1Q20 M&A Trends
What a change in the insurance distribution Merger & Acquisition (“M&A”) space in only a few weeks. 1Q20 began as a hot first quarter but quickly cooled. In the first quarter, there were 134 total announced transactions in the market. Entering 2020, buyers were well capitalized and hungry to complete deals. Until Mid-March, transaction activity continued unabated. However, since that time, we have seen deals slated to close either 4/1 or 5/1 begin to get pushed out 30-90 days, largely due to logistics of confirmatory financial and legal due diligence.
Prior to mid-March, competition among buyers drove further increases in average valuations over the last twelve months. (Please note: Deal value statistics are calculated on a rolling twelve-month basis; the data set described in this article includes deals from 4/1/19-3/31/20.) As of the Last Twelve Months (“LTM”) Q1 2020, the Average Purchase Price grew to 11.99x Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA“), from an average of 11.76x during 2019, representing a modest, but not insignificant increase of 2% in total purchase price. Given the recent slowdown in deal activity, and a stock market reset due to COVID-19, it is possible that we have seen a peak of valuations at nearly 16x EBITDA for top platform transactions.
Digging deeper, we saw platform deals once again continuing to show the greatest growth in values. Buyers have been seeking agencies with scale, niche expertise, and the capability to produce sustainable, consistent growth.
It is clearly too early to estimate the impact that the global COVID-19 pandemic will have on deal multiples. Sellers with significant exposure to the hardest hit industries (entertainment, hospitality, retail, restaurants, etc.) will likely see reduction in values or loss of interest from buyers. We have explored buyers’ appetites and capabilities to complete transactions in previous blog posts, but with the economic situation changing rapidly, it remains difficult to predict where agency values are going to settle over the next several months.
To be clear, MarshBerry believes that the insurance distribution industry has strong fundamentals that make it an attractive investment with a relatively low risk profile. As a result, we expect continued interest from private equity groups, public brokers, as well as privately held national and regional brokers. An ample supply of selling brokers should continue due to brokers struggling with internal perpetuation and as operating shareholders continue to age on average. There is a possibility that we may see fewer opportunistic sales as sellers wait on the sidelines to see if multiples remain high. However, there continues to be some looming concerns about a potential capital gains increase if there is a change in White House leadership come November. This dynamic may push more supply into the market later this year as potential sellers evaluate their net after-tax proceeds in a potentially rising capital gains tax environment. We also expect that buyers may be more selective in pricing for top tier companies vs. average performers. Ultimately, we are still in a wait and see environment. Things continue to change daily related to the pandemic and the downstream impact to industry will also continue to evolve.
Stay tuned to future posts for updates on our daily perspective on new market dynamics.
If you have questions about Today’s ViewPoint or would like to learn more about potential risks to your business, please email or call Phil Trem, President – Financial Advisory at 440.392.6547.
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1Data as of March 31, 2020
Source: MarshBerry proprietary database. Data compiled from transactions in which we were directly involved, those from which we have detailed information, and transactions in the public record. Numbers may not add due to rounding. Past performance is not necessarily indicative of future results. Individual results may vary.
Multiples calculated based on deals closed for each time period noted.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
Base Purchase Price: The amount of proceeds paid at closing, including any escrow amounts for indemnification items, (i.e., Paid at Close) plus amounts that the buyer may initially hold back, but which are paid as long as the seller’s performance does not materially decline, or which may be paid at closing but are subject to a potential adjustment (i.e., Live Out).
Realistic Earn Out: The amount of proceeds realistically anticipated to be achieved in the future based on a number of factors including seller historical and expected performance, buyer and seller realistic discussion of earn out metrics, etc.
Maximum Earn Out: The additional earn out above the realistic level, that if achieved, would generate the maximum possible earn out payment.
Platform: High level transaction for a buyer, typically due to a new geography niche, expertise, size, talent, etc.