October 2021

Written By Jason Kania

October is the only time of the year during which all of the "Big Four" major professional sports leagues in the US and Canada are in season; the NBA and NHL, while the NFL is about a third of the way through its regular season, and Major League Baseball beginning it postseason. In their history, the Big Four have played games on the same day nineteen (19) times! And finally, in the month of October, the US celebrates the following causes: Adopt a Shelter Dog; Arts & Humanities; Bullying Prevention; Cyber Security Awareness and Filipino-American, Italian-American, and Polish American Heritage.

Following are a number of resources to help you in your pursuit of an acquisition. Contact us if and when we can be of help. In the meantime, please find a selection of resources below to support your efforts. 

FUND SPOTLIGHT. Selection of Topics and Deals that correspond with industries of interest to Red Forest Capital funds.

INTERESTING

TAXES. On Saturday, September 25, 2021, the House Budget Committee voted to advance a $3.5 trillion spending package to the House floor for debate. The House Ways and Means Committee and the Joint Committee on Taxation previously released summaries of proposed tax changes intended to help fund the spending package. Many of these provisions focus specifically on businesses and high-income households.

The legislative proposal is 881-pages - additions, removals and modifications are expected as the legislative process continues. For more detail, visit Plante Moran’s summary or the Ways and Means website and following are a selection of notable proposals;

  • Personal Service Corporations may be taxed 26.5% on all taxable income

  • Corporate Income Tax schedule may be;

    • income below $400,000 taxed at 16%;

    • income between $400,001 and $5MM taxed at 21%;

    • income above $5MM taxed at 26.5%

  • Marginal Income Tax Rate may increase from 37% to 39.6% e

  • Capital Gains may increase from 20% to 25% effective after September 2021. In addition, the taxable income thresholds for the 25% capital gains tax bracket would be made the same as for the 39.6% regular income tax bracket (see above) starting in 2022.

  • Adjusted gross income over $5MM surtax of 3%

  • Net Investment Income Tax of 3.8% expanded to income greater than $400,000 ($500,000 for joint filers)

  • Estate and Gift Tax basic exclusion reduced to ~6MM from $11.7MM

LIGHTER FARE

M&A, PRIVATE EQUITY & INDUSTRY UPDATES

AEROSPACE & DEFENSE deal activity is expected to continue and will be influenced by geopolitical tensions despite a relatively flat defense budget.

AGRICULTURE & FOOD inputs to the value chain have been challenged by pandemic-induced labor shortages, supply chain disruptions, and limited processing capacity. End Customer segments like restaurants is recovering in the face of major labor and supply chain challenges, rising menu prices, and increases in CV-19 cases. In Q22021, the “Big 3” food distributors improved top and bottom-line performance, with average sales +70.7%, cases +54.7% and gross profit +77.0%. Opportunities remain in producers and packers aim to invest in technology and automation.

AUTOMOTIVE

B2B & SUPPORT SERVICES. In August, 127 Business & IT Services deals (down 15% MoM) valued at $ 8 B (down 5% MoM) with EV/Revenue at ~3.9x were announced according to Petsky Pruner. Origination continues to be difficult as obvious targets are acquired and rich valuation

CONSUMER spending surged in fashion and travel in H12021. Inflation-adjusted consumer spending is expected to rebound as consumers return to work and/or school, prepare for the holiday gift giving season, and pursue brand sales.

EDUCATION

ENERGY deal volume is up during H1 2021 and deal value remained flat when compared to Q42020. Potential energy disruptions and increased stability in gas prices will likely slow M&A activity. Despite consolidation in oilfield services, supply still outweighs demand. Increased energy transition momentum and environmental, social, and governance (ESG) adoption is likely to reveal opportunities in innovative technologies, some targeting greenhouse gas reduction or electrification targets, technology or digital capabilities.

ENGINEERING & SCIENTIFIC SERVICES

ENVIRONMENT & RELATED

FINANCE & INSURANCE bulge-bracket M&A are soaring in 2021. Apollo, Blackstone and CVC Capital have all bought $19.3 B worth of insurers, compared to ~$13 B in all of 2020.

FRANCHISES

GOVERNMENT, CIVIC & SOCIAL ORGANIZATIONS

HEALTH CARE M&A continues to thrive with the TTM deal values and volumes surpassing 2018, 2019, and 2020. The Affordable Healthcare Act was upheld for the third time by a Supreme Court ruling in June. Investor interest in physician groups (in part due to pandemic-driven financial impact) and behavioral care (likely due to growing long-term demand) continue. Deal activity is expected to continue driven by the need for capital, regulatory changes, innovation, patient-focused commitments, and a competitive healthcare environment.

HOSPITALITY, TRAVEL & TOURISM M&A has slowed with a total of 57 deals announced in August 2021, down 17.4% MoM. Opportunities continue to exist in mobile point of sale (mPOS) given the increased popularity of contactless payments.

INDUSTRIALS & MANUFACTURING deal volume decreased 18% and deal value increased 91% when compared to the same period in 2020. Investor interest is expected to continue as manufacturers adapt to supply chain disruptions and pursue further automation. The proposed Infrastructure Plan would include spending for industrial and construction machinery.

LEGAL & RELATED

MARKETING & ADVERTISING In August, 122 MarTech deals (down 15% MoM) valued at~ $7 B (up 55% MoM), with EV/Revenue at 14.6x were announced according to Petsky Pruner. Also in August, 31 Ad & Marketing Agency deals (up 30% MoM) with EV/Revenue at 1.4x were announced according to Petsky Pruner. Opportunities in Digital Marketing continues to attract interest given the increase in ad spend, rising ad prices and privacy changes that will challenge targeting.

MEDIA & ENTERTAINMENT In August, 169 deals (down 21% MoM) valued at $23.1 B (down 23% MoM) with EV/Revenue at 4.8x were announced according to Petsky Pruner. Opportunities in publishing, digital media brands. gaming and content creation remain.

MINING & NATURAL RESOURCES

REAL ESTATE & RELATED. The Q22021 US Chamber of Commerce Construction Index improved across revenue expectations. The industry at large continues to face headwinds with material costs, labor shortages, and global supply-chain disruptions. confidence in new business opportunities, and backlogs. Investor interest continues to focus on technology and solutions to address labor gaps, protect margins, and create efficiencies. The Infrastructure Bill, is likely to provide funds for roads, bridges, public schools, water infrastructure, and broadband.

RETAIL, TRADE & WHOLESALE. With the world still trying to emerge from the COVID-19 pandemic, companies must remain flexible to anticipate consumer shopping habits, e-commerce and quick deliveries among the primary concerns. Companies looking for technological innovation may acquire start-ups with advanced technology already at their core. Areas of investment for technology gains will be electric vehicles or autonomous trucking, digital freight brokerages, fleet management platforms, delivery drones, and freight-forwarding technology.

TECHNOLOGY M&A continues is break-neck pace with $511 B in Q22021. In August, 520 Software and Information deals (down 2% MoM) valued with EV/Revenue at ~14x were announced according to Petsky Pruner. Origination continues to be difficult as obvious targets are acquired and rich valuation multiples. Investor interest is expected to continue in cloud, customer relationship management, and business intelligence or analytics.

TELECOMMUNICATIONS

TRANSPORTATION & LOGISTICS deal value increased while deal volume declined moderately, compared to H12020. The sector represented the highest percentage of deal value and volume, expected to continue through the remainder of the year. Supply chain disruptions, shipment delays, factory closures in Asia, increasing inflation and currency fluctuations have increased investor interest in the sector.

VETERINARY

WASTE MANAGEMENT & RECYCLING

Jason Kania
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November 2021
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September 2021