The Potomac Company Presents Bubble Trouble: M&A in the Year of FED Tightening

 

Paul examines the market’s effect on fluctuating asset prices for business owners. He comments, “Your wealth is the current price of that future cash flow. We’ve lived in an era where policymakers have done everything in their power to create the wealth effect by juicing up the stock market, reflating the real estate market, and they’ve also tried pretty hard to create inflation. As we can see in 2022, they’re finally successful.” 

 

Giannamore discussed the increase of prevailing interest rates in 2022 set by central banks with the Federal Reserve unable to support the market—a scenario last seen in the 1980’s. Thus, the bond and equity market is being repriced. Giannamore mentions that this will ultimately force The Fed to create “demand destruction” as a policy. Guided with detailed charts, Giannamore presented private market multiples and public valuations and how they have changed over timed based on the macroeconomic environment and industry fundamentals.  

 

With inflation running at its hottest in 40 years, pest control owners are now less optimistic. The “Big Four” (Anticimex, Terminix, Rentokil, and Rollins) along with Thompson Street Capital Partners’, Certus, and others are under a great deal of pressure when choosing who to acquire in 2022. Giannamore, however, says, “I don’t care about the number of buyers in the market. I’m watching what’s going on in the debt markets. I’m watching what’s going on with high yield market and credit cycle…What Terminix is doing impacts things on the margin. I always say to clients that it’s these big things that are going on. This is what matters.” 

 

Giannamore introduced two guests: Jim McHale, former Potomac client and JP McHale president, and David Billingsly, former president of the Western Region for Anticimex. With full glasses of Macallan scotch and lit cigars, they discussed the ins and outs of the sales of both American Pest and JP McHale, markets and multiples, and answer dozens of questions from the live audience.   

 

Billingsly commented, “[Pest control businesses] are about as recession-proof as we can get.” Giannamore responds, “There are always two variables. If you're recession-resilient, there's the stream of cashflow. Let's go with it and say, ‘David is right.’ Not only is it easier to hire people, but the business didn't trail off. The fundamentals of the industry are strong. That's one leg. The other leg though is the current pricing of the asset. If the Fed hikes or the bond market doesn't believe the Fed, then it does it on its own.” 

 

On the sale of JP McHale, Jim McHale commented, “Toward the end of the JP McHale era, I was trying to initiate concepts, push through ideas and initiatives and we just didn’t have the people. We didn’t have the infrastructure. [Anticimex] has presented me with that infrastructure, with the resources, [and] a tremendous amount of technology.” 

The full presentation of Bubble Trouble: M&A in the Year of FED Tightening can be found here.