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Middle Market M&A Outlook

Posted by on in Mergers & Acquisitions
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The economic recovery has breathed some life back into the M&A markets, which is expected to continue into 2011 and beyond. The majority of middle-market business executives (69%) expect increasing M&A activity in the next 12-18 months, driven largely by economic recovery, improved capital markets and building cash levels. Cash rich strategic buyers, private equity groups (PEGs) and consolidating markets will combine to create powerful forces behind recovering deal flow in the coming years, as will continued opportunities related to distressed industries. 

The M&A market crashed in 2008/9 with deal flow down more than 50% from 2007. As the economy tanked and bank debt dried up companies moved into survival mode and private equity investment almost completely dropped out. Much of the deal flow during this period reflected distressed opportunities experiencing poor cash flow, troubled banking relationships and depressed values.

While the market for large deals (>$1Bn) has been slower to recover, the middle market seems to be recovering well with deal flow up 50% in the last half of 2010. According to recent studies, middle-market M&A activity is expected to increase 36% in 2011 over 2010 to levels not seen since the 2006/7 peak.

The key drivers of this recovery in M&A transactions include:

  • Pent up sell-side opportunities as market conditions have improved
  • Building cash balances on buy-side with increasing pressure to put it to use
  • Improving credit and economic conditions with continued low interest rates
  • Pressure to grow despite economic conditions
  • Desire to streamline and align corporate portfolios
  • Modest valuations compared to peaks

Buy-side capital is certainly building. U.S. corporate cash balances exceed $2 trillion, up 57% over 2006 levels; private equity groups have aggregated $500 billion in cash; and the top 10 food companies alone have amassed more than $10 billion in cash. Given the low rate of return on cash, pressure to deploy these funds to capture higher returns is building.

In the middle market the M&A activity is driven by liquidity--owners’ desire for it and buyers’ access to it. The primary reason mid-market owners seek liquidity events is retirement. With the aging boomer demographics, the outlook for middle-market deal flow is expected to remain strong in the coming years.

Food- and ag-related M&A is exhibiting similar trends. According to Ascendant’s merger and acquisition database, food and ag deals were up 22% in 2010 over 2009.

The drivers of increasing deal flow in the food- and ag-related sectors reflect a bullish outlook for the industry along with building buyer interest and capacity.  These drivers include:


  • Strong Demand Outlook - continued population growth; improved eating habits in emerging markets, seeking proportionally more protein in their diets; expanding industrial use for transportation fuels and other bio-industrial uses


  • Constrained Supply Conditions - productive agricultural land and resources are limited


  • Building Cash Balances and Improving Credit Markets

  • Strategic Buyers Seeking Growth and Strategic Alignment - geographic expansion; scale; new product/market presence; platforms (health and wellness, organic, energy drinks, dried fruit and nuts); emerging markets; strategic realignment (buy strategic/divest nonstrategic)


In the renewable energy space, our activities have been primarily limited to ethanol. There have been more than 40 ethanol plant transactions in the past five years. Initially, this activity was driven by distressed opportunities as margins compressed and levered companies ran out of cash, tripped bank covenants and struggled to raise additional capital. As of late there seems to be more strategic interest reflecting a desire to expand to improve scale economics and diversify risk or to vertically integrate to increase control and reduce risk. The development of new projects has all but stopped, reflecting market, credit and policy conditions. In 2011, Ascendant successfully sold three plants, helped successfully restructure a distressed plant, and conducted numerous business valuations for others in the industry.

From a broader renewable energy standpoint, much of the rest of the market is either stagnant or still in an R&D/project development phase (biomass, cellulosic ethanol, renewable diesel, algae). Until there is greater certainty around public policies and incentives going forward and/or the emerging technologies are proven commercially, we do not believe there is much M&A potential in those sectors, at least at this time.

One area in the energy sector experiencing increasing M&A activity is the power and gas market. With ever-increasing regulatory and compliance costs and shifting economics away from coal, there seems to be increasing interest and activity in realigning energy production assets and scale.

In conclusion, we are confident that transaction interest and activity in agribusiness, food processing and renewable energy will continue to attract interest and attention in the coming years. The primary threats to continued growth in this area include a significant worsening of economic conditions, a pullback by the lending community and/or further deterioration or increased uncertainty around U.S. policy outlook (e.g., energy, tax, agriculture, federal debt, etc.).




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Guest Tuesday, 23 January 2018