L.A. deals keep pace in third quarter.

Metro-Goldwyn-Mayer Inc., Winchell's Donut House and Mercedes-Benz of Beverly Hills were among the handful of local companies that changed corporate ownership in the third-quarter, helping to drive $9.2 billion in local deal activity.

The value of the announced deals involving L.A. County-based companies rose 115 percent in the July-September period from $4.5 billion in the year-ago third quarter, according to Factset/Mergerstat. In the preceding second quarter of 2004, deal value totaled $8.9 billion.

Nationwide, announced deal value surged 67 percent in the third quarter to $561 billion, compared with $336.7 billion in the year-ago quarter, according to Thomson Financial.

Deal values are only one measure of merger and acquisition activity. Only one-third of the companies bought or sold disclose actual sale prices, so the aggregate figures provide only a rough snapshot of momentum during the quarter.

Another measure is deal volume. In the third quarter, 112 deals were announced involving Los Angeles-based companies either as buyer or sellers, down from 116 in the like year-ago period and 137 in the second quarter, according to Factset/Mergerstat.

Private equity deals

Local merger and acquisition activity continues to be propelled by private equity firms, which accounted for 17 percent of total deal volume in the quarter. Investment bankers and lawyers say that private equity firms are choosing to unload their existing holdings as they embark on new campaigns to raise additional funds.

"We're seeing a meaningful percentage of transactions where a sponsor is involved in a company and they're looking to exit so they can show their limited partners a success story," said Jeffrey Kabot, a director at Levine Leichtman Capital Management, which specializes in taking equity stakes in companies primarily owned by management.

The high valuations and multiples for many deals mirror what's going on in the residential real estate market. Quality companies in prime neighborhoods are receiving fairly rich multiples, driving up the prices for firms in ho-hum locales, Kabot said.

The biggest local deal in the period was Sony Corp.'s purchase of MGM for $2.85 billion. Edison International, parent of Southern California Edison, sold Edison Mission Energy's remaining international power generation portfolio for $2.3 billion, to a consortium of energy players, with International Power PLC taking a 70 percent stake and Mitsui & Co. picking up 30 percent.

Colony Capital Group LLC, the big Los Angeles-based real estate fund, bought four casinos including the Atlantic City Hilton and Harrah's and Bally casinos in Tunica, Miss., for $1.24 billion from merger partners Harrah's Entertainment Inc. and Caesars Entertainment Inc. Privately-held Colony, a new addition to the gaming industry, recently bought the Las Vegas Hilton from Caesars and Resorts International Atlantic City from Sun International.

In other deals, Yum Yum Donut Shops Inc., based in City of Industry, gobbled up the West Coast's largest chain, Winchell's Donut House of Santa Ana, paying an undisclosed price to Canadian investment firm Shato Holdings. And Mercedes-Benz of Beverly Hills was bought by Group 1 Automotive Inc., of Houston, which owns 91 auto dealerships nationwide. Again, the price was not disclosed.

Public companies still shy

Bernie Zaia, managing director at Barrington Associates, said private equity groups have rebounded strongly after struggling from 2000 to 2002.

"They've re-emerged after a dormant period and we're seeing private equity, groups as extremely aggressive bidders for transactions," he said, adding that it has been difficult for public companies to complete transactions because of the general stock market downturn.

"Their currency is not as valuable as it was in 2003 and with Sarbanes-Oxley restrictions, many companies are being choosy about what deals they want to go after," Zaia said.

Steady M&A activity continues to be driven by low interest rates and strong debt markets. However, there is concern about the ongoing health of the economy.

Because so many of the deals being completed are predicated on continued strong financial performance, an economic slowdown would likely result in a surge in restructuring activity.

Economists at UCLA's Anderson Forecast projected last month that the national economy would sustain annual growth of 3 percent through 2005. But they also noted that weaknesses leave the U.S. vulnerable to a recession.

Many of the deals being done, because of their high valuations, leave little margin for error.

"It's going to be a pretty competitive, pretty tough economy, because we still have a lot of excess capacity from investments made five or six years ago," said Michael Bazdarich, senior economist at the Anderson Forecast. "If the companies making acquisitions have brought down their expectations and are going in with their eyes open, then these deals should turn out OK. But this is a lower-return environment than we're used to. This is not an economy where people are throwing money around willy nilly."

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