2013 Mergers Alliance TIC Report

5/23/2018 2013 Mergers Alliance TIC Report

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Global Testing, Inspection

and CertificationM&A update

Summer 2012

The global testing, inspection and

certification (TIC) market is valued

at 100 billion.Globalisation and

the widespread implementation

of tougher rules and regulations

in product safety and efficiency

are driving its development. These

factors combined with the greater

use of outsourcing means theindustry is growing faster than

most other service sectors.

Whilst the industry is highly

fragmented, consolidation is under

way, as the market leaders and

mid-sized players continue to pursue

acquisition strategies. This presents

a great opportunity for sellers.

The key observations fromour research:

The TIC industry is characterisedby high growth rates, double digitoperating margins and anon-cyclical nature.

The ten largest companies worldwideare all headquartered in Europe but

all operate globally. The combinedgeographical revenue breakdown ofthe top three is 45% EMEA*, 31%

Asia Pacific and 24% Americas.

All of the major players and mid-sized challengers have been highlyacquisitive. SGS has completed 32deals since 2010 and Bureau Veritashas acquired 50 businesses in thelast five years.

Transaction multiples have averaged8x operating profit for small capbusinesses and have reached 10x to12x for mid-sized companies.

Valuations are even higher forbusinesses offering establishedpositions in sectors with high barriersto entry.

Companies widening

their expertise and

geographic presence

through M&A

Buoyant M&A market,

high transactionmultiples

There are many opportunities

in the TIC sector as growth

continues unimpeded by the

global economic uncertaintyMichel Degryck, Partner

Perfect time for sellers in highly

acquisitive market

*EMEA (Europe, Middle East, Africa)


2/12

Global Testing, Inspection and Certification M&A update

Figure 1: TIC market structure

Source: Mergers Alliance

2

Application of TIC

services broadening

Certificationof systems and processes (factories,

industrial equipment, manufacturers) on various

criteria: security, environmental impact, compliance

to standards.

Testingof commodities to

confirm exploration potential

and quality of products.

Inspectionof finished products or commodities

before/after shipment to check compliance with

the buyers specifications (quality, quantity

and/or customs agencies).

Testingof products against

safety, regulatory, quality and

performance standards.

TIC companies serve manufacturers, traders, consumer retailers and governments across a variety ofindustries globally.

IndustrycharacteristicsTIC companies ensure that their clients

meet the required health and safety and

quality requirements.

Specifically, they engage in the provision

of inspection, verification, testing andcertification services (and related auditing,consultancy and training services).

The purpose of these services isto help increase productivity, help localmanufacturers meet global standards,manage risk and improve the quality,safety and compliance of a companyand their products or services.

In effect, the TIC market is the sum of

numerous small niches all of which dependon a mix of local and international rulesand regulations.

TIC is primarily a service industry, where thekey success factors are people, proximity,flexibility, workflow and IT systems. Theindustry is therefore not capital intensive,with CAPEX ratios averaging around 2%to 3% of revenues for inspection andcertification businesses (mainly IT) and

6% to 8% for laboratory testing.


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TIC

market

c. 100bn

60%

40%

Outsourced

In-House

Figure 2: Industry overview

Source: Socit Gnrale, Capital Partner

3

We estimate the global TIC market to

be worth approximately100 billion.

Circa 60% of this market is conducted

in-house, a process that is particularlyevident in the life science, utilities andpublic sectors.

The rest of the market is served byindependent service providers (companieswhose primary business activities areproviding TIC services).

Key growth factorsThe outsourced TIC market is expected

to increase by10 billion over the

2011/2015 period. This growth will be

underpinned by a number of drivers:

Regulations and standards: New andtougher regulations combined with a

clear shift towards more complexstandards and rules are creating newmarket opportunities and are generatingadditional growth in existing markets.Initiative examples include: Reach, EU

Toy Safety Directive, GHS, EU EnergyUsing Products directive.

Outsourcing: Large companies areincreasingly outsourcing inspectionand testing in an attempt to reducecosts, since the increasing levels ofregulations make it progressively costlierto test in-house. They are fostering afocus on core activities and passing onresponsibility to independent thirdparties for compliance.

Global trade: Global trade is a majordriver of growth due to its correlationto the size of inspected volumes.Conversely, varying degrees ofprotectionism are also contributing to

growth. Local rules and regulationscreate barriers to entry and protectlocal manufacturing.

Product diversity and

sophistication:The rise in innovation,diversity and shorter lifecycles of manyconsumer products is increasing theapplication and volumes of servicesoffered by TIC companies.

New standards

and regulations

driving the market

40bn 50bn

2011 2015

5%to6

%CAG

R

Figure 3: Outsourced market

compound annual growth rate

Source: Socit Gnrale, Capital Partner

Only 40% of the TIC

industry currently

outsourced

Shorter lifecycles of

consumer products

contributing to

TIC growth


4/124


Safety and quality concerns:

The cost of liabilities due to non-conformity has been rising. This, addedto the fact that bad press spreadsquicker and more effortlessly than everbefore, means that corporates arelooking to defend themselves throughpre-emptive measures, which includethird-party certification see Figure 4for a UK market sample.

Emerging markets:The TIC market inthe developing regions has the potentialto grow at a rapid pace due to:

-

The increase in the export of goods,all of which need to be compliant withWestern standards. Moreover, thereis an increasing trend for Westerncompanies to control the entirevalue chain. Most of the inspectedvolumes are currently donepre-shipping.

- New rules and standards arebeing imposed, especially inthe infrastructure and oil

& gas segments (in Brazilfor example).

- New regulations forproducts sold to thedeveloping domesticmarkets which aregrowing quickly thanksto an expanding middleclass, especially in the BRICnations. The big challenge forthe emerging economies is toensure companies apply the existingrules and standards to their domesticmarkets to avoid health and safetycrises such as the Chinese milkscandal when infant milk wasadulterated with melamine.

Figure 4: Product recalls in the

UK market

Source: Reynolds Porter Chamberlain

100

50

150

300

200

250

350

0

2008-09 2009-10 2010-11

Consumer GoodsFood

Pharma

Expanding TIC in the

emerging markets,

boosted by globaltrade, new

infrastructure

standards and political

pressures

Product recalls

stimulating TIC in the

consumer segment


5/125


Trade buyersSGS and Bureau Veritas hold a

cumulative 18.5% share in the highlyfragmented outsourced market where

for-profit players compete with

non-profit organisations. Their growth

has been boosted by M&A and their

acquisitive strategies are being

replicated by other top TIC players

and market challengers.

Whilst the top ten leading companiesgenerate more than 1 billion each inrevenue, over 50% of the market ismade up of mid-sized and very smallcompanies, many generating less than10 million each.

SGS (Switzerland) and Bureau Veritas(France) are the global industry leaders,with 4 billion and 3.4 billion inrevenues respectively in FY2011.Following the acquisition of Moody in

April 2011, Intertek (UK) has moved intothird place with revenues in excess of

2 billion.

From a global perspective, the sectoris dominated by European companies,with the top 10 players all based inWestern Europe. Just behind them is

Campbell (Australia) and UL (USA)

which rank eleventh and twelfthrespectively.

An interesting feature of the industry is thenumber of top companies that are held byfoundations and professional associations.Five of the 12 leading players (Dekra, TVSd, TV Rheinland, DNV and TV Nord)are non-profit organisations, as are manysmall local players, particularly incontinental Western Europe.

Figure 6: Key market leaders

(ranked by FY 2011 revenues)

Source: Company reports, Bureau Veritas,Capital Partner estimates

Source: Capital Partner estimates

DNV 3%

TV

Rheinland 4%

TV SD 5%

Dekra 5%

Intertek 5%

Bureau

Veritas 8.5%

SGS 10%

Others 59%

Figure 5: Market share

0

1

2

3

4

bn

SGSSGS

Bur

eau

Ver

itas

Bureau

VeritasIn

tert

ek

Intertek

Dek

ra

Dekra

TUV

Sud

TUVSud

TUV

Rhe

inla

nd

TUVRhe

inland

DN

VDNVA

pplu

s

pplus

TUV

Nor

d

TUVNo

rd

Lloy

dsR

egis

ter

Lloyds

Registe

r

Cam

pbel

l

Campbe

llU

LUL

Figure 7: Revenue: Geographical

breakdown (

million)

Source: Capital IQ

20%

10%

40%

30%

90%

80%

60%

50%

70%

100%

0%

SGS Bureau

Veritas

Intertek

Asia PacificAmericas

Europe/Africa/Middle East

1991

845

1114

1746

672

940

663

682

750

A fragmented industryled by SGS and

Bureau Veritas


6/126


40

60

80

100

120

140

160

180

200

220

240

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

SGS Eurofins CAC40 FTSE100Bureau Veritas Intertek

Figure 8: TIC index

Current valuationsTIC companies have been outperforming wider European stock indices since

January 2010. This can be attributed to the non-cyclical, profitable and highgrowth nature of the industry. It should be noted, the strong Swiss franc and

the lack of major acquisitions over the past two years by SGS has seen the

companys performance fall back slightly relative to its competitors.

Source: Bloomberg

Investors driving top

company valuations

higher

M&A activityThere has been significant M&A activity

in the TIC sector during the last ten

years. The leading players have

completed infill acquisitions to broaden

or reinforce their service matrix (see

Figure 9) as well as expand their

geographical footprint.

Transaction multiples for mid-capcompanies can reach 10x to 12x operatingprofit whilst multiples for smaller companies

tend to be slightly lower at 8x operatingprofit. Acquisition premiums of up to 50%are being presented to targets offeringstrong positions in high barriers to entrysectors, for example the nuclear andmedical segments.

SGS and Bureau Veritas offer the mostcomprehensive range of services,

covering almost all the business segments.The rest of the industry players are missingkey sub-segments, geographies and/ormarket share. To penetrate these markets,the larger companies have adoptedacquisition strategies. The acquisition of amid-cap player in particular is often thequickest way to enter a specific marketsegment, a process that would take yearsto develop internally.

The premiums offered to mid-cap

companies are often justified by theimmediate synergies they deliver as wellas their strategic relationships with keyclient accounts and the stronger barriersto entry they afford.

Buyers paying

premiums to enterinto new strategic

segments


7/127


X X XXX X X X X

X XX X XX

X X XX X X

X X

X X XX X X X X

XX X X

X XX XX

X X

XX X X

X XX X X X XXX

X XX X X X X

X X XX X X X

X

Marin

e

Services

toIndu

stries

InService

Verific

ation

Constru

ction

Certification

Consum

er

Produ

cts

Government

Contra

cts

Commodities

Envir

onm

ent

Autom

otive

Life

Scien

ce

X X X XXX X X X X

X X XXX X X X XX

Figure 9: Market leaders and listed comparables

In September 2010, Bureau Veritasacquired UK based Inspectorate. The

acquisition gave Bureau Veritas over300 million of additional revenue andhas allowed the company to enter theoil, gas and agri-commoditiesinspection markets as well as double itsmarket share in the minerals tradingsegment. The acquisition providedBureau Veritas access to a globalnetwork required to compete withSGS and Intertek in this segment.

In April 2011, Intertek acquired Moody

International for 508 million or 13.5xEBITDA. The acquisition has enabledIntertek to strengthen its position in

the global energy market (currently #2behind SGS), especially in the strategic

upstream division.Eurofins doubled its pharmaceuticaloperations with its acquisition ofLancaster Labs (February 2011). Theacquisition, which added 84 million toits life science business, also allowedEurofins to enter the attractive North

American markets. Eurofins alsorecently acquired IPL (Institut Pasteurde Lille) which doubled Eurofins marketshare of the French environmental

testing market.

2.7x 14.6x 20.0x

4.4x 20.5x 13.6x

2 .1 x 1 3. 1x 2 0. 3x

EV/s

ale

s2011

EV/Ebit

da

2011

EV

/Ebit

2011

2.6x 14.9x 18.5x

2.9x 13.8x 17.8x

*

* Based on May 3rd stock priceand the most recent published net

debt figures


8/12

SME trends

Small to medium sized companies arewell positioned in these current industry

conditions and have themselves beenhighly acquisitive over the past threeyears. We expect this trend tocontinue as they seek scale andinternationalisation.

Specialised TIC companies generatingmore than 10 million in revenues areoften considered to have reached acritical mass in their niche and becomeattractive targets for the large players.

Private equity activity

PE investors have been active in theindustry since the early 2000s. TIC

companies currently owned/partlyowned by a private equity houseinclude, amongst many others: Bureau

Veritas (Wendel), Applus (Carlyle), Exova(CD&R), Socotec (Qualium), LGC(Bridgepoint), TestAmerica (HIG) andESG (3i).

During the past three years we haveseen trade buyers regularly outbidfinancial buyers in auction processes.

Therefore private equity firms have

concentrated on minority stakeopportunities or transacting whencorporates have not been invited tothe bidding process to guarantee asuccessful MBO (be it primary orsecondary).

Recent secondary MBO transactionshave produced excellent multiples formid-sized companies, examples includeKiwa (NPM), Trigo (Industri Kapital),Carso (FSI & Euromezzanine)

(see Figure 11).

8

Numerous smaller

deals

Strong, longstanding

private equity

investment


1 2

Market

Value

Strategic

Value

8x

EBIT

10x / 12x

EBIT

Strategic value drivers

Reinforce market/size/global positioning

Complement an existing business withstrong synergies

Track record and experience to delivera buy and build strategy

Figure 10: Transaction multiples for small and mid-sized firms

Source: Capital Partner

M&A prospectsTIC is one of the few industries that

has proven resilient in the current

challenging macroeconomic

conditions, yielding above average

growth rates and high profit margins.These positive dynamics will continue

to attract a large amount of investment

and will keep the valuations of market

leaders and mid-sized companies high.

Large and mid-market players willpreserve their aggressive externalgrowth strategies over the next fiveyears which will boost the M&A market.

We expect companies with 5 million

to 50 million revenue to remain veryattractive to these buyers. There willbe upward pressure on acquisitionvaluations for companies in this revenuebracket due to the diminishingavailability of such assets for sale.

In particular we expect a strongappetite for TIC businesses thatexhibit the following characteristics:

-

Businesses that offer value-addedTIC and consulting services to theenergy, cleantech, medical,commodities and agro/foodbusiness segments.

- Companies that provide TICservices across the whole valuechain of a niche or a specific sub-segment, from raw materials tomanufacturing and assembly upto distribution to the end user.

- Domestic or regional companiesthat can be developed globallythrough leveraging a potentialacquirers existing network.

M&A activity to

maintain its pace

despite economic

uncertainty


9/129


Ann. date Target HQ Country Business description Acquirer HQ Country Currency EV (m) EV/Sales EV/EBITDA EV/EBIT

Mar-07 CCI AustraliaProvider of technical

services to the coal industriesBureau Veritas France EUR 50,3 1,48x 13,7x 18,6x

Aug-07 ECA SpainProvides inspection, control, testing and

certification services to all industries, as well

as governments

Bureau Veritas France EUR 156,0 0,91x n.a. 8,1x

May-08 Amdel Australia Provider o f analytica l and test ing services Bureau Veri tas France EUR 274,0 2,42x 10,1x n.a.

Oct-08 Socotec FranceInspection, audit, consulting and

and certification for the construction,

industry and health sectors

CDC France EUR 400,0 0,93x 11,1x n.a.

May-09 Noble Denton UKProvider of life-cycle marine and offshoreengineering services to the energy industries

Germanischer Lloyd Germany EUR 141,0 1,81x 9,3x 10,6x

Nov-09 PearlStreet AustraliaThe largest non-destructive testing

services providerin AustraliaALS Laboratories Australia AUD 108,3 1,14x 10,1x 13,7x

Feb-10 LGC UKAnalytical, forensic and diagnostic services

and reference standardsBridgepoint UK GBP 257,0 1,98x n.a. n.a.

Mar-10 AF Kontroll Sweden Technical inspection and non-destructive

testing companyDekra Germany EUR 62,7 1,50x n.a. n.a.

Sep-10 Inspectorate UK Commodities inspection and testing company Bureau Veritas France EUR 543,2 1,61x 10,9x n.a.

Dec-10 Ammtec AustraliaMetallurgical and mineral testing

services companyALS Laboratories Australia AUD 143,5 2,64x 11,2x 13,4x

Dec-10 Velosi UKProvider of TIC services to the oil &

gas industry Applus Spain USD 120,0 0,65x 6,8x 7,9x

Dec-10 Groupe Carso France

Testing services to the environment

and health food & feed and

DNA forensics sectorsFSI France EUR 130,0 1,18x 9,3x n.a.

Feb-11Lancaster

LaboratoriesUSA

Offers analytical services to the pharmaceutical,

food, biopharmaceutical and

environmental sector

Eurofins France USD 200,0 1,74x n.a. n.a.

Mar-11 Moody

InternationalUK Supplier of management system certification,

technical and inspection servicesIntertek UK GBP 450,0 n.a. n.a.13,5x

Jul-11 Trigo FranceComponents quality inspectionand conformity upgrade services company

IK Investment Partners Sweden EUR n.a. n.a. n.a. n.a.

Jul-11 Kiwa NetherlandsIndependent certification inspection,

testing and consultancy firmNPM Capital Netherlands EUR 220,0 1,42x 10,5x n.a.

Average 1,53x 10,6x 12,1x

Note: Based on latest financials preceding the deal date or on the year of the deal if it happened at year-end

Mar-12 ESG UK Campbell Brothers Australia AUD 33,0 n.a. n.a. n.a.

UK based food and pharmaceutical testing

laboratory (Eclipse Scientific) and the Ireland

based microbiological, food chemistry

and residue testing business

Mar-12 T.H. Hill USA Bureau Veritas France USD n.a. n.a. n.a. n.a.Engaged in the provision of engineering,

quality assurance and training solutions

Sep-11 IPL France Eurofins France EUR n.a. n.a. n.a. n.a.Provider of environmental and

food services

Figure 11: Selected M&A transactions

Source:Zephyr, Merger Market, Thomson Financials, Morgan Stanley, company reports


10/12

ContactsSpecialist advice on callFor information on sector trends, valuations and corporate finance advice in TIC

Bruno Ruiz Arrue

Partner, Spain

Telephone: +34 943 327 044Email: [email protected]

Owen Hultman

General Manager, Japan


David Wolfe

Senior Partner, Russia


Pieter Veldtman

Director, South Africa


Horacio Facca

Managing Director, USA

Telephone: +1 (781) 273 6062Email: [email protected]

Richard Holden

Director, United Kingdom


Jan Willem Jonkman

Managing Partner, Netherlands


Ervin Schellenberg

Managing Partner, Germany


Leonardo Antunes

Managing Director, Brazil


Ugo Zampieri

Partner, Italy

Telephone: +39 02 92 88 04 00Email: [email protected]

Michel DegryckPartner, France


Vikas AggarwalAssistant Vice President, India

Telephone: + 91 22 6634 6666Email: [email protected]

10


The global TIC team is focused

on sharing intelligence anddeveloping cross-border M&A

opportunities; meeting

regularly to make the most

of each others knowledge

and relationships

Richard Holden

Member of the TIC Sector Team


11/1211


Market segment definitions and trends (appendix)

Market segments by shareThe TIC sector is spread across a large numberof segments, industries and technical niches,

each characterised by their own specifications,

drivers and growth paths.

Services to industry

The industrial segment is being strongly fuelledby the oil & gas, energy and transportation sectors.Outsourcing in these sectors is acceleratingas regulations become more stringent and

widespread globally.

The building and construction segment is a cyclicalmarket with limited growth prospects in the Westerneconomies. Nonetheless, TIC services are constantlyin demand thanks to new and ongoing regulationsfocused on green and sustainable buildings, as wellas the growing need to manage the lifecycle andintegrity of building assets.

There has been notable private equity activity in thesegment. In 2010 3i Group acquired aerospace and

oil & gas testing specialist Element MaterialsTechnology (formerly Stork Materials Technology)for 160 million. Since then, under 3is ownership,Element has been making acquisitions of its own,buying Detroit Testing Laboratory (DTL) group andMAR-TEST Inc, both active in the aerospacesub-segment.

Consumer testing

The consumer segment includes testing, productinspection, process assessment and technicalassistance for all types of products (e.g. electronics,toys and textiles). The segment offers substantialupside potential due to tighter regulations and theincreasing trend of companies looking to securecoveted third party certification to reinforce thereputation of their product offerings.

Both mid-market and larger players have beentargeting consumer focused TIC companies. EAGInc recently acquired Chemir Analytical Services Inc,a company that specialises in testing toys and other

consumer products. Smaller deals included Interteksacquisition of consumer product testing expertsPorst & Partner GmbH for 2.5 million.

Life sciences, food and environment

The market is dominated by laboratory testingspecialists that are both working for and competingwith the leading TIC players. The segment is alsogoing through a discernible industrialisation trend,

with larger and more specialised labs emergingalong with rising volumes and price pressures.

ALS Laboratory Group (Campbell Brothers)has been active acquiring European based lifescience/environmental businesses of late. The

Australia based company acquired Advanced MicroServices Laboratories and Eclipse Scientific Groupfrom Environmental Scientifics Group for a combinedvalue of 30 million increasing their total employeesin Europe to over 1000.

Commodities

The commodities segment primarily revolves aroundthe global trade of agri-commodities, minerals,oil & gas and chemicals. The sector is supportedby commodity trading, high growth levels and risingcommodity prices. A global network is a prerequisiteand the segment is highly concentrated.

The rising prices of commodities, among other factors,has attracted the attention of the large multinationals.Bureau Veritas recently acquired Acme Analytical

Laboratories and also bought a minority stake incoal analysis business ACT UIS Laboratorios deMoambique Lda.

Source: Campbell, Bureau Veritas, Capital Partner

TIC

marketc. 100bn

9%

22%

7%9%

53%

Consumer Testing

Life Sciences, Food &

Environment

CommoditiesOthers

Services to

industries


12/12

Contact Us...

Australia

AustriaBelgium

Brazil

Bulgaria

Canada

China

ColombiaCzech Republic

Denmark

Finland

France

Germany

IndiaItaly

Japan

Luxembourg

Mexico

Netherlands

NorwayPoland

Russia

Singapore

South Africa

Spain

SwedenSwitzerland

Turkey

UK

USA

With a dedicated TIC sector team, the Mergers Alliance partnersare expertly placed to offer advice.

In particular, we offer:

Advice on structuring and completing deals in the TIC market.

Information on sector trends and valuations.

Access to corporate decision-makers and owners.

Join in the mergers and acquisitions discussion

Global coverage

Stas MichaelBusiness Manager

Direct Line: +44 (0) 20 7881 2990E: [email protected]

www.mergers-alliance.com

Selected Mergers Alliance deals

acquired

sold

to

sold

to

acquired

a portfolio company of

has been acquired by

Management buyout of

has sold a minority stake of

to

sold

to

Documents

2013 Mergers Alliance TIC Report