An M&A Boom in Debt Collectors

M&A is heating up as buyers see a promising future in pursuing consumers' unpaid bills

By Jessica Silver-Greenberg

Not all dealmaking is dead. While many private equity firms, corporate buyers, and vulture investors have been scared off by the credit crunch, a flurry of activity is still occurring in one industry: companies that collect and buy consumer debt.

So far this year, $1.8 billion worth of mergers and acquisitions have been done in that business, compared with $1.65 billion in all of 2007. Meanwhile, overall M&A has dropped 26%, to $892 billion, in the first three quarters, according to Thomson Reuters. "Money never sleeps, and neither does the need to collect it," says Charlene A. Davidson, a senior managing director at researcher McGladrey Capital Markets....

McGladrey Capital Markets leads negotiations as HealthEdge acquires Intra-Op Monitoring

Costa Mesa, Calif. – November 21, 2008 – Intra-Op Monitoring Services Inc., an intra-operative neurophysiological monitoring company, has been acquired by HealthEdge Investment Partners. Transaction terms were not disclosed.

McGladrey Capital Markets LLC initiated the transaction, sourced the buyer, led the negotiations and acted as exclusive financial advisor to Intra-Op Monitoring Services. Illinois-based Ungaretti & Harris acted as the legal advisor to Intra-Op Monitoring, and Shumaker, Loop & Kendrick, LLP in Tampa, Fla., served as lead deal counsel for HealthEdge Investment Partners.

McGladrey Capital Markets leads negotiations as Mitchell Imports acquires Aldik

Costa Mesa, Calif. – November 14, 2008 – The Mitchell Import Company, d/b/a TJ Collection, has acquired Aldik Inc., a leader in distinctive, high-quality merchandise servicing the floral and home decor industries for more than four decades. Transaction terms were not disclosed.

McGladrey Capital Markets LLC acted as the lead financial advisor to Aldik’s former owner, Encore Consumer Capital, a San Francisco-based private equity firm. Latham & Watkins LLP acted as the legal advisor to Encore, and Bryan Cave LLP provided legal counsel to Mitchell Imports.

"The sale of Aldik enabled our client, Encore Consumer Capital, to selectively maximize its portfolio holdings and reposition capital for future investment opportunities," said Charlene Davidson, Senior Managing Director of McGladrey Capital Markets. "Furthermore, Aldik will benefit from an experienced and strategic partner in Mitchell Imports, enabling additional growth and continued market leadership opportunities. This divestiture was an optimal transaction for all parties."

Trickle Down Economics (from Mergers & Acquisitions)(subscription required)

The middle market, though shielded, is not immune to the carnage facing Wall Street.

..."The mid-market has always been more pragmatic," adds Hector Cuellar, the president of McGladrey Capital Markets (FKA: RSM EquiCo Capital Markets). "We've just never been afforded the luxury to chase after anything too exotic."...

...Certainly mid-market shops will be opportunistic when bigger deals present themselves. Hector Cuellar, the president of McGladrey Capital Markets, notes his firm's industry expertise and geographic coverage could see McGladrey "step into a lot more of those $500 million to $1.5 billion deals."...

..."There's been a lot of consolidation in terms of who is holding the capital today," McGladrey Capital Markets senior managing director Charlene Davidson notes, alluding to the foreign investments in the financial services space.

"It's had a humbling impact," she adds. "In the past the US has been very domineering when it comes to what regulation looks like. Going forward, I think you're going to see the EU have a far greater voice... Basel II requirements will be coming at us one way or another."...

Drill, baby, drill (from TheDeal.com)(subscription required)

....Equipment companies are also on the prowl for add-ons. Smith Materials and Equipment Co., Halliburton Co. and Cameron International Corp. are all on the hunt for targets, according to Mike Parham, a banker at McGladrey Capital Markets.

It's not entirely a zero-sum game, however, as not all majors that have cut back on drilling are looking to buy. Many find themselves in the same predicament as the middle-market companies mentioned above. Chesapeake Energy Corp., for example has become a seller largely as a result of its declining stock price, says Parham....

Parham also anticipates private equity will return to oil and gas midmarket M&A. "I think [in] January or February you're going to see a lot of private equity funds jump back into the market," he predicted. "I think there are going to be a lot of going private transactions."

A new president in the White House heightens worry for some in the sector. "There's a concern you're going to see an increase in the capital gains tax [under an Obama presidency]," said Miroslav Lazarov, vice president at McGladrey Capital Markets. Lazarov adds that while an Obama administration would be more focused on developing renewable energy, any economic upswing would increase oil demand for the short term, which should keep markets robust.

"We're going to be forced to start drilling again," Lazarov said.

Mother Nature may also complicate matters. "All it's going to take is a little bit of a cold spell and oil prices are going to shoot back up," said Parham, who anticipates a return to oil prices around $80 a barrel. "Don't believe the demand decline hype."

Historical Perspectives (from the Orange County Business Journal)

HECTOR CUELLAR
PRESIDENT, MCGLADREY CAPITAL MARKETS

CHARLENE DAVIDSON
SENIOR MANAGING DIRECTOR, MCGLADREY CAPITAL MARKETS

This crisis is unmatched and while its visible implications are often compared to that of the Great Depression, this touches far more aspects of the economy and with deeper global implications at stake. It’s so complex that the consumer, commercial, corporate and global markets are all simultaneously affected. The interconnectivity of these capital markets is negatively affecting personal stock accounts, corporate balance sheets and the real estate we live on, work in and drive by. In other words, this touches everybody.

One move by the government won’t fix it. The root of the problem began with loss of control and oversight, eventually spreading to potentially intentional fraudulent practices. And despite the evidence of a fractured system years ago, the immediate opportunities outweighed the complexities of meaningful discovery and conscientious objection to the enormous wealth being created.

We’re nervous, yet prepared to weather the storm. We think it could be another six to nine months for the undercurrents to stabilize and expect upward trends 12 to 18 months out. Credit markets have shut down for many types of deals. In the investment banking world there’s considerable market confusion and a realignment of investor strategies. Fundamentally speaking, a lack of financing makes deals harder to close. And with less cash flow from companies, deals become less attractive and even less likely to be financeable.

Larger deals are generally hit the worst. There were signs of their distress in 2007 and by the beginning of 2008, things got progressively worse and have since been trickling into the middle-market deal flow. The larger appetites for risk and the sheer magnitude of their exposures have sidelined many of the major Wall Street firms. The next tier of investment banks doesn’t carry the same risk but do remain subjected to significant downsizing. And while we are all vulnerable to a shrinking economy with less access to credit, we believe that boutique firms actually have the greatest opportunity ahead.

Domino Effect: Banks, Lenders Look to Shore Up Investments to Avoid Being Knocked Over by Credit Crisis (from the Orange County Business Journal)

Mergers and acquisitions have slowed to nearly a halt due to a lack of available credit.

Weaker profits from companies also are making deals less attractive, according to Hector Cuellar, president of McGladrey Capital Markets LLC, a Costa Mesa based investment bank.

Cuellar says it could be another six to nine months before things might turn around. “We’re nervous, but we’ll weather the storm,” he said.

Banks Say `Kiss My Ring,' Choke Dealmaking: Chart of the Day (from Bloomberg)

The credit squeeze choked off the market for most debt-financed takeovers worth more than $5 billion last year. Now the smallest deals are getting killed too.

"There aren't people lending," said Paul Weisbrich, an investment banker at RSM McGladrey Inc. To even consider a loan, lenders are saying, "Kiss my ring."

The CHART OF THE DAY shows U.S. mergers since 2005 by dollar value and by number of transactions. They plummeted by value in 2007, when banks cut back the syndication of loans for multibillion-dollar deals. This year, the number of deals has plunged too, as banks reject financing for takeovers worth just $50 million, said Weisbrich, who is based in Costa Mesa, California.

RSM McGladrey advises on takeovers of less than $1 billion, those it calls "middle market" transactions. They aren't usually as dependent on market cycles as bigger deals, Weisbrich said, because they are often driven by the retirement plans of company founders, and depend on links to individual banks rather than the syndicated loan market. Now, even those bank relationships are coming under stress as banks hold onto cash.

"This thing is almost hermetically sealed," said Weisbrich, whose firm is a unit of H&R Block Inc. "The joke in M&A circles is that this is the time to go to Tuscany, because there's not a lot going on."

McGladrey Capital Markets leads negotiations as Böhler Uddeholm AG acquires Summerville Steel Company

Costa Mesa, Calif. – November 7, 2008 – Böhler Uddeholm AG has acquired Kent, Wash.-based Summerville Steel Company, a privately-held distributor of specialty steel products. Transaction terms were not disclosed.

McGladrey Capital Markets LLC (www.mcgladreycm.com) initiated the transaction, led the negotiations and acted as the exclusive financial advisor to Summerville Steel.