SCOTTSDALE, Ariz. -- When discussing recent merger-and-acquisition (M&A) transactions that have been completed, the first thing that everyone wants to know is the purchase-price multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) paid for the companies or portfolios of assets. For the vast majority of deals, one may only speculate on the multiples that were paid because most transactions are private and the purchase price or the EBITDA numbers, or both, are not made public. However, when the purchase price is disclosed, and people know the number of assets, it is fairly easy to determine the price per location.
In the past year or two, there were a few transactions in which the purchaser paid more than $4 million per site.
But it is important to define how the purchase-price multiple is determined because there are several ways in which people may look at that number.
- The first and perhaps most common way (and the way we always look at it) is the multiple based on the prior fiscal year or trailing 12-month store-level EBITDA.
- A second way is the multiple based on store-level EBITDA after corporate overhead, which tends to result in a significantly higher multiple.
- A third way, which is often used in very large transactions involving public companies, is the multiple after the synergies of the acquisition or combination are considered and the excess overhead resulting from the combination is removed.
In our view, there are factors besides EBITDA that enter into the purchase-price analysis, such as land and building size, geographic location of the portfolio, environmental issues, age and condition of underground storage tanks, market share, size of the transaction, and synergies provided to the acquiring party.
Furthermore, fee properties are viewed differently than leased properties. Multiples for leased properties are generally determined on the basis of the remaining term of the leases including renewal terms. Therefore, the longer the remaining lease term, the higher the multiple. However, the multiples for leased properties don’t generally approach those for fee properties.
On the other hand, the multiple ranges for fee properties are tied more directly to a simple EBITDA analysis, with some upper limit based on real-estate fundamentals such as replacement cost.
A few years ago, the general perception was that average stores in most markets would command a range of 4x EBITDA to 6x EBITDA. However, that range fairly quickly crept up to 6x to 8x. Within the past two years, many transactions were completed with multiples in the 8x to 10x range, with a few large or dynamic transactions going in the 10x to 12x range, or perhaps even higher, according to many industry observers.
In a review of M&A deals completed in the past 15 months, it seems to us that multiples are remaining strong and will continue to do so for the foreseeable future for a number of reasons:
- First, with the continued industry consolidation, there are few buyers on the landscape who have the ability to complete large transactions, particularly without a financing contingency in their offers.
- Second, as a result of the large number of transactions that have occurred during the past couple of years, there are fewer quality companies and portfolios of assets available for sale. Consequently, the ones that do become available tend to receive a great deal of attention and aggressive bidding.
- Third, even though we are in a robust economic environment with increasing interest rates, rising labor and maintenance costs, and expensive health costs, those negative factors seem to be offset to some degree by the recently enacted corporate tax-rate reductions at the federal level. These tax cuts have resulted in significantly greater liquidity for companies seeking quality companies or assets.
All of these factors point to a sustained period of strong multiples being paid for quality companies and portfolios of assets.
Now, for a review of deals completed since January 2017 …
Dennis L. Ruben is executive managing director of NRC Realty & Capital Advisors LLC, Chicago. Contact him at dennis.ruben@nrc.com.
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