Private businesses in WA are selling again after last year’s slump, but the valuations are short of the boom time levels.
TASMAN Oil Tools, KT Pipeline Services, and Kingston Bridge Engineering are three Perth businesses with a lot in common, but there is also a big difference.
Operating from the locations of Bassendean, Midvale and Welshpool, they have focused on servicing the energy and resources sectors.
Unknown to the wider community, they grew quietly over many years to a point where they were highly attractive to listed companies.
In fact the founders of all three have sold their businesses, reaping the rewards for many years of hard work.
However, the size of those rewards depended in large part on timing.
Kingston Bridge founders Joe Horvat and Belmiro DaSilva George enjoyed exquisite timing.
They sold their business to ASX-listed Crane Group in June 2007 near the peak of the last resources boom; as a result they got a high price ($97 million), were paid fully in cash, and at a price that was equivalent to 7.5 times annual profit.
Those terms are rarely seen in private business sales, and judging by transactions this year, show no sign of reappearing.
Tasman Oil Tools has been sold to UK company Northbridge Industrial Services for up to $16.9 million, according to documents lodged by Northbridge with the London Stock Exchange.
The purchase price equated to a multiple of 4.5 times ‘normalised’ earnings before interest and tax (EBIT).
KT Pipeline Services has been sold to ASX-listed company Monadelphous for up to $30 million, which equates to three times ‘average annualised’ EBIT.
Business advisers accept that selling prices have come off their peaks.
“The very highs have disappeared but the historic norms still survive, and these range in many instances between three times EBIT and five times EBIT,” Mergers & Acquisitions managing director Ross Goldstein said.
Goodwin Mitchell O’Hehir managing director Graham O’Hehir agrees.
“In my observations, it appears that EBIT multiples are about 20 to 25 per cent lower than in the boom,” Mr O’Hehir said.
The most notable trend for M&A director Jeff Roberts is that transactions are actually happening again.
“Last year we only completed one transaction but this year we have done Whelans and KT Pipelines; we just had an offer accepted on another this week and we are working on several others that we feel confident will sell before Christmas,” Mr Roberts said.
In the current market, very few all-cash transactions have been completed.
The exception was Austin Engineering’s recent $13 million purchase of Mandurah-based Pilbara Hire.
That price equated to 3.3 times Pilbara Hire’s expected 2009-10 EBIT.
In addition, the vendors will be eligible for a further undisclosed earn-out payment if they achieve a pre-determined EBIT target for the 2010-11 year.
The Tasman transaction involved mainly cash payments and a small scrip component.
The owners of the business, advised by WHK Horwath Corporate Finance, have been paid $12.3 million in cash and issued $1.6 million in Northbridge shares up-front.
They will qualify for a further $1 million cash payment in December 2010 and a final $2 million cash payment in September 2011, subject to there being no net asset adjustment or breach of warranty.
KT Pipeline’s vendors will end up with an even bigger stake in their purchaser, Monadelphous, but can take comfort from the historically very strong performance of that company’s stock.
The vendors have been paid $10 million in cash and issued 422,627 Monadelphous shares (with a stated value of $6.5 million).
They can earn up to another $13.5 million (split one-third cash and two-thirds scrip) subject to achieving certain financial targets up to December 2011.
The vendors of Mt Hawthorn-based surveying and mapping business Whelans have discovered the risks that go with taking part-payment in scrip.
Loss-making engineering company Emerson Stewart has bought the business for a total of $9 million.
Based on Whelans’ published 2008-09 accounts, this equated to a multiple of 5.3 times EBIT.
However, Emerson managing director Dario Amara said the purchase price was based on historical EBIT over four years, and equated to a multiple of 3.75 times.
Whelans’ owners were paid $5.3 million in cash and $3.7 million in shares, with the latter priced at 12 cents per share.
Unfortunately for them, the lightly traded stock has halved in value and is now trading at 6 cents per share, so the original deal is not looking so attractive.
Business in Perth isn’t just about mining and engineering.
The founders of Baby on a Budget struck a deal this year to sell their retail business to listed company Headline Group for $2 million, split 50:50 between cash and scrip.
Headline will also assume $1.1 million in bank debt.
The vendors can potentially earn a further $1 million (split 50:50) subject to meeting certain performance criteria.
Mr O’Hehir said the sector getting the best prices was large independent supermarkets, which are selling at 4.5 to 5.5 times EBITDA.
Mining services companies and small wholesalers are also in demand, selling at three to four times EBITDA.
