OREANDA-NEWS. Fitch Ratings says in a new report that enterprise value (EV) market multiples (EV/EBITDA) of European leveraged finance corporates stabilised at post-crisis highs of around 9x in 1H16, in line with their 2007 levels. EV multiples in M&A and LBO transactions remained around 9x in 1H16 as well, after reaching 10x in 2015.

After the equity market correction in the summer of 2015, prolonged global fiscal and monetary stimulus as well as the extension of quantitative easing by the ECB in early 2016 have supported valuations, despite lacklustre economic growth prevailing in Europe and recurring financial market volatility.

Weak top-line revenue performance since the 2009 financial crisis has led corporate managers to defend high share price performance metrics by focusing on acquiring revenue, extracting synergies through consolidation, while taking advantage of low borrowing costs. Unlike in the 2006-2007 period of credit-driven LBOs, trade buyers have dominated M&A activity in the post-crisis period.

Since 2013, financial sponsors have remained net sellers of corporate assets. In the low growth, ample credit environment of recent years they are less competitive in vendor auctions. Their return requirements and relative lack of scope for cost and merger synergies put them at a disadvantage. The recent acquisition of Spain-based hospitals chain Quironsalud by German healthcare group Fresenius SE & Co KGaA (BBB-/Stable) from private equity sponsor CVC Capital Partners for a multiple close to 11x EBITDA is a recent example of the trend toward trade buyer advantages in M&A.

Notwithstanding the current sellers' market for financial sponsors, they are compelled to reinvest and have taken a page from IPO and trade buyers by focusing on growth and buy-and-build approaches when paying premium multiples for new assets. Specifically, Fitch observes a marked shift towards sourcing tactics around smaller targets in niche, growth-oriented fintech, medtech and IT services sectors. These transactions include higher equity contributions than the 2006 and 2007 vintage deals often because they complement existing portfolio companies or they are viewed as disruptors in their industry with solid growth trajectories.

Valuations vary greatly by sector. Sharp rises in the food, beverage and tobacco sector (to 16.0x in 1H16 from 9.8x in 2015) and natural resources (9.5x against 5.2x) have been offset by significantly lower multiples in the chemicals sector (5.3x against 12.4x), diversified manufacturing (6.8x against 10.4x) and technology (7.3x against 15.2x).

The full report, "European Leveraged Finance Multiple EV-aluator", is available at fitchratings. com or by clicking on the link above. The report provides an updated analysis of European transaction multiples by sector, using data collected over the last decade to June 2016. It provides an overview of sector valuation statistics, changes in distressed multiples, and summaries of individual transactions on a sector-specific basis.