

12Q

4-12

Q1-

13Q

2-13

Q3-

13Q

4-13

Q1-

14Q

2-14

Q3-

14Q

4-14

Q1-

15Q

2-15

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$11.5

$13.0

$10.0

$20.5

$12.0

$14.9

$17.6

$29.8

$9.7

$13.8

$17.5

$31.4

$22.7

$22.9

$15.3

$20.6

$16.5

$19.0

Me

dia

n T

EV

($

mm

)


Quarterly Midwest M&A Median Deal Size



2 0 1 5 M & A C O N F E R E N C E

Median Valuation (TEV/EBITDA) in Q2-15 was significantly higher than both the prior sequential quarter and the year-earlier quarter

Q2-15 multiples are at historically strong levels, the highest since Q2-13

Corporates and sponsors have shown a willingness to pay a premium to close deals


Q1-

11Q

2-11

Q3-

11Q

4-11

Q1-

12Q

2-12

Q3-

12Q

4-12

Q1-

13Q

2-13

Q3-

13Q

4-13

Q1-

14Q

2-14

Q3-

14Q

4-14

Q1-

15Q

2-15

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

7.6x

10.8x10.1x

8.5x

5.4x

8.5x

9.7x10.4x

13.6x

14.6x

10.8x

7.0x

9.1x8.5x

11.3x

8.4x8.0x

12.4x

Quarterly Midwest M&A Median Valuations (TEV/EBITDA)



2 0 1 5 M & A C O N F E R E N C E

Quarterly M&A transactions with Midwest buyers increased from 145 in Q1-15 to 166 in Q2-15

The number of transactions with Midwest targets increased as well with 135 announced or closed transactions in Q2-15 vs. 97 in Q1-15. The figures reiterate the strong buyer appetite for Midwest companies


Q1-

11

Q2-

11

Q3-

11

Q4-

11

Q1-

12

Q2-

12

Q3-

12

Q4-

12

Q1-

13

Q2-

13

Q3-

13

Q4-

13

Q1-

14

Q2-

14

Q3-

14

Q4-

14

Q1-

15

Q2-

15

50

70

90

110

130

150

170

190

210

230

Midwest Buyers Midwest Targets

Quarterly Midwest M&A Buyers & Sellers



2 0 1 5 M & A C O N F E R E N C E

Core industries (including Industrials, Materials and Consumer) accounted for 39% of total Midwest M&A transaction volume in Q2-14, a slight 1% decrease from Q1-14

The Consumer sector rebounded with the biggest increase in Q2-14, up 3% from Q1-14. The Material and Industrial sectors saw the biggest decreases in Q2-14, down 2% from Q1-14


Financials28%

Consumer24%

Industrials16%

Healthcare9%

Info Tech9%

Energy7%

Materials4%

Telecomm / Utilities4%

Q2-15 Midwest M&A Transaction Volume by Sector



2 0 1 5 M & A C O N F E R E N C E

Borrowers with less than $15mm EBITDA Borrowers with at least $15mm EBITDA

Pricing Multiples Pricing Multiples

Asset Based Senior L + 175 – 275

LIBOR Floor: none N/A

L + 150 – 250

LIBOR Floor: none N/A

Cash Flow Senior L + 475 – 575

LIBOR Floor: 100 2.75x – 3.25x EBITDA

L + 425 – 525


Senior Stretch Unlikely N/A L + 500 – 600


Unitranche L + 750 – 850


L + 700 – 800


2nd Lien Loans Unlikely 4.00x – 5.00x EBITDA L + 850 – 1000


Sub Debt

Cash of 11.0% – 13.0%

PIK of 1.0% – 2.0%

All-in of 12.0% – 14.0%

4.00x – 5.00x EBITDA

Cash of 10.0% – 11.0%

PIK of 1.0% – 2.0%

All-in of 11.0% – 13.0%

4.00x – 6.00x EBITDA

Equity N/A Approximately 35% N/A Approximately 30% – 35%

Overview of U.S. Middle Market Debt Pricing and Terms

As regularly published in:

Lincoln’s View on Pricing and Terms



Current Trends in Senior Debt Structure

Pre 2008 2008 - 2009 2015

Hold Levels $50 million $25 million max $50 million +

Stretch Pieces Aggressive Nonexistent Yes

Term Loan Amortization Little or none Nearly a prerequisite Little or back-end loaded

Covenants Limited to 1 or 2 and loose Full package, much tighter 1 to 2 covenants; looser

Advance Rates Aggressive (ABL-Lite) Conservative (ABL-Heavy) Aggressive (ABL-Lite)

Rate Floors Rare Standard Rare

Rate Protection Language Minimal Robust and complex Robust and complex

Prepayment Penalties Rare Standard Rare

Bank Commitment Fully underwritten Best efforts Best efforts

Market Flex Language Limited, if any Required Required

Bank Group Syndications Relationship driven "Club Deals" Syndications

14

2 0 1 5 M & A C O N F E R E N C E

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

Favorable Debt Financing Environment

Middle-Market M&A Loan Volume

Source: Standard & Poor’s Leveraged Commentary and Data

Middle-Market Leverage Multiples

2009: $1.42010: $4.42011: $6.32012: $5.62013: $4.82014: $9.5

Competition among lenders have driven the strongest lending markets since 2007

($ in billions)

2007 2008 2009 2010 2011 2012 2013 2014 Q1'150.0x

2.0x

4.0x

6.0x

4.1x3.3x

2.5x3.2x 3.6x 3.5x 4.0x 4.3x 4.4x

5.6x

4.5x

3.3x

4.2x 4.3x 4.5x4.8x

5.3x4.9x

Sr. Debt Other


2 0 1 5 M & A C O N F E R E N C E


Since 1949, the average length of bull markets has been 42.5 months

The current bull market has lasted 47 months to date

Historically, bull markets end due to:

High equity valuations

Tight monetary policy

Unforeseen geopolitical events

Historical S&P 500 Index Relative to Federal Funds RateBull vs. Bear Markets


2 0 1 5 M & A C O N F E R E N C E

Historical S&P 500 Index Relative to M&A TransactionsPresidential Election Years


Since the 1968 election, 6 out of 12 election years were followed by a bear market within one year

Average M&A transactions during Republican terms are 20,346

Average M&A transactions during Democratic terms are 8,553



Predictions for 2015-2016

18

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