Asian companies, and especially Chinese ones, have rushed into European mid-caps to take advantage of depressed valuations since the eurozone crisis started and they bought so much that they doubled EBITDA multiples in just two years, Mike Weaver, managing director at valuation company American Appraisal, said in an interview.
EBITDA multiples – a measure of a company's return on investment – for acquisitions by Chinese companies of European ones jumped from 5.7 times in 2010 to 8.2x in 2011 and to 11x last year, according to data compiled by American Appraisal.
This happened while average global EBITDA multiples fell to 8.8x last year from 9.6x in 2011 because of concerns about the future of the eurozone, a slowdown in key emerging economies and a rush to get deals done in the US before tax cuts expired.
"The Chinese IPO market is pretty much closed, secondary buyouts are tough in China, and their GDP is growing. So they've got lots of cash to spend and they're looking to diversify their product portfolio and their geography," Weaver said.
"Also the Chinese government is pushing Chinese businesses to get access to intellectual property and research and development from the Western world. We're seeing them buying good quality assets in the tech space, in infrastructure."
Companies being snapped up are in the more traditional Western European countries such as the UK and Germany.
While investors look for companies in financial and business services, media and entertainment and advertising, in Germany they are more attracted to companies in the engineering sector.
BOTTOMING OUT
"They can pick up some decent assets. There's a decent amount of cash on Western European and US balance sheets but they're not putting that to use, so the Chinese are getting in first to pick up good quality assets," Weaver said.
These Asian investors have helped many European companies stay afloat during the eurozone debt crisis. Multiples for overall Asian acquisitions in Europe increased from 4x in 2010 to 10x last year.
"Without that [Asian investment], European multiples would be significantly lower. They're bringing capital into Europe," Weaver said.
But it will be difficult for EBITDA multiples to rise further from here, as it all depends on the eurozone's ability to recover from its crisis, he warned.
"If [the eurozone] continues to bump along the bottom then I think we'll see this trend leveling out. Without a recovery in Europe, I can't see multiples rising. They're quite high multiples already. I don't see emerging markets paying more than 10x."
"So I will say that multiples will not increase, possibly they will decrease."
"If Europe recovers, we'd have the perfect storm, with private equity companies starting competing again and maybe another M&A boom. But we still think that's still a long way off," Weaver said.
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OFFICIAL CORRECTION: An earlier version of this story quoted Weaver as saying "product property" instead of "product portfolio." The quote has been corrected.