What About Valuations?

We would concur that buyers are still seeking to buy. However, the emerging challenge seems to be around valuation. The gap has widened; buyers reflecting the macroeconomic picture (rising interest rates, geopolitical tensions, and pressure on debt and equity markets) think prices have permanently reset. Many vendors on the other hand remain stuck on last year’s valuations.

Deals in the listed area are reflecting this with several deals being done at between 7% and 32% down on the historical 52 week high. The private market (Enterprise value range $5-150M) where Oasis is extremely active, is presenting a different picture. Buyers remain not only active but sensible on valuations provided the asset is strategically matched. The often-forgotten point by vendors and (sometimes buyers) is that businesses that match a strict criterion and are properly presented are in short supply! The clock is ticking for buyers not just sellers. They have growth to secure, strategic objectives to meet and problems to solve, and we are not seeing the headline price as the challenge. When a genuine buyer finds what he wants and the vendor is also a willing seller, the buyer is not normally going to lose it because of a valuation gap.

Creativity Is Going to Be the Name Of The Game

We are not seeing deals fall over because of price perse. What we are seeing is a lack of creativity by vendors in looking at how a deal can be structured to secure their price. Cash deals have historically run at 50% for Oasis in Australia, that’s probably going to drop while uncertainty remains.

We have seen some fantastic outcomes; where vendors, recognising the strategic benefits of a merger (with either a larger trade player, or the capital backing of a Private Equity firm) structure the deal. Securing an initial de-risk, then going on a journey of 1-3 years with the buyer, to scale and take what can often be a much bigger second trench having had the benefit of the synergy (costs and/or marketing).

These deals take imagination and discipline to execute equitably to ensure adequate safeguards for vendors, but if done well, they can be fantastic and will often massively enhance the returns for the shareholders. We recently saw an enterprise value rise from c$10.0M to $33.0M in 2 years. We have also seen in two recent deals, resulting from the listed buyers share price improvement, enterprise values double in less than 12 months.

More Time Needed

Certainly, it pays to go early when considering succession and an exit. You need time for a structured deal to play out and your involvement will likely be required for an extended period past completion. We never like receiving calls from vendors who are “over-it” and “fed up” and want-out by a week next Wednesday! A quick deal is rarely a good deal for a vendor. Some planning can help especially if price is important.

Typically, our three lawyers quoted in the AFR cannot agree on the outlook, we probably agree most with Alexander who said, “I think we are going to see some pretty good deal flow in the second half, particularly in the last quarter.”

It’s probably a bit early to be talking about 2023 however we do know that the boomers continue to get older (including myself) and that many will have to look seriously at securing an exit. Where those businesses are properly matched with the right buyers and combined with some creativity (notwithstanding something catastrophic) deals will continue to get done irrespective of what’s happening macro economically.

Good Luck and Stay safe

References 

1. Top lawyers reveal the big question hanging over deals, James Thomson, AFR, 26 August 2022 https://www.afr.com/chanticleer/top-m-and-a-lawyers-reveal-the-big-question-hanging-over-deals-20220826-p5bcxo