On purchase, the value of SMEs now exceeds 10.1 times EBITDA, a level never reached even on the eve of the financial crisis, according to the Argos index.
Brexit, trade war, “yellow vests” … These threats do not calm the appetite of funds and manufacturers. At the end of 2018, they disbursed an average of 10.1 times the gross operating income (EBITDA) of SMEs targeted in the Euro zone. A level never crossed, even during the financial bubble on the eve of the 2007 crisis, according to the Argos index. This is a major trend: since the end of 2016, records have been constantly broken.
Large gap with listed companies
This outbreak is driven by large groups very rich in cash and ready to capitalize on their industrial synergies. In one year, the price they put on the table to get their hands on SMEs surpassed the high of late 2017 and 2006, at some 10.7 times EBITDA. Investment funds are also crumbling under investment capital and are barely less reasonable (9.8 times).
Compared to multiples of mid-sized companies listed on the stock exchange, the difference is striking: they fell last year from 11% to 8 times EBITDA.
“This growth is fueled by low rates and debt facilities and we can see in particular a high volatility in the prices offered by manufacturers”, underlines Louis Godron, partner of Argos.
Stop in the event of a hard Brexit
“One can wonder, at these multiple levels, about the remuneration of the political risks currently incurred”, he said. If a worst-case scenario materializes around Brexit, “A correction will be expected”, Argos warns.
French prices differ little from the general euro zone index. On the other hand, in the event of a sudden drop in values in the region, it is not excluded that a country will be an exception and continue to push prices upwards: Germany. During the financial crisis in 2009 and in the euro zone in 2012, acquisition prices were far from having collapsed there.
Rates, shock absorber
For now, however, the signals of a speculative bubble are still far away, according to Louis Godron. First because “Funds and manufacturers have a much more active approach than in 2007 in order to generate synergies and margins for post-acquisition operational improvement”. Then, long rates, much lower than in 2007 (0.5% against 4.1%), still serve as a real shock absorber.
“We do not notice either a runaway number of transactions as in the past when prices go up”, he said. The volume of mid-size deals climbed 18% half-year in 2018, but remained virtually stable between the last two quarters (+ 1%).