Wrap Up

Q2 2013:
Deal Flow Still Slow, but Hope Springs Eternal

Transaction closes are still taking a pause from the frenzied fourth quarter, but dealmakers say they’re starting to see an uptick

The lackluster pace of middle-market dealmaking in the first quarter of 2013 slowed even further in the second quarter, with dealmakers continuing to point to the busy fourth quarter of 2012 as the culprit. Looking at transactions worth $1 billion or less, only 418 managed to close in the quarter, according to Thomson Reuters. That’s a 5 percent drop from the 437 deals that were completed in the first quarter and about 25 percent less than the 513 middle-market deals that closed in the second quarter of 2012. At $53.7 billion, deal value was slightly higher in the second quarter than the preceding quarter’s $52.8 billion but lower than the same quarter a year ago, when deal value came in at $65.3 billion.

Topping the list of mid-market deals that were completed in the quarter is Moon Township, Pa.-based Atlas Pipeline Partners LP (NYSE: APL), which acquired Teak Midstream LLC, a processor of natural gas in the Eagle Ford Shale of south Texas, for $1 billion in cash. The deal reflects the wave of M&A activity we’re seeing in the energy sector.

Other notable transactions include private equity firm Onex Corp.’s (TSX: OCX) purchase of Nielsen Expositions, a tradeshow operator and subsidiary of ratings agency Nielsen Holdings NV (NYSE: NLSN), for $950 million, as well as Sycamore Partners’ purchase of pop-culture retailer Hot Topic Inc. (Nasdaq: HOTT) for about $625 million—two deals that are emblematic of PE focus on brand name properties that resonate with consumers.

One of the most celebrated deals that closed in the quarter falls just outside our $1 billion definition of a middle-market deal. With a price tag of $1.1 billion, New York blogging service Tumblr Inc. ranks as Yahoo Inc.’s (Nasdaq: YHOO) fourth-biggest acquisition and the largest made by Marissa Mayer since leaving Google Inc. (Nasdaq: GOOG) to become CEO of Yahoo in July 2012. The once-struggling Yahoo has become an M&A machine, picking up 10 other companies over the past 10 months, including four announced in May.

Despite the down quarter, dealmakers remain optimistic about the balance of the year. “We have an abundance of capital available in the debt markets, private equity funds with a fair amount of capital at their disposal—all of these things should be factors to show an increase in M&A activity,” says Ted Koenig, chief executive of Chicago-based lender Monroe Capital LLC.

Based on anecdotal evidence, deal flow may have already started to pick up a bit. “What we’re finding now is we’re having a lot of discussions with potential sellers about exiting properties,” says Bill Roman, a managing director at Harris Williams & Co.

Certainly, there were some very big deals announced in the second quarter. Valeant Pharmaceuticals International Inc.’s (TSE: VRX) $8.7 billion deal for Bausch & Lomb Holdings Inc., the eye-care company owned by Warburg Pincus LLC, was one of the largest announced purchases, followed by Shuanghui International Holdings Ltd.’s offering to pay about $7 billion for the world’s largest pork producer Smithfield Foods Inc. (NYSE: SFD), in what is considered the biggest Chinese takeover of a U.S. company. Then there was the $2.65 billion sale of Longview Timber LLC to Weyerhaeuser Co., a U.S. real-estate investment trust that owns timberland, in what was considered the third-biggest forestry acquisition in North America.