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Global Testing, Inspectionand CertificationM&A update
Summer 2012
The global testing, inspection andcertification (TIC) market is valuedat €100 billion. Globalisation andthe widespread implementationof tougher rules and regulationsin product safety and efficiencyare driving its development. Thesefactors combined with the greateruse of outsourcing means theindustry is growing faster thanmost other service sectors.
Whilst the industry is highlyfragmented, consolidation is underway, as the market leaders andmid-sized players continue to pursueacquisition strategies. This presentsa 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 butall 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 wideningtheir expertise and
geographic presencethrough M&A
Buoyant M&A market,high transaction
multiples
“There are many opportunitiesin the TIC sector as growthcontinues unimpeded by theglobal economic uncertainty”Michel Degryck, Partner
Perfect time for sellers in highlyacquisitive market
*EMEA (Europe, Middle East, Africa)
Global Testing, Inspection and Certification M&A update
Figure 1: TIC market structure
Source: Mergers Alliance
2
Application of TICservices broadening
Certification of systems and processes (factories,industrial equipment, manufacturers) on variouscriteria: security, environmental impact, complianceto standards.
Testing of commodities toconfirm exploration potentialand quality of products.
Inspection of finished products or commoditiesbefore/after shipment to check compliance withthe buyer’s specifications (quality, quantityand/or customs agencies).
Testing of products againstsafety, regulatory, quality andperformance standards.
TIC companies serve manufacturers, traders, consumer retailers and governments across a variety ofindustries globally.
IndustrycharacteristicsTIC companies ensure that their clientsmeet the required health and safety andquality requirements.
Specifically, they engage in the provisionof 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 ofnumerous 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) and6% to 8% for laboratory testing.
Global Testing, Inspection and Certification M&A update
TICmarket
c. €100bn
60%
40%
Outsourced
In-House
Figure 2: Industry overview
Source: Société Générale, Capital Partner
3
We estimate the global TIC market tobe worth approximately €100 billion.
Circa 60% of this market is conductedin-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 expectedto increase by €10 billion over the2011/2015 period. This growth will beunderpinned by a number of drivers:
Regulations and standards: New andtougher regulations combined with aclear shift towards more complexstandards and rules are creating newmarket opportunities and are generatingadditional growth in existing markets.Initiative examples include: Reach, EUToy 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 togrowth. Local rules and regulationscreate barriers to entry and protectlocal manufacturing.
Product diversity andsophistication: The rise in innovation,diversity and shorter lifecycles of manyconsumer products is increasing theapplication and volumes of servicesoffered by TIC companies.
New standardsand regulations
driving the market
40bn 50bn
2011 2015
5% to 6% CAGR
Figure 3: Outsourced marketcompound annual growth rate
Source: Société Générale, Capital Partner
Only 40% of the TICindustry currently
outsourced
Shorter lifecycles ofconsumer products
contributing toTIC growth
4
Global Testing, Inspection and Certification M&A update
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, there is an increasing trend for Westerncompanies to control the entirevalue chain. Most of the inspectedvolumes are currently done pre-shipping.
-- New rules and standards arebeing imposed, especially in the infrastructure and oil& gas segments (in Brazil for example).
-- New regulations forproducts sold to thedeveloping domesticmarkets which aregrowing quickly thanks to 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 theUK market
Source: Reynolds Porter Chamberlain
100
50
150
300
200
250
350
02008-09 2009-10 2010-11
Consumer GoodsFoodPharma
Expanding TIC in theemerging markets,boosted by global
trade, newinfrastructure
standards and politicalpressures
Product recallsstimulating TIC in theconsumer segment
5
Global Testing, Inspection and Certification M&A update
Trade buyersSGS and Bureau Veritas hold acumulative 18.5% share in the highlyfragmented outsourced market wherefor-profit players compete withnon-profit organisations. Their growthhas been boosted by M&A and theiracquisitive strategies are beingreplicated 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 than€10 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 inApril 2011, Intertek (UK) has moved intothird place with revenues in excess of€2 billion.
From a global perspective, the sector is 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, TÜVSüd, TÜV Rheinland, DNV and TÜV 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%
TÜVRheinland 4%
TÜV SÜD 5%
Dekra 5%
Intertek 5%
BureauVeritas 8.5%
SGS 10%
Others 59%
Figure 5: Market share
0
1
2
3
4
bn
SGS
SGS
Bureau
Verita
s
Bureau
Veritas
Interte
k
Interte
kDek
raDek
raTU
V Sud
TUV Su
d
TUV Rhein
land
TUV Rhein
land
DNVDNV
Applus
ApplusTU
V Nord
TUV N
ord
Lloyd
’s Reg
ister
Lloyd
’s Reg
ister
Campbell
Campbell ULUL
Figure 7: Revenue: Geographicalbreakdown (€ million)
Source: Capital IQ
20%
10%
40%30%
90%80%
60%
50%
70%
100%
0%SGS Bureau
VeritasIntertek
Asia PacificAmericasEurope/Africa/Middle East
1991
845
1114
1746
672
940
663
682
750
A fragmented industryled by SGS andBureau Veritas
6
Global Testing, Inspection and Certification M&A update
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 FTSE100 Bureau Veritas Intertek
Figure 8: TIC index
Current valuationsTIC companies have been outperforming wider European stock indices sinceJanuary 2010. This can be attributed to the non-cyclical, profitable and highgrowth nature of the industry. It should be noted, the strong Swiss franc andthe lack of major acquisitions over the past two years by SGS has seen thecompany’s performance fall back slightly relative to its competitors.
Source: Bloomberg
Investors driving topcompany valuations
higher
M&A activityThere has been significant M&A activityin the TIC sector during the last tenyears. The leading players havecompleted infill acquisitions to broadenor reinforce their service matrix (seeFigure 9) as well as expand theirgeographical footprint.
Transaction multiples for mid-capcompanies can reach 10x to 12x operatingprofit whilst multiples for smaller companiestend 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-capcompanies are often justified by theimmediate synergies they deliver as wellas their strategic relationships with keyclient accounts and the stronger barriers to entry they afford.
Buyers payingpremiums to enterinto new strategic
segments
7
Global Testing, Inspection and Certification M&A update
X X X X X X X X X
X X X X X X
X X X X X X
X X
X X X X X X X X
X X X X
X X X X X
X X
X X X X
X X X X X X X X X
X X X X X X X
X X X X X X X
X
Mar
ine
Ser
vice
s
to In
dust
ries
In S
ervi
ce
Veri
ficat
ion
Con
stru
ctio
nC
ertif
icat
ion
Con
sum
erP
rodu
cts
Gov
ernm
ent
Con
trac
tsC
omm
oditi
esE
nviro
nmen
tA
utom
otiv
eLi
fe S
cien
ce
X X X X X X X X X X
X X X X X X X X XX
Figure 9: Market leaders and listed comparables
In September 2010, Bureau Veritasacquired UK based Inspectorate. Theacquisition gave Bureau Veritas over€300 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 global network required to compete with SGS and Intertek in this segment.
In April 2011, Intertek acquired MoodyInternational 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 strategicupstream 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 NorthAmerican markets. Eurofins’ alsorecently acquired IPL (Institut Pasteurde Lille) which doubled Eurofins marketshare of the French environmentaltesting market.
2.7x 14.6x 20.0x
4.4x 20.5x 13.6x
2.1x 13.1x 20.3x
EV
/sal
es 2
011
EV
/Ebi
tda
2011
EV
/Ebi
t 201
1
2.6x 14.9x 18.5x
2.9x 13.8x 17.8x*
* Based on May 3rd stock priceand the most recent published netdebt figures
SME trends
Small to medium sized companies arewell positioned in these current industryconditions 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. TICcompanies currently owned/partlyowned by a private equity houseinclude, amongst many others: BureauVeritas (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 haveconcentrated on minority stakeopportunities or transacting whencorporates have not been invited to the bidding process to guarantee asuccessful MBO (be it primary orsecondary).
Recent secondary MBO transactionshave produced excellent multiples for mid-sized companies, examples includeKiwa (NPM), Trigo (Industri Kapital),Carso (FSI & Euromezzanine) (see Figure 11).
8
Numerous smallerdeals
Strong, longstandingprivate equity
investment
Global Testing, Inspection and Certification M&A update
1 2
MarketValue
StrategicValue
8xEBIT
10x / 12xEBIT
Strategic value drivers
Reinforce market/size/global positioning
Complement an existing business withstrong synergies
Track record and experience to deliver a 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 thathas proven resilient in the currentchallenging macroeconomicconditions, yielding above averagegrowth rates and high profit margins.These positive dynamics will continueto attract a large amount of investmentand will keep the valuations of marketleaders 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 will be upward pressure on acquisitionvaluations for companies in this revenuebracket due to the diminishingavailability of such assets for sale.
In particular we expect a strong appetite for TIC businesses that exhibit the following characteristics:
-- Businesses that offer value-addedTIC and consulting services to theenergy, cleantech, medical,commodities and agro/food business segments.
-- Companies that provide TIC services across the whole value chain of a niche or a specific sub-segment, from raw materials tomanufacturing and assembly up to distribution to the end user.
-- Domestic or regional companies that can be developed globallythrough leveraging a potentialacquirer’s existing network.
M&A activity tomaintain its pacedespite economic
uncertainty
9
Global Testing, Inspection and Certification M&A update
Ann. date Target HQ Country Business description Acquirer HQ Country Currency EV (m) EV/Sales EV/EBITDA EV/EBIT
Mar-07 CCI Australia Provider of technical services to the coal industries
Bureau Veritas France EUR 50,3 1,48x 13,7x 18,6x
Aug-07 ECA SpainProvides inspection, control, testing andcertification 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 of analytical and testing services Bureau Veritas France EUR 274,0 2,42x 10,1x n.a.
Oct-08 Socotec FranceInspection, audit, consulting andand certification for the construction, industry and health sectors
CDC France EUR 400,0 0,93x 11,1x n.a.
May-09 Noble Denton UK Provider 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 testingservices provider in Australia
ALS Laboratories Australia AUD 108,3 1,14x 10,1x 13,7x
Feb-10 LGC UK Analytical, forensic and diagnostic services and reference standards Bridgepoint UK GBP 257,0 1,98x n.a. n.a.
Mar-10 AF Kontroll Sweden Technical inspection and non-destructive testing company
Dekra 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 Australia Metallurgical and mineral testing services company
ALS 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 FranceTesting services to the environmentand health food & feed and DNA forensics sectors
FSI France EUR 130,0 1,18x 9,3x n.a.
Feb-11 LancasterLaboratories
USAOffers analytical services to the pharmaceutical,food, biopharmaceutical and environmental sector
Eurofins France USD 200,0 1,74x n.a. n.a.
Mar-11 Moody International
UK Supplier of management system certification,technical and inspection services
Intertek UK GBP 450,0 n.a. n.a.13,5x
Jul-11 Trigo France Components 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 firm NPM 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
ContactsSpecialist advice on call…For information on sector trends, valuations and corporate finance advice in TIC
Bruno Ruiz ArruePartner, Spain
Telephone: +34 943 327 044Email: [email protected]
Owen HultmanGeneral Manager, Japan
Telephone: +81 3 6895 5521Email: [email protected]
David WolfeSenior Partner, Russia
Telephone: +7 495 937 5855Email: [email protected]
Pieter VeldtmanDirector, South Africa
Telephone: +27 11 268 6231Email: [email protected]
Horacio FaccaManaging Director, USA
Telephone: +1 (781) 273 6062Email: [email protected]
Richard HoldenDirector, United Kingdom
Telephone: +44 20 7881 2960Email: [email protected]
Jan Willem JonkmanManaging Partner, Netherlands
Telephone: +31 73 623 8774Email: [email protected]
Robert KraskaDirector, Germany
Telephone: +49 69 97 40 30 0Email: [email protected]
Leonardo AntunesManaging Director, Brazil
Telephone: +55 21 2543 3117Email: [email protected]
Ugo Zampieri Partner, Italy
Telephone: +39 02 92 88 04 00Email: [email protected]
Michel DegryckPartner, France
Telephone: +33 148 246 300Email: [email protected]
Vikas AggarwalAssistant Vice President, India
Telephone: + 91 22 6634 6666Email: [email protected]
10
Global Testing, Inspection and Certification M&A update
“The global TIC team is focusedon sharing intelligence anddeveloping cross-border M&Aopportunities; meetingregularly to make the most of each other’s knowledge and relationships”Richard HoldenMember of the TIC Sector Team
11
Global Testing, Inspection and Certification M&A update
Market segment definitions and trends (appendix)Market segments by shareThe TIC sector is spread across a large number
of segments, industries and technical niches, each characterised by their own specifications,drivers and growth paths.
Services to industry
The industrial segment is being strongly fuelled by the oil & gas, energy and transportation sectors.Outsourcing in these sectors is accelerating as regulations become more stringent andwidespread 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 andoil & gas testing specialist Element MaterialsTechnology (formerly Stork Materials Technology) for €160 million. Since then, under 3i’s ownership,Element has been making acquisitions of its own,buying Detroit Testing Laboratory (DTL) group andMAR-TEST Inc, both active in the aerospace sub-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 otherconsumer products. Smaller deals included Intertek’sacquisition 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 emerging along with rising volumes and price pressures.
ALS Laboratory Group (Campbell Brothers) has been active acquiring European based lifescience/environmental businesses of late. TheAustralia based company acquired Advanced MicroServices Laboratories and Eclipse Scientific Groupfrom Environmental Scientifics Group for a combinedvalue of €30 million increasing their total employees in Europe to over 1000.
Commodities
The commodities segment primarily revolves aroundthe global trade of agri-commodities, minerals, oil & gas and chemicals. The sector is supported by 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 AnalyticalLaboratories and also bought a minority stake in coal analysis business ACT UIS Laboratorios deMoçambique Lda.
Source: Campbell, Bureau Veritas, Capital Partner
TIC market
c. €100bn
9%
22%
7% 9%
53%
Consumer Testing
Life Sciences, Food &Environment
Commodities Others
Services toindustries
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AustraliaAustriaBelgiumBrazilBulgariaCanada
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Czech RepublicDenmarkFinlandFrance
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SingaporeSouth Africa
SpainSwedenSwitzerlandTurkeyUKUSA
With a dedicated TIC sector team, the Mergers Alliance partners are 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
Andre JohnstonResearch Manager
Direct Line: +44 (0) 20 7881 2967E: [email protected]
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