Jim Grien, President of TM Capital, discusses M&A activity in an Atlanta Business Chronicle article on middle market M&A

May 3, 2010 – Middle market mergers and acquisitions appear to be heating up in Atlanta, and it’s not just distressed plays being made by private equity firms.

Buyers appear to be gunning for strategic purchases to bolster their presence in a sector or to branch out into a complementary industry as buyers and sellers begin to see eye-to-eye on price.

“The pure transactional work, the M&A work, the restructuring work is very active,” said Jim Grien, president of TM Capital in Atlanta.

According to the second-quarter report by BDO Seidman LLP’s Pitchbook, private equity deal flow increased 10 percent to 305 deals in the first quarter of 2010 from the fourth quarter of 2009. It’s up 6 percent from the first quarter a year ago.

Deal flow has increased each of the past four quarters, but the number of deals is less than half of its peak in second-quarter 2007.

Dollars invested — $14 billion — is less than a tenth of the high of $188 billion in fourth-quarter 2007.

States east of the Mississippi River accounted for half of all deals in the first quarter of this year, with 24 percent coming from the Southeast, according to Pitchbook.

One such company is Navigation Capital Partners Inc., which has closed six deals since the second quarter of 2009, including Atlanta-based online marketing firm Definition 6 LLC.

In February it closed on Specialized Technical Services Inc. (STS), a company it says is poised for a breakthrough as utilities look to be greener and to use smarter and more efficient technology.

STS provides data management and installs and reads smart meters for power companies. Next-generation readers could lead to significant efficiencies in power usage, saving utilities and their customers money.

The deal is the first in a likely series of buys in the sector to grow STS from $50 million to $200 million in annual revenue, said Navigation Managing Director Larry Mock. “The six companies we’ve done, one common characteristic is companies with a tailwind,” Mock said. “In this category there is no industry leader. … Here we have the opportunity to build the industry leader.”

From September 2008 to February 2009, during the fallout of the financial collapse, companies were geared into survival mode. Smaller companies remained locked out of the credit markets even into the late part of last year, Mock said.

“I’ve called that the nuclear winter,” he said. “In the last few months we’ve seen a spring awakening of the debt market.

“That bodes extremely well not only for M&A but for middle-market companies looking to expand.”

According to Pitchbook, middle-market deals appear “poised to emerge as the front-runner in the race for [private equity] deals in 2010. Credit markets are continuing to stabilize and deal volume seems to be recovering.”

But the market uncertainty remains. Dealmakers have concerns about an evolving regulatory environment and questions about future economic growth.

Still, BDO Seidman predicts middle-market activity to remain strong.

Another Atlanta player recently has been restaurant and retail franchiser Roark Capital Group, which has acquired six companies in the past six months.

In April, Roark acquired quick-service wing chain Wingstop Restaurants Inc., and followed that up with a buy of Canadian pet retail chain Bosley’s Pet Food Plus Inc. It was the first acquisition in Canada by Roark’s Pet Valu Canada Inc. subsidiary since it entered the Great White North late last year.

Roark also owns Carvel, Cinnabon, Schlotzsky’s, Moe’s Southwest Grill, McAlister’s Deli, Money Mailer, Fast Signs, Batteries Plus and Primrose Schools.

Richardson, Texas-based Wingstop has more than 650 restaurants either open or under development in 34 states and in Mexico.

The chain has 60 restaurants in the pipeline set to open this year.

Bosley’s operates 23 stores in British Columbia.

“The recession has slowed deal flow [overall], but we continue to build on relationships and take action on opportunities,” said Erik Morris, managing partner with Roark. “Our pipeline is strong. We’ve seen a pickup in activity the last six months.”

Private equity groups that made buys at the height of the market spent much of 2008 and 2009 on the sidelines, shoring up their investments.

As they look to exit from those deals, they’re also looking at new opportunities. Though financing remains a challenge, it appears to be stabilizing, insiders say.

John Schneider, an attorney with Hunton & Williams LLP in Atlanta, said financing is still more complex, but the “frothiness of the market has abated.”

After an extended period of time when neither buyer nor seller was willing to pull the trigger, the willingness appears to have returned.

“People can see a path forward now. It’s strategic,” Schneider said.

Read full article here.