In preparing for the article for the Gibraltar Business Credit and Greenfield Commercial Credit merger, I spent some time with Tim Stute, managing director at Milestone Advisors, who served as the exclusive financial advisor to the transaction on behalf of the seller. Stute was forthcoming not only with his observations of the Gibraltar/Greenfield transaction, but with his observations concerning the larger landscape of commercial finance mergers and acquisitions as well. And who better to ask? Stute and his firm have advised on recent notable transactions such as the sale of PrinSource to North Mill Capital and Marquette Equipment Finance’s sale to PacWest Bank.
Stute notes, “We’ve had a nice run for the last couple of months and the market for commercial finance M&A is definitely improving. We came out of a period of time through most of 2010 in which the activity — and it was limited — was focused mainly on distressed deals. The commercial finance business being sold may have been performing perfectly fine, but the bank or parent was in some level of distress.” He further explains in these instances, the parent may have been experiencing either funding issues or credit issues or a combination of both, thereby forcing the parent to sell assets as a way to synthetically raise capital. For many, the ability to access funds through the capital markets had become an exercise in futility and selling their solid commercial finance portfolios became the alternative.
But what of the sellers that weren’t in distress? Stute says, “As with any downturn, there were some sellers who in all likelihood, planned on selling in the 2009 to 2010 timeframe but held off due to the recessionary market and its impact on valuations. But with some of the deals we’ve seen lately, including the PrinSource deal, we had entrepreneurs that had been waiting on the sidelines for things to improve who didn’t want to wait anymore. In some cases they were older or they had a succession plan issue. Others just took the opportunity to get a better valuation than they would have been able to achieve during the darkest days of the recession.”
Yet, there are those that still are holding out for the valuation levels attainable in what Stute refers to as “the glory days” of 2004 through 2007. He explains, “We still have those uncomfortable situations that sometimes come with our profession. We’ll meet a potential seller who has perhaps shared some information about their company. We come in cold and say, ‘We’ve reviewed the materials and here’s what we think you’re worth in today’s market.’ Sometimes, the conversation ends right there.” While there have been some signs of improvement, Stute states clearly, “I’d argue that we may never get back to some of the giant multiples that we saw for these types of companies back before the recession.”
He explains why: “That’s because the valuation that we were able to get in deals in 2004 through 2007, when we sold clients to companies like Wells Fargo, was made possible from the bank’s trading at very high P/E ratios. This made it easier for these transactions to be significantly accretive. Today, many banks are still unprofitable, let alone trading at high valuation metrics. Many continue to have internal problems with regard to credit quality. So, you don’t yet have a market where the banks have returned as buyers for commercial finance companies in a major way.”
Still, Stute assures, the game’s not over when it comes to banks as buyers. He notes the Marquette/PacWest transaction typifies what we might expect going forward with regard to commercial finance company acquisitions. “We’ll see more of these types of deals over the next few years because most banks are so heavily weighted in real estate, where there is little to no growth. Banks will need to diversify in order to obtain asset growth, and I think it’s only natural that they go to the commercial finance sector, whether it’s leasing, ABL, factoring or SBA lending.”
While Stute doesn’t predict a return to the glory days of yore, he does envision a market in which the banks will play an increasingly bigger role. He states, “We don’t think that the banks are going to be quite as aggressive on valuation as they have been in the past because of higher capital requirements, which negatively impact return on equity. But a major cost of funds synergy will always exist when banks buy commercial finance companies. If you couple this savings opportunity with the need for asset growth, banks will steadily become bigger players for commercial finance targets. And that competitive dynamic will continue to improve valuations for sellers going forward.”