Middle Market M&A Review

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1st Quarter • 2017

Middle Market M&A Review SUMMARY & OUTLOOK Valuations Reach New Highs

TABLE OF CONTENTS Summary & Outlook 1 M&A Activity

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Select Engagements

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Middle market M&A extended its winning streak. U.S. target announced deal volume rose 7.7% to 10,689 during the twelve months ended December 31, 2016. Value advanced 4.6% to $217.9 billion during the same period. And, average purchase price multiples expanded to 6.9x last twelve months (LTM) adjusted EBITDA over the 2015 average of 6.7x. Leveraged loan issuance climbed in 2016, up 12% from a year earlier and the third biggest year on record. Dry powder available to private equity groups remains at record levels, as does cash held by corporations, although the latter continues to be limited to a few at the top. For the vast majority of companies, the cash-to-debt ratio is at a 10-year low. Overall, the economic variables that drive M&A continue to be supportive. • The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6% in January to 125.5 (2010 = 100), following a 0.5% increase in December, and a 0.2% increase in November. The LEI’s sharp expansion, broad-based among leading indicators, points to a positive economic outlook in the first half of this year. • According to the “advance” estimate by the BEA, real GDP increased at an annual rate of 1.9% in 4Q16. Positive contributions from personal consumption, inventory investment, residential and nonresidential fixed investment, and state and local government spending were offset by negative contributions from exports, federal government spending and imports. • Total nonfarm payroll employment increased by 227,000 in January and the unemployment rate was little changed at 4.8%, the U.S. Bureau of Labor Statistics reported. • On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.6% in January, while the Producer Price Index for final demand increased 0.6% in January. • Consumers’ assessment of current conditions decreased in January after increasing in December. The Conference Board Consumer Confidence Index® now stands at 111.8 (1985 = 100), compared to 113.3 in December. Despite the retreat in confidence, consumers remain confident that the economy will continue to expand in the coming months. Based on historical cycles and sliding leverage multiples, we may be in the late innings of the current M&A expansion. Limited organic growth options, the need to address changing business models and the abundance of capital are driving deals across home plate. At the same time, a lack of attractive targets, record valuations and geopolitical risk could cause buyers to start taking more pitches. For more information or to discuss how BlueWater Partners can help you evaluate your financial and strategic alternatives, please contact us.

BlueWater Partners Quarterly Update

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M&A ACTIVITY Deal Volume

According to Thomson Reuters, U.S. target middle market announced deal volume increased 7.7% to 10,689 from 9,924 during LTM ending December 31, 2016 and December 31, 2015, respectively.

CHART

Source: Thomson Reuters

Commercial Services was the most active sector during the last three months (L3M) ending December 31, 2016, although volume decreased 23.7% to 432 from 566, according to FactSet. The next four most active sectors, Technology Services, Finance, Consumer Services and Producer Manufacturing, also experienced declines in volume. In fact, 14 of the 21 sectors tracked by FactSet posted lower activity.

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Source: FactSet

Deal Value U. S. target middle market announced deal value rose 4.6% to $217.9 billion from $208.3 billion between the LTM ending December 31, 2016 and 2015, respectively, according to Thomson Reuters. Average deal value dropped 2.9% to $20.4 million from $21.0 million. After leveling off during 2014 and 2015, purchase price multiples resumed their upward push. According to CHART GF Data, the average multiple for transactions with $10-250 million Total Enterprise Value (TEV) swelled to 6.9x LTM Source: GF Data adjusted EBITDA during the period ending December 31, 2016. The “size premium,” which is the spread between the lower middle market ($10-25 million TEV) and upper middle market ($100-250 million TEV), averaged 3.0x, up from the average of 2.3x during 2013-2015. Lower and upper middle market companies traded at 6.0x and 9.0x, respectively.



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Debt and Equity Middle market transactions were funded with 3.9x total debt/EBITDA on average during LTM ending December 31, 2016, level with 2015. Senior debt increased to 3.1x from 3.0x in 2015. And, subordinated debt at 0.8x was down from the 0.9x average in 2015.

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Source: GF Data

Leveraged lending rebounded since March, after dropping for 10 consecutive months. Thomson Reuters reports leveraged loan issuance climbed to $875 billion in 2016, up 12% from 2015 and the third highest year on record. A 25% jump in refinancing activity was the main driver of this gain, as M&A leveraged loan volume fell by 18% to $270 billion. At the same time, middle market yields declined to 6.46% in January.

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Equity contributions reversed the fall since 2013, rising to 45.4% in YTD 2016 from 43.3% in 2015. The lower and upper middle markets were responsible for the increase, reflecting borrowing limits in the lower end and upward valuation pressure in the upper end.

The amount of cash held by corporations was at a 10-year peak at the end of 3Q16, and the amount of dry powder available to private equity groups is also at an all-time high. According to FactSet, Source: GF Data S&P 500 (ex-Financials) finished with cash and short-term investment balances amounting to $1.5 trillion at the end of 3Q16. Similarly, Preqin reports global callable capital reserves (“dry powder”) of buyout funds rose to $820 billion as of December 2016, up from $755 billion at the end of 2015. A closer look at corporate cash balances, however, reveals a disconcerting trend. For the S&P 500 (ex-Financials), the cash to debt ratio was 33.7% at the end of 3Q16, essentially even with the percentage at the end of 3Q15 but still 5.2% below the average ratio over the past 12 quarters.



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SELECT ENGAGEMENTS

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Substantially all of the business, operations and assets of General Products Corporation’s Angola, Ind. facility and the stock of its Mexican subsidiary based in San Luis Potosí, Mexico (“General Products”) have been acquired by AAA Sales & Engineering, Inc. (“AAASE”), a manufacturer of precision machined products for customers operating primarily in the agricultural equipment and off-highway vehicle markets. AAASE is a platform company of Industrial Opportunity Partners (“IOP”), an operations-focused private equity firm based in Evanston, IL. BlueWater Partners acted as the Chief Restructuring Officer and financial advisor and Miller Johnson acted as the legal counsel to General Products for this transaction.

CONTACT Matthew J. Miller Managing Director (616) 988-4796 [email protected] BlueWater Partners is a middle market investment banking, consulting and merchant banking firm. As strategic advisors to business owners and management, BlueWater Partners works with companies to create, manage and realize business value, frequently before or through a sale or acquisition. BlueWater Partners’ services include advice on mergers and acquisitions, divestitures, capital sourcing, performance improvement, restructuring and turnaround. This document is intended to provide an overview of certain information relating to middle market transactions, and we are not soliciting any action based upon it. The material presented herein is based on certain data and sources we consider to be reliable; however, we make no representations as to its accuracy or completeness. The information presented is as of the date provided herein, and we have no obligation to update the information. This document is intended for the private use of the recipient for informational purposes only, and the material is for general information only and should not be construed as containing any specific advice or recommendation. No part of this document may be copied, photocopied or duplicated in any form by any means or redistributed without the express written consent of BlueWater Partners, LLC.



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