We wrap up our discussions with our All-Star M&A Brokers with their opinions on rising interest rates and some final thoughts.
Included in our group:
- Lou McDermott – Kalil & Co.
- Jim Johnsen – Johnsen, Fretty & Co
- Max Drachman – Drachman M&A Co.
- Marty Williamson – Williamson Associates
- Paul Wright – SignValue
What are the chances that increasing interest rates will impact the pace of transactions?
Lou McDermott – Despite increasing interest rates affecting buyers’ pro-formas, the attractiveness of the industry and its historical returns will result in the M&A activity in OOH being far less affected than other industries.
Jim Johnsen – So long as interest rates (ie prime of fed funds or however you want to measure it) remain below 5%…I think we are okay. I think the larger force at play is that demand outstrips supply. If rates click up above 5%…and advertising demand pulls back…well then we will have a temporary frost. But in my experience it always thaws.
Max Drachman – It is possible rising interest rates will suppress values, however, ad rates are climbing which may make the interest rate escalation a “push” on the eventual purchase price.
Marty Williamson – We don’t really expect the current rise in interest rates will have any major impact on M&A activity in the near term.
Paul Wright – As interest rates rise and more consolidation occurs, we anticipate activity slowing. Industry consolidation in the late 90’s lasted for about four or five years. We think this wave of consolidation will likely slow in the next two years as interest rates and inflation rise.
Finally, any other thoughts or observations related to the Merger & Acquisition market?
Paul Wright – We are often asked if multiples of revenue and cash flow are higher now than they used to be. The answer is, yes multiples are higher. However, in some of those cases, revenue was lower (due to declines in occupancy during covid), so overall prices may not have changed much in the last few years. The sharp decline in revenues in 2020 and digital conversion opportunities caught the attention of many buyers, but access to very cheap capital and/or equity participation has driven most of the activity for the last year.
Jim Johnsen – Lots of people think that they have made it when they successfully sell their business and convert it to greenbacks. While it works against me, I argue that the day they build their business is the day they created the value. It’s just that the value lies in billboard permits and leases and structures, not gold or dollars. At time of exit what they are really accomplishing is a conversion of one form of value for another (and giving the IRS a chunk of it). So…sell your business when it makes sense…don’t sell your business because you want to create value.
Max Drachman – The recent stock market volatility is loud, however not indicative of valuations in our space. OOH’s value proposition stems from its peerless ability to target consumers and spread a message. The overall media landscape continues to evolve and typically to the benefit of OOH. The most recent evolution is streaming’s upcoming shift to ad based models. As the small screen continues to fragment, advertisers more and more will see OOH as the preeminent medium for action.
Lou Mc Dermott – One last comment about OOH and its resiliency comes from our President, Frank Kalil. “It’s as though outdoor has no natural predators.”
Insider’s Take: Thanks to Max, Marty, Lou, Paul and Jim for taking the time to provide their insights. I hope all of you appreciate how fortunate we are to have M&A firms that are as knowledgeable, professional and effective as we do in OOH. They are a valuable resource, so reach out to them if you are considering selling or purchasing assets.
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