Study: European mid-market valuations still tumbling

Multiples paid for mid-market companies have been falling for two years, but buyout activity has yet to pick up, says a new study.

Valuations of unlisted European mid-market companies are still falling, according to a report commissioned by mid-market buyout firm Argos Soditic.

Since reaching a high of 9 times EBITDA during 2006 and 2007, the average valuation of unlisted European companies has fallen consistently for 24 months and is now at 6.2 times EBITDA. This is the lowest level since Argos Soditic first commissioned the Argos Mid-Market Index in 2004.

Continental deal activity has been stymied during the credit crunch by – among other things – the unrealistic price expectations of vendors. The continued fall in valuations is in many cases a result of vendors being forced into action, said Gilles Mougenot, president of Argos Soditic, in a statement. “Some sellers either cannot or do not wish to put off divestments and are thus willing to accept lower valuations,” he said.

Worsening economic conditions across the Euro zone – GDP shrank by 4.6 percent in the second quarter of 2009 – have affected the valuation of target companies, while poor visibility of earnings has made buyers more cautious. Valuations have been further impacted by the reduction of available leverage for buyouts.

Deal activity in continental Europe remains depressed, with only 30 leveraged buyouts in the first six months of 2009: 80 percent fewer than the same period in 2007.

“There are still sellers who think they can sell for seven to eight times EBITDA,” said Hubert Verbeek, managing partner of Dutch mid-market firm Holland Venture, in an interview with sister publication Private Equity International in August. “I don’t think this is realistic at this moment,” he added.

The fall in valuations of unlisted companies is at odds with the movement of listed company multiples, which have been enjoying a rally since March of this year. Argos calculated that listed companies’ valuations (EBITDA multiples) increased by 13 percent during the first six months of the year.