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EVERGRANDE PROPERTY SERVICES GROUP LIMITED

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Delayed Hong Kong Stock Exchange  -  04:08 2022-03-18 am EDT
2.300 HKD   +2.68%
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Evergrande Property Services : Uncertainty and reduced leverage capacity make it harder to fund takeovers

10/12/2021 | 09:31am EDT

One of China’s biggest property developers, Evergrande, has come under mounting pressure in recent weeks to repay investors and bond holders on the back of three missed payments on over $300bn of liabilities.

This potential default has triggered fears across global markets that investors will not get their money back. It has also had an effect on global debt markets fearful of what a default could mean for the availability of capital.

The impact of this development could be wide reaching, with a myriad of British firms relying on debt capital to finance mergers, acquisitions and growth in a period where the M&A market is at a high point.

With this in mind, Reece Tomlinson, the founding partner of corporate advisory firm RWT Growth, warned that the uncertainty could mean for the UK M&A market, especially for SMEs.

In fact, he said that a combination of long-term uncertainty, reduced leverage capacity and an increase in performance based deal structures is likely to lead to a general reduction in M&A activity and more power for buyers.

“With several structural global issues looming on the horizon, which have the capacity to shake the foundation of global debt markets; the impact on M&A may be profound,” Tomlinson told City A.M.

“Generally, when one thinks of the impacts global debt markets have on M&A, they think of the big deals highlighted in business publications such Forbes yet the biggest impact is actually on the SME’s.”

Long-term uncertainty is expensive

When lenders and capital providers deem the long-term economic view to be too uncertain, they increase interest rates and reduce their leverage exposure on transactions as a measure to protect against risk.

This means that when borrowing money for an M&A transaction, which Bain estimates to have dropped from 75 per cent in 2019 to approximately 50 per cent in 2021; the net result is that it costs the acquirer more and requires more cash to complete a given acquisitionm, Tomlinson pointed out.

“When it comes to SME M&A transactions, multiples are often constrained to the capital the acquiring party has available and therefore decreased leverage has the propensity to reduce total average EBITDA multiple(s) SME’s receive on transaction.”

Further, assuming that many buyers of SME’s don’t have unlimited sources of capital, when investing more cash into a particular M&A deal it reduces the total amount of deals that the buyer could make with said cash available, he added.

“The resultant debt market uncertainty is both immediate and has longer term implications for SME’s,” Tomlinson noted.

Leverage capacity directly impacts exit multiples

Notwithstanding liquidity crises in debt markets, which can occur as a result from impactful one-time events like the potential collapse of Evergrande or Lehman Brothers in 2008, lenders determine how much exposure they want to have on a particular deal based on their comfort with both the company who is guaranteeing the debt and the market itself.

“The rates at which lenders are lending on M&A deals have historically hovered around 2.5x to 3.5x EBITDA, however this has dropped to an average of 2x to 3x EBITDA,” Tomlinson pointed out.

“To put this into perspective, let’s say that an SME with $1m in EBITDA is selling for a 6x multiple. This means that at a best-case scenario, changes in lender sentiment will increase the cash portion of the transaction by a minimum of $500k and increase the cash required 16 per cent,” he explained.

Performance-based deal structures

With market uncertainly and the fact that we now adjust for the impact of Covid on every M&A transaction, the impact is greatest on lenders who are weary of lending towards anything other than actual financial performance, Tomlison said.

“Therefore, when debt levels are reduced on a given transaction and sellers want to ensure they receive the exit multiple they require to sell the company.”

“It means that more of the transaction needs to be structured in a way that is performance based. With performance-based elements of a transaction comes additional risk for the seller,” he concluded.

The post M&A cash: Uncertainty and reduced leverage capacity make it harder to finance takeovers appeared first on CityAM.

© City AM, source Newspaper

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Analyst Recommendations on EVERGRANDE PROPERTY SERVICES GROUP LIMITED
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Financials
Sales 2021 13 478 M 2 119 M 2 119 M
Net income 2021 3 630 M 571 M 571 M
Net cash 2021 13 388 M 2 105 M 2 105 M
P/E ratio 2021 6,48x
Yield 2021 -
Capitalization 20 219 M 3 168 M 3 178 M
EV / Sales 2021 0,51x
EV / Sales 2022 0,42x
Nbr of Employees 81 136
Free-Float 41,8%
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Mean consensus HOLD
Number of Analysts 3
Last Close Price 1,87 CNY
Average target price 3,36 CNY
Spread / Average Target 79,9%
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Managers and Directors
Chang Long Zhao General Manager
Fen Yu Vice General Manager
Sheng Li Duan Chairman
Zhao Hui Guo Independent Non-Executive Director
Yanhong Wen Independent Non-Executive Director
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