M&A amid COVID-19

Buying and selling companies in the landscaping industry was extremely active the last few years. Has the COVID-19 pandemic caused this to changed? In the short term, yes, but the long term seems to still be in good shape – but it’s early in the pandemic and that can change, according to the experts we asked.  

Below is a Q&A with:

Greg Clendenin, CEO, The Clendenin Consulting Group

Brian Corbett, founder and managing partner of CCG Advisors

Ron Edmonds, founder and president, Principium Group

Jeff Harkness, partner, Three Point Group

Tom Fochtman, CEO, Ceibass Venture Partners

How is COVID-19 impacting the M&A world generally and the green industry specifically?

GC: Across virtually all industries, M&A activity has slowed down, especially in terms of new transactions coming in. Some industries have been affected more than others. With the green industry being labeled as an essential service (and it is), it has not been affected as much as others. However, that is not to say that it isn't significant. Some of the impact is yet to be realized since we are not yet at the peak point of the virus. 

BC: COVID 19 is affecting all M&A. With market swings at the level they are and the resulting dislocation of the broader market, it is a very delicate situation. While BrightView is presently the only publicly traded buyer of commercial landscape companies, they and all other buyers are backed by private equity firms of various size and sophistication. That said, all private equity firms are creatures of risk & reward analyses and highly calculated return expectations.

Translated, this means they do not act or invest impulsively and that they will act first to protect their current investments, then, when able to consider putting more capital to work and at risk, they will entertain potential transactions. CCG is talking to all buyers and thus far none have shared any plans to stop investing in the industry, but they caution we are in a different place than we were just 30 days ago.

You must look at each private equity group individually and what investments they have outside of their landscape companies to understand the likelihood of whether they are in a position to make investments currently. Subject to what other businesses they own and what industries they are exposed to, they may be in a better or worse position to invest in their landscape company. We are talking to all buyers about what they can and cannot do in the near term. All of them do want to see new deals and do not want to lose out on good acquisition opportunities but not all will be willing or able to close deals in the near term. The ones who are willing and able, will expect that the prices they pay, and the structure of the deal will factor in the present uncertainties.

In addition to their own risk aversion, most PE back platforms will use some level of debt to finance transactions and the debt markets are just as affected as the equity markets right now. In the face of lowered demand, some lenders may extend more credit to the larger more financially stable borrowers that would enable them to finance more deals than other smaller, less well-capitalized groups.

RE: Of course, it is early to say with any precision. At the present time the economy is soaked with uncertainty and uncertainty is the enemy of getting deals done. If the economy falls into a deep and prolonged recession, that is going to significantly impact deal flow. But many people are optimistic that, especially with government intervention, that will not be the case.

During the first three weeks of March, we mostly saw buyers (along with most everyone else) looking internally and, after ensuring the safety of their own teams, re-evaluating what the impact of COVID-19 on their access to capital, investment strategies and processes. We are currently seeing things get back to normal, at least what will be the "new normal." We are beginning to see the number of inquiries moving up considerably. They are still not at pre COVID-19 levels, but they are moving up a lot.

Historically, there is a usually a physical meeting between buyers and sellers at a fairly early stage of the process. I think that is not likely to change, so travel restrictions will have an impact. Of course, travel-based due diligence is off for the time being. However, much of due diligence is electronic nowadays anyway. Virtual data rooms are the norm for large and small deals. I still think it will be hard to get deals actually closed until we are past most "shelter-in-place" and similar restrictions.

The scope of due diligence is likely to include an expanded consideration of safety considerations. Contingency planning and business continuity planning is likely to get a look too. We have several unusual twists, including a significant delay in access to H-2b workers due to closed borders and travel restrictions.

Many transactions in this industry rely on Section 7(a) loans guaranteed by the Small Business Administration (SBA). Since the SBA has been tasked with administering the loan programs associated the stimulus program, I suspect that getting traditional SBA financing may be slowed down for a while.

 

JH: We had deals scheduled to close and fund on the March 31st. These are delayed for 90 days. Most deals scheduled in the industry for Q1 and Q2 are on hold as buyers and PE groups access the economic impact of COVID-19 on the current business and their other current portfolio businesses. In the meantime, remote meetings, packaging, and conversations continue as most groups believe the true impact on performance will be Q2. Green industry companies are deemed essential businesses, and so our guys are operating within the current regulations.

TF: It’s a little early to tell but it will slow M&A down for sure, in large part because people can’t or are not willing to fly.  Can’t do site visits, meet the owner/seller face to face, etc.
There is still plenty of available money for financing acquisitions, but banks have moved into a very risk adverse, conservative position. I suspect 2020 will be a somewhat slow year for acquisitions.  We did benefit when the Department of Homeland Security ruled that landscaping is ‘essential’ in all 50 states so a buyer does not have to worry about being shut down.

How has this affected any deals you had in progress? 

GC: At this point, it has not affected transactions that we have in process either in the valuation or in the process continuing. Some deals in terms of the process may be affected when the process gets to a point when travel is desired by the buyer, but I see some deals closing without any travel. That can be done without any real negative impact on the deal related to travel restrictions. Technologically, we live in a small world. The transactions more at risk are the larger ones where the buyer may want to be on-site before the closing and that is understandable on the large deals. Some buyers will be willing to complete due diligence via email and video and audio conferencing and then close without being physically together with the seller.  

BC: CCG has been as busy as ever in landscape M&A recently, having closed three green industry transactions in December of 2019 alone and we have already closed two thus far in 2020. To date, the COVID crisis has only caused one transaction to be put off. The group that was to fund the transaction has ownership of several portfolio companies that will be hard pressed to survive the COVID crisis as they are directly affected by the shutdowns of travel and hospitality industries. So, they understandably need to spend all their time protecting those assets rather than be distracted trying to close on a new platform investment.

We would also expect some other transactions to be delayed as buyers already active and operating in the sector can ensure the safety of their own employees and smooth operations of their own entities before getting back to closing deals. Once the buyers feel they’ve reached that point, we think these deals will begin to close again.

At CCG, we remain very busy advancing our current deals and advising other companies on how to move forward in the current crises. We are not consultants, but as investment bankers who know this industry, we can offer strategic advice to business owners intended to help them navigate these complicated times and get to the negotiating table in the strongest position.

RE: In general, we believe the deals that we have in process are likely to get done, but they are getting slowed down. Buyers and sellers alike have had to take a breather and make sure their businesses are operating safely. Due diligence is likely to move more slowly. But, many investors seem ready to move on as best they can.

TF: My most recent example was getting an Indication of Interest letter from a buyer, but then the travel issues began and we are in a holding pattern. On the same transaction we received a new IOI last week from another interested party. That buyer said they would charter a flight to make the site visit.

Do you think this will slow down the M&A long-term (the bubble finally bursting)?

GC: I am naturally an optimist and I like to focus on goals instead of obstacles. I think in this case, it is reasonable to be optimistic. Our economy was rocking before COVID-19 began to spread across the world. The foundation underneath the roaring economy was very strong. Short term, I am bearish about the next several months. Beyond that, I believe the economy will come roaring back and so will M&A activity and valuations in the green industry. With the companies already in due diligence, I see them selling for those valuations that we have seen in the last few years. That is our experience. So, medium and long term, I am bullish.

We are likely headed to a recession with a recession being officially defined as the GDP declining for two quarters in a row. Recessions are created by an event. This event is the onslaught of this virus. We will get over this event. However, short term, there could be a drop in the multiples of revenue and EBITDA that we have become used to in recent years. New sales (new accounts coming onboard) are slowing and that will hinder the growth and profit of companies and those things obviously have an impact on valuations. But, as I said, that is short term. This industry is driven by need. Landscapes will continue to need maintenance. It will be back as strong as ever and M&A activity will come back, as well.  

BC: We have seen many to most of our clients fortunately get the “essential business” designation so they can continue to operate which is a tremendous thing. Think about where workers, companies and owners would be if the businesses were shuttered like restaurants and hotels? That said, time will tell how budgets and forecasts will hold up. As in other times of financial stress, we would expect to see the more contractually oriented maintenance companies weather the storm better than companies who rely on new installations which will see more disruption.

That said, maintenance companies all count on enhancements and out of contract services for a big part of their revenue and typically a bigger part of their margins. Some of this revenue could be lost or at least deferred if clients feel they need to pull in the purse strings during the crisis. This would serve to reduce revenue and earnings in the near term which would have a negative effect on valuation in the near term.

It is too soon to tell what the long-term effect will be on valuations and volume of transactions. The good news is the industry was as strong as ever at the onset of this crisis and there is no reason that it won’t rebound quickly as the crisis subsides. That said, selling today could and likely will be at valuations that reflect the present uncertainty. I have always been a half full guy rather than half empty, but we cannot ignore certain realities no matter how short-lived they could be.

The good news for would be sellers – there are still a lot of buyers, the buyers want and need to grow their companies and there are only so many top-quality companies to acquire as they look to expand. This would fall under the “timing is everything” phrase we all know so well. Timing was as good as it’s ever been, it’s questionable now but will be good again.

RE: I think it is inevitable that deals will slow down. Of course, I have been saying that for several years, since the recession we are apparently now in represents the end of the longest post-war expansion period. However, I think there is reason to be optimistic that the slow-down will be neither prolonged nor deep. To describe it as “the bubble finally bursting” is premature. You have to remember that there is still a great deal if investment capital out there that needs to be deployed. Much of the high level of M&A activity over the last couple of years has been driven, directly or indirectly, by private equity. Private equity's first priority right now is going to be ensuring the health of their existing portfolio companies. But there is still a great deal if dry powder out there that must be invested. Several factors may affect that, but there will still be dry powder and investors will still be searching for quality businesses to invest in. Businesses that demonstrate their resilience through this period may look very attractive. We have a new term that has popped up in the context of the restrictions resulting from the fight against the virus, "Essential Services". I think some investors are likely to be very interested in the investment potential of Essential Services.

JH: There is still a tremendous amount of dry powder (capital) that needs to be deployed. We will continue to have a very favorable low interest rate environment and access to financing (both from commercial lenders and alternative financing sources (i.e. – private credit/debt funds) and certain underlying dynamics which have been driving M&A in the industry to this point will continue. Market chaos breeds opportunity. The recent reduction of interest rates to near zero will help fuel deal activity, especially on larger transactions with market leading companies once the impact from the coronavirus begins to wane.

TF: I do not. The landscape fundamentals are still very strong, especially the reoccurring revenue nature of landscape maintenance and in particular, commercial maintenance. This rather sudden and unintended recession, by most economists’ accounts is not projected to be that long. Maybe up to 18 months.  Unless Covid-19 rages and can’t be controlled and unless it does not work itself out as predicted, I think the M&A markets in general will return to normalcy and be very active.

What advice do you have for companies who were looking to buy or sell?

GC: My advice is this: If it is time for you to sell, then don't stop the process. It doesn't mean you're going to sell now or when valuations are temporarily down, but the acquisition process takes some time. Go ahead and get those things done that you will need to do, with the advice of your advisor, so when it is time for you to close and close on the price and terms you like, then you will be ready to complete the process without starting from the beginning. During this temporary challenging period, press on.

BC: Take care of your priorities right now. Keep your family and employees safe. If able to work, do so in ways that comply with social distancing protocols. Be proactive with your clients to let them know how you are keeping your people safe and thus their people and properties, safe and sanitary in the COVID world. Customers are not unlike buyers or any other human being, the more information they have, the better informed and more comfortable they feel. Well informed and more comfortable buyers buy more.

Then, you need to be talking to your investment banker about what they are hearing and seeing from the buyers. In the lull between now and the markets supporting more widespread deal closings, you should be drilling down on your operations, your financial performance, modeling what can be done to protect your business’ revenues and earnings at this time. Contrary to popular perception, valuations ebb and flow and doing everything you can to protect value now, will help to maximize value at the time of closing.

RE: I am reminded of the famous Warren Buffett quote about responding to epidemics of two "super-contagious diseases"- greed and fear. "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."  To me, this means for potential business buyers, there will be good opportunities, but opportunities need to be assessed carefully, taking into consideration the risks that business buyers already considered, but also the new ones arising from our new economic uncertainty. For business sellers, there will also be opportunities.

There is always demand for good businesses, but it is even more important than ever to make sure you are ready to go through the scrutiny that will come with a business sale process. This is a great time for business owners to do some self-evaluation and identify those areas they can work on to make sure that buyers will consider their business very desirable. One of the things that I discovered years ago, especially during the Great Recession, is that there are always more buyers than sellers. That doesn't mean it may not get harder to get deals done or that valuations may not fluctuate, but there are buyers.

In any economic client, the single most important thing a business owner can do to work toward a successful sale is to focus on running a successful company, taking care of both its employees and its customers.

TF: It may not happen for them in 2020. Those companies should stay the course, focus on building and growing a profitable enterprise and stay focused. If need be, use whatever governmental stimulus is available and work their plan. Continue to build a very desirable and saleable business enterprise.