Financing: Negotiating the Choppy Waters
Rough waters, no doubt. Despite the Federal Reserve cutting interest rates last month to almost zero (a historic low range of 0% to .25%, from 1%), credit is almost non-existent in many parts of the U.S. and Latin America. Uncertainty and risk aversion are to blame for the current state of affairs. Yet, it’s not all gloomy and credit and finance are still available.
1) Private Equity: Plenty of cash
In fact they are in a de-leveraging process in which they have to cut costs themselves. Banks are in a similar situation. However, Many private equity funds have a big advantage vs. banks and large companies due to the fact that their (debt to equity) leverage ratios are much lower (typically between 1 and 2) than those of larger private equity funds (typically higher than 10) and other financial institutions. According to media investment bank Jordan Edmiston Group, they are sitting on $500 billion of uninvested capital. Investors continue to be interested in funding them as the example of Hispania Capital Partners shows. The Chicago based private equity firm just announced that it got committed capital of $105 million for its second fund from investors including Verizon's Pension Fund, Credit
2) Investment Opportunities: Looking for non-cyclical strong growth
Private Equity Funds tend to make equity and buyout investments in strategically positioned lower-middle market companies predominantly engaged in providing goods and services to the rapidly growing Hispanic demographic in the U.S. and Puerto Rico. Hispania´s new fund is designed to invest in companies with compelling value propositions, proven management teams, positive cash flow, and annual revenues in excess of $10 million. It will invest up to approximately $20 million per platform investment.
Particularly in times of economic weakness, they tend to focus on the non-cyclical drivers of U.S. Hispanic business growth. Palladium Equity Partners, a New York based investment fund whose investments include Todobebe, recently made investments in California and Michigan based community banks with heavy Hispanic exposure. The firm will soon announce another financial services deal. Victor Maruri, Managing Partner at Hispania recently told Portada that interesting sectors are Business Services, Education Services with a Hispanic specific angle (English as a Second Language, Tradeschools and Adult Education). One of the companies Hispania owns is CSA Group: Founded in 1956, it has grown to become the largest Hispanic-owned A/E/P&E firm in the U.S., with offices throughout the United States, Caribbean, and Latin America, including Panama City, Panama.
As an example of a less cyclical prone company, Marury cites Haircare products company Samy, which is less prone to recession. Hispania sold this company last year to a strategic buyer that wanted to enter U.S. Market at a 1.7 sales valuation.
3) Media and Advertising: Strategic Buys
Some companies have financing resources to undertake strategic acquisitions. This is the case of Cross Media Works which last week acquired Hispanic Independent Television Sales (HITS) and Azteca America businesses from the trustee in the Interep bankruptcy proceedings. Basically, Cross Media Works gained sales muscle in the Hispanic market with the addition of HITS and Azteca America sales teams. Another recent and smaller deal in which a general market company acquired a Hispanic media company was Phoenix Media´s purchase of Boston Hispanic newspaper El Planeta.
(For a guide to price Hispanic Media properties click here
The opportunities may be much larger in non traditional media sectors. According to a recent report from the The Jordan Edmiston Group, “Database & Information, B2B Online Media, Consumer Online Media and Interactive Marketing Services – are expected to garner 88 cents of every growth dollar in US Media from 2007 to 2010. We expect CMOs to funnel leaner budgets away from “above the line” brand awareness to “below the line” marketing to drive leads, directly impact sales and quickly shift market share. Technology will play a decisive role in this transition, and recurring revenue models will prevail. We anticipate keen interest and increased M&A activity in such sectors as customer contact, loyalty and CRM, and interactive advertising optimization, as well as market research and information solutions.”
4) The allure of small and regional banks
In the current environment most of the major banks are not interested in cash flow lending, especially when lending into an industry that is seen in decline and in transition.
The one bright area of lending concerns small banks: "Locally or regionally owned banks are very much in tune with their communities and many of them adhered to their lending discipline during the economy's run-up. They tend to be more inclined to work with long-time customers, such as newspapers who want to grow through acquisition," John Cribb, managing broker of John Cribb of newspaper brokerage firm Cribb & Greene, recently told Portada.
5) Seller Financing Revival
With the current scarcity of credit, seller financing, where an owner lends the buyer of his company most of the money to make the acquisition, is increasingly becoming a tool to get transactions closed. According to John Cribb, a typical seller financed sale structure looks like this:
·Cash down payment of 20% to 30% of the purchase price.
·Balance paid over 5 to 10 years at 5% to 7% interest per annum.
·Part of the balance may be in the form of a non-compete agreement which does not bear interest.
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