Q4 2012 Capital Markets Newsletter - Western Reserve Partners LLC

Middle Market Update
CLEVELAND ● COLUMBUS ● DALLAS
www.wesrespartners.com
Year-End | 2012
Inside this issue:
M&A Markets
Overview
• Private Equity Activity
• Strategic Activity
• Bankruptcy Transactions
Capital Markets
Overview
• Equity & Debt Contributions
• Senior Debt Trends
• Subordinated Debt Trends
Transaction in Focus
• Recapitalization of The
SpyGlass Group, Inc. by
Crane Investment Company
2
3
4
Western Reserve provides M&A, capital
raising and other financial advisory
services to middle market companies
across a focused set of industry
verticals, including industrial, business
services, consumer, healthcare,
technology and real estate. With 35
professionals in three offices (including
affiliates), Western Reserve delivers
thoughtful advice, keen market insight
and superior execution to its clients,
both nationally and internationally.
Western Reserve’s managing directors
average nearly 30 years of experience
and have directly executed more than
600 transactions throughout their
careers.
Western Reserve Partners LLC is a
member of M&A International, the
world’s largest alliance of investment
banking firms, as well as World Services
Group, a global consortium of middle
market focused law firms and other
advisors, which provides unparalleled
access to global companies and
investors. The firm is a FINRA-member
broker / dealer and member of SIPC.
Highlights in Mergers & Acquisitions
• Though the U.S. economy saw lower unemployment, growing GDP and double-digit gains
in the stock market, 2012 ended as a mediocre year for middle market M&A activity
− Continued uncertainty surrounding U.S. economic policy and the Eurozone crisis caused
activity to lag behind 2011 levels through the first three quarters of 2012
− However, clarity found after the election drove a fourth quarter push to close deals by
year end ahead of tax rate increases slated for 2013
• Despite these challenges, Western Reserve enjoyed a record year in 2012, and believes that
positive economic indicators and supportive capital markets will provide a strong
framework for middle market M&A in 2013
Highlights in Capital Markets
Middle Market M&A Activity
(# of transactions) ($ in billions)
1,400
1,200
1,000
800
600
400
200
0
994
Source: Thomson Financial
1,041
1,172
1,240
1,111
• Despite more favorable lending conditions, middle market loan volume was down
significantly below 2011 levels
• A significant maturity wall in 2013 exists which, if coupled with an uptick in M&A
activity, could support an increase in loan volume
($ in billions)
$40.0
$35.0
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$14.4
$9.5
$26.9
Number of Transactions
792
568
Middle Market Loan Issuance
$35.4
$36.4
$31.8
799
Deal Value
846
799
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
* Middle Market = transaction value between $25 and $250 million
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$9.2
$5.4
$11.5
$14.3
$0
$9.9
Source: S&P
* Middle Market = issuers with EBITDA of ≤ $50 million
Mergers & Acquisitions ● Capital Raising ● Financial Opinions & Valuations ● Restructuring & Bankruptcy

2
M&A Markets Overview
Private Equity Activity
• Financial sponsor activity dipped slightly year-overyear
in 2012, with deal count and capital invested
down 14% and 13%, respectively
− 2012 add-on activity remained strong, at 48% of
buyouts, though slightly off 2011’s 50% mark
• With 641 deals, 2012 was a record year for exit
volume, compared to the historical average of 395
• More than 6,500 companies are currently held by
financial sponsors, and nearly 70% have been held
for three years or longer
Add-On vs. Platform Activity
(# of transactions) (% of total)
3,000
60%
2,500
50%
48%
44% 44%
46%
48%
50%
40% 41%
2,000 35%
37%
1,102
40%
857
1,500
30%
678
775
498
679 794
1,000
677 20%
500
336
1,240
1,392
486
866
1,015
976
632
794 798 727
529
10%
0
0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Add-Ons Platforms Add-Ons as a % of Total
Source: Pitchbook
Strategic Activity
• Though strategic M&A activity slowed in 2012,
corporate buyers have continued to acquire growth
in the absence of organic opportunities
($ in billions)
$2,500
S&P 500 Cash Balances
• S&P 500 cash balances remain at a ten-year high of
nearly $2.0 trillion
−
Near zero interest rates and higher dividend
taxation provide incentive for continued
corporate reinvestment
$2,000
$1,500
$1,000
$989 $999
$1,497
$1,601
$1,703
$1,943
• Multiples paid by strategic buyers in 2012 averaged
7.4x, down from 8.0x in 2011
$500
$0
2007 2008 2009 2010 2011 2012
Source: Capital IQ
Bankruptcy Transactions
• Bankruptcy activity continues to decline from
recessionary highs seen in 2009, with associated
deal volume falling in lockstep
−
As the lending market continues to strengthen
and abundant financing sources remain
available, many “would-be” bankruptcies have
been prevented
Bankruptcy Transactions
(# of transactions) ($ in billions)
400
$400
352
350
$350
302
300
$300
250
$250
200
183
166
203
189
147
$200
150
119
$150
100
85 93
$100
50
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
$50
$0
Number of Transactions
Deal Value
Source: Thomson Financial
CLEVELAND . COLUMBUS . DALLAS
Mergers & Acquisitions ● Capital Raising ● Financial Opinions & Valuations ● Restructuring & Bankruptcy

Capital Markets Overview
3
Equity & Debt Contributions
• In 2012, average debt multiples held steady around
3.5x EBITDA, demonstrating continued availability
of leverage for middle market LBOs
• Overall equity continues to comprise just below 50%
of the average capital structure
−
Rising valuations in 2012 led to a slight increase
in equity share over 2011 levels; however, this is
still below the 50%+ equity contributions seen in
2009 and 2010
4.0x
3.5x
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
Middle Market* LBO Debt Multiples
3.3x
3.4x 3.4x
3.0x
2.8x
1.0x
1.0x 1.0x
0.7x
1.0x
2.3x
2.3x 2.4x 2.4x
1.8x
2008 2009 2010 2011 2012
Sub Debt
Senior Debt
Source: GF Data
*Middle Market = transaction enterprise value between $10 and $250 million
Senior Debt Trends
• Senior debt comprised 37% of the average capital
structure in 2012, or 2.4x EBITDA
• As of December 31, the 90-day LIBOR base rate was
.31%, down from .36% on September 30
• Senior debt spreads hovered between 5.3% and 5.6%
throughout 2012
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
Middle Market* LBO Senior Debt Pricing
5.9%
5.6%
5.4% 5.3%
5.6% 5.4%
4.8%
Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12
Overall $10 - $25 million $25 - $50 million
$50 - $100 million $100 - $250 million
Source: GF Data
*Middle Market = transaction enterprise value between $10 and $250 million
Subordinated Debt Trends
• Sub debt comprised 16% of the average capital
structure in 2012, or 1.0x EBITDA
• In Q4’12, sub debt coupons remained relatively
consistent with previous quarters, averaging 12.7%
• Payment-in-kind (“PIK”) interest averages ranged
from 2.4% to 4.5% throughout 2012
−
75% of deals with junior capital in Q4’12 featured
PIK interest
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Middle Market* LBO Sub Debt Pricing
17.3%
17.3%
16.1%
14.8% 14.7%
15.2%
15.7%
15.1%
3.9%
4.8%
4.5%
2.4% 2.2% 2.4%
3.1% 2.4%
12.2% 12.5% 12.4% 12.5% 12.8% 12.8% 12.6% 12.7%
Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12
PIK Interest
Coupon Pricing
Source: GF Data
*Middle Market = transaction enterprise value between $10 and $250 million
CLEVELAND . COLUMBUS . DALLAS
Mergers & Acquisitions ● Capital Raising ● Financial Opinions & Valuations ● Restructuring & Bankruptcy

Transaction in Focus | The SpyGlass Group, Inc.
4
has been recapitalized
The Ready-Mix Assets and Eastern
Cement Corporation of
have been acquired by
a division of
CRH plc
The Assets of
Schwab Materials, Inc.
have been acquired by
has sold its
Construction and
Engineering
Services Division to
John A. Martell
and
Bonnie M. Martell
Fairness Opinion to the
Board of Directors
has been recapitalized
December 2012
has been acquired by
Dan T. Moore
Company, Inc.
has acquired
has completed a reverse
stock split
Fairness Opinion
has been acquired by
a portfolio company of
A portfolio company of
has been acquired by
a portfolio company of
has been acquired by
he David J. Joseph Company
a wholly owned subsidiary of
has been acquired by
has been acquired by
Series C Redeemable
Convertible Participating
Preferred Stock
has been recapitalized by an investor
group led by Crane Investment Company
Bankruptcy Estate of
Driggs Farms of Indiana,
Inc.
a portfolio company of
has been acquired by
has been recapitalized by
has been recapitalized by
Land-O-Sun Dairies, LLC
an affiliate of Dean Foods
Valuation Services
a member of the
has acquired
Partners in
Plastics, Inc.
a division of
has been acquired by
has been acquired by
and
Members of Managemen
has been acquired by
Senior Credit Facility
has been recapitalized by
has been acquired by
The undersigned acted as exclusive financial advisor
to The has SpyGlass been acquired by Group, Inc. in this transaction
has been acquired by
has been recapitalized b
Bill Burke
and
Members of Management
a portfolio company of
Fairness Opinion
Financial Opinion
Financial Advisory
Services
and
portfolio company of
has been acquired by
and
mbers of Management
has been recapitalized by
an investor group led by
Crane Investment Company
has been acquired by
has been acquired by
Fairness Opinion
has been
reorganized by
Timeshare
Acquisitions LLC
and
have formed an Equity
Joint Venture
has been acquired by
a portfolio company of
has been acquired by
a portfolio company of
has been recapitalized by
and
a portfolio company of
Valuation Services
s been reorganized by
Artemiss, LLC
an affiliate of
a portfolio company of
Company Overview
has been acquired by
has sold its
Cephalosporin
Finishing Facility to
has been acquired by
funds managed by
Oaktree Capital
Management, L.P.
a portfolio company of
has been acquired by
a portfolio company of
has been acquired by
Partners in Plastics, Inc.
has been acquired by
an Affiliate of
has been acquired by
has sold its coupon
redemption operations t
SpyGlass is a leading provider of niche telecommunications expense management services. Headquartered in Westlake, Ohio, the Company’s
services include audit and implementation of telecom expense savings opportunities such as recovery of funds paid in error, elimination of
unnecessary services and improvement of provider cost structures. SpyGlass serves a diverse range of customers, including private sector businesses
of all sizes, government agencies, educational institutions and healthcare facilities.
a portfolio company a portfolio of Marlin company
Equity P
of Marlin Equity Partner
Transaction Overview
Western Reserve Partners served as the exclusive investment banker to The SpyGlass Group, Inc. in its recapitalization by an investor group led by
Crane Investment Company. Co-Chief Executive Officers Bradley Clark and Edward DeAngelo remained significant shareholders in the company
and continued to serve in the same capacity along with the existing management team.
Of SpyGlass’ new business partner, co-founder/CEO Ed DeAngelo said, “Our team is thrilled to be partnering with Crane Investment Company as
we continue to invest in the business and execute our long term growth strategy.”
Commenting on Western Reserve, co-founder/CEO Brad Clark said, “Western Reserve’s assistance and advice were critical in finding the right
partner and navigating through the process. Their team’s expertise, responsiveness, perseverance and creativity allowed us to achieve a very
favorable outcome for the company, our employees and our customers.”
has been
recapitalized by
Contacts
Charles V. Aquino
Managing Director
216.589.9534
caquino@wesrespartners.com
Victor F. Faris
Managing Director
216.589.9531
vfaris@wesrespartners.com
David P. Mariano
Director
216.574.2108
dmariano@wesrespartners.com
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216.589.9534
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216.589.9530
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Managing Director
214.459.3322
khirsch@wesrespartners.com
Kevin M. White
Director
216.589.9536
kwhite@wesrespartners.com
This newsletter is published solely for the general information of clients and friends of Western Reserve Partners LLC. Information contained in this publication is based on data obtained from
sources we deem to be reliable; however, we do not guarantee or represent that it accurate or complete, and it should not be relied upon as such. Opinions expressed are our current opinions
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Mergers & Acquisitions ● Capital Raising ● Financial Opinions & Valuations ● Restructuring & Bankruptcy