Transcript Robbert Claassen, Global Trends and Developments in TIC

TIC sector: a corporate finance perspective
CEOC General Assembly - 14 May 2012
Agenda
1.
Introduction
2.
The outlook for the TIC 1) sector is good
3.
Consolidation set to continue
4.
How to value a TIC company?
5.
Typical transaction structures
Q&A Session
Notes: 1) TIC: Testing, Inspection, Certification
ABN AMRO at a glance
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2
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Corporate Finance & Equity Capital Markets
Amsterdam
New York
Paris
Frankfurt
• The Corporate Finance & Capital Markets division
of ABN AMRO consists of ~95 financial
professionals with the majority of its execution
power driven from the Amsterdam office
• ABN AMRO CFCM is also present in France,
Germany and the USA with dedicated Corporate
Finance teams, and is currently extending its
network and presence in other relevant markets
• CFCM is supported by dedicated Sector Teams
of Equity Capital Markets and ABN AMRO’s
global network of Private Banking and Corporate
Banking professionals who jointly offer access to
major corporates and investors as well as their
key decision makers
Product expertise
Robbert Claassen
Managing Director, Corporate Finance
Tel.
Mob.
E-mail
+31 (20) 6282200
+31 (6) 51478238
[email protected]
• Debt Solutions (acquisition & leveraged finance,
export & project finance, loan syndications, debt
capital markets, asset securitisation, structured
finance, capital structuring & advisory)
• Corporate Finance & Capital Markets
• Private Equity
• All other core products including trade, finance,
treasury, cash management and insurance
TIC sector deals
1
USD 730,000,000
AUD 198,600,000
AUD 445,000,000
Sale to Investcorp
Rights Issue
Acquisition of Amdel
April 2011
UK
October 2009
Australia
May 2008
Australia
Undisclosed
EUR 1,078,000,000
USD 552,000,000
Undisclosed
Acquisition finance
Bodycote
Initial Public Offering
Project Financing
Sale of Inspecta to 3i
August 2008
UK
October 2007
France
August 2007
Turkey
August 2007
Finland
Undisclosed
AUD 41,000,000
EUR 64,000,000
Sale of subsidiary to
Bridgepoint
Takeover offer for CCI
Sale to Applus
January 2006
Finland
February 2005
Denmark
February 2005
Denmark
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3
4
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Continued growth expected in most TIC segments
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2
3
4
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Segment outlook
Outlook
Market growth trends
 Growing revenues at 3-6x
GDP
 Larger players target 7-10%
organic revenue growth
 Annual 100-200bps margin
increase through:
• Back office off-shoring
and rationalisation
• Use of scalability
• More value added
services
• Lean management
Org revenue
growth
˜11% 1)
2)
9-12%
EBITDA
Margin
2010E Market
size (EUR bn)
Marine
3
Consumer products
7
Commodities
5
Gov. services
4
Industry
15
Construction
26
IVS
10
Certification
4
+220bps
+100-150bps
3)
7-9%
+100-150bps
Notes: period mentioned in most recent strategic updates
Source: Bureau Veritas, SGS, Intertek
07-11
12-15
Profitability
12-15
TIC market benefits from strong fundamental growth drivers
1
2
Global increase QHSE demand
Increasing regulation
Trend to outsourcing
Full-Service concept
Meet international client
demand
Consolidation potential
3
4
5
TIC sector attractiveness: cash generation and defensiveness
2
3
4
5
3
1
 EBITDA margins
18-27% of top 6
listed players
 Cash conversion
ratio’s of top 3
players typically
reach > 80%
1
High and resilient cash
flow generation
1
5
Low cyclicality
Scalable
business
model
2
4
2
 None of the global
top 3 has reported
organic revenue
declines in any
year since 2000,
although some
segments are
cyclical
 Entry barriers:
• Brand
• Network
• Accreditations
• Reputation
• Capital requirements
• Expertise
4
Diversified
and sticky
client base
3
Substantial
barriers to
entry
 Largest client <3% of
revenues at BV and
SGS
 e.g. 90-95% retention
rate in classification
and management
certification
5
 Scalability
predominately in lab
testing and IT systems
Source: Company info, ABN AMRO analysis, annual reports
Attractiveness acknowledged by stock market
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2
3
4
5
5 year share price performance (indexed)
200
180
160
140
120
100
80
60
40
20
0
1-May-07
1-May-08
1-May-09
1-May-10
1)
TIC Sector Composite
FTSE 350 Support Services
FTSE 350
1) TIC sector composite based on: SGS, BV, Intertek, SAI Global, Eurofins, Campbell
Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis
1-May-11
1-May-12
TIC Sector best performing segment in Business Services …
1
2
Share price performance (2005-2012 YTD)
TIC
1)
214%
BPO/ IT
154%
Financial
outsourcing
63%
Facility
Management
57%
General BPO
54%
26%
BPO/ HR
Specialist
Staffing
14%
Security services
13%
Distribution
General staffing
1) TIC sector companies included are: SGS, BV, Intertek, SAI Global, Eurofins, Campbell
Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis
-17%
-29%
3
4
5
TIC Sector valuation multiples are the highest
1
1)
2.3x
Financial
outsourcing
2.3x
9.9x
9.9x
Specialist
Staffing
BPO/ HR
1.8x
Distributors
1.1x
0.8x
8.6x
8.2x
BPO/ IT
General BPO
7.7x
Specialist
Staffing
0.7x
BPO/ HR
Securtity
services
0.7x
Facility
Management
6.5x
General
staffing
6.3x
Securtity
services
6.2x
Distributors
General
staffing
5
11.0x
Financial
outsourcing
1.8x
Facility
Management
4
TIC
BPO/ IT
General BPO
3
EV/EBITDA (2012E)
EV/ Sales (2012E)
TIC
2
0.6x
0.2x
1) TIC sector companies included are: SGS, BV, Intertec, SAI Global, Eurofins and Applus
Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis
7.4x
The TIC market is still fragmented and is consolidating
Revenue 2011 (EUR m) – largest players
3,993
3,359
1
1,859
1,749
1
2
3
4
5
Similar M&A strategy at key consolidators
• Some 15 active consolidators exist with strong M&A
pipelines
• Pursuing M&A actively, with often dedicated M&A
departments
• 50/50 organic/external growth typically for top 3
1,678
1,417
1,296
• Deal size increases however (Moody, Inspectorate)
1,108
923
896
1
• M&A focus on commodity sectors and industrial
sectors recently
1
855
842
• Small to medium sized targets mainly (90% < EUR
30m revenues)
3
Top 3 players represent less than
30% of global
outsourced TIC market 2
829
767
1
705
Notes: 1) 2010 figures; 2) broker comments 3) estimate
Source: Company info, Annual reports, ABN AMRO analysis
• Also M&A focus exist on filling the gaps: i.e. add
missing segments or (emerging) countries
M&A activity coming back from slower 2009
 Bureau Veritas and SGS
most active in M&A
historically, both with large
global networks, covering
most segments
(“verticals”)
 No industry transforming
acquisitions (yet) between
players in top 15
 Deal size increases
 Since financial crisis,
strategic buyers are more
active, compared to 20052009 period, where PE
players dominated the TIC
M&A market
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3
4
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Estimated number of transactions in the global TIC market
100
84
80
61
60
63
66
59
54
43
37
40
18
20
0
2004
Largest deal
Highlights
1
2005
2006
2007
2008
2009
2010
2011
2012YTD
Macquarie
EUR 130m
EUR 193m
Soluziona
RTD
EUR 500m
EUR 1480m
Itevelesa
Increasing deal size of transactions
EUR 265m
EUR 74m
EUR 542m
EUR 522m EUR 250-300m
M&A expected to continue, as clear benefits exist
1
Market watchers expect continuation of M&A
“Bureau Veritas has been a prolific acquirer of small and medium-size
TIC businesses and appears well-placed to continue this. We see
opportunities for growth across its current businesses, especially in
currently smaller-scale areas such as commodities testing”
RBS on Bureau Veritas
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5
 “TIC sector expertise, knowledge and skills can be
leveraged across different geographical regions. Newly
acquired services / skills can be redeployed across the
network international” Intertek
1
2
For an industry that carries clear economies of scale, TIC remains
remarkably fragmented. […] But with some cyclical deceleration and an
increasingly ripe ownership structure, deal activity looks set to
accelerate, we believe.”
Broker research
3
M&A drivers in TIC are threefold
The group had already made four acquisitions for a total consideration
closed to £30m so far in 2010. Given the current economic climate, we
would expect Intertek to slow its external growth strategy in order to benefit
from potentially lower prices in the months ahead”
HSBC on Intertek
“
2
Clear economies
of scale and
synergy
potential
Benefits of
a global
network,
especially in
inspection
services
Addition of
fast growing new
niches to the
portfolio of
services
3
1
Clear economies of scale and synergy potential
Within “verticals” labtesting segments:
 Efficiency and scalability exist predominantly in the
laboratory intensive testing business, so often within
the same vertical market (e.g. Environmental, Clinical,
Food labs) as utilisation rates are relevant
 Less efficiency gains possible in more people
intensive inspection segments, although local
dominance relevant in e.g. non-destructive testing
Synergies between “verticals”:
 IT systems and IT platform unification
 Network optimisation: TIC sector expertise, knowledge
and skills can be leveraged across different
geographical regions
 Extract the potential inter-disciplinary synergies of a
diversified services portfolio
 Cost and overhead rationalisation
1
2
3
4
“We believe that size is an advantage in the testing and verification
business as economies of scale can lead to better utilisation of
networks. Furthermore, global companies like to work with the
company offering the largest and densest laboratory/office
network internationally”
Source: Pictet on SGS
We believe that margins around 13% are achievable based on
economies of scale […] “Acquisitions in all other divisions could
lead to synergies and lead to higher margins after integration”
Source: Julius Baer on SGS
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2
Strong global network: proximity to clients and projects
International network an increasing barrier to entry
 Although often local business, network is key
 Offering a large and dense global network is vital
(e.g. Automotive suppliers) in more segments
 Geographical leverage, one-stop shopping also e.g.
In management certification
 Large contract execution (e.g. Shell Pernis), limited
number of TIC players are preferred suppliers
Other barriers to entry:
 Extensive expertise needed
 Reputations/ integrity/ brands
 Significant investments in accreditations
 HR management skills
 Access to highly skilled, experienced and specialized
staff
 Harmonization of regulation benefits larger players
 Price pressure in segments drives efficiency
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2
3
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“The group is now actively considering larger acquisitions. […] Something
that would give the group greater reach globally and in an area where
we are currently not the leading player”
Source: CEO Intertek interview, MergerMarket
“TÜV Süd acquired Technical Inspection unit of Dow Olefinverbund. The
takeover strengthens the position of TÜV SÜD in Germany and opens new
perspectives for driving internationalization.”
Source: TÜV Süd press release
SGS is pleased to announce the acquisition of Correl Rail Limited,
Birmingham, UK. "This acquisition enlarges the SGS Industrial Services
offering. Through its unbeatable network, SGS will further develop these
activities in Europe and abroad"
Chris Kirk, CEO of SGS; June 2011
“Bureau Veritas has built a network of mineral testing services following
completion of 4 acquisitions over the past 18 months. This enables the
company to provide laboratory testing services to its clients wherever
they are.
Source: Bureau Veritas press release
3
Adding technology, accreditations, expertise, segments
 Fill the gaps (some 12-15 TIC segments exist)
 Newly acquired technology/expertise can be
redeployed across the (international) network
 Adjacent services and markets
 Understanding processes; e.g. efficient design of
laboratories can be applied to several testing
segments
 Balanced portfolio - reduce exposure to specific
different markets / cycles increasing resilience
 Some look for niche segments with fragmented,
local competition
1
2
3
4
“Trough this acquisition DEKRA, leading testing organization in Europe, is
significantly expanding its position in the area of product testing and
certification. For instance, DEKRA is acquiring an internationally
recognized testing brand: KEMA-KEUR. KEMA Quality holds a big
variety of accreditations that cover all relevant standards”
CEO DEKRA, August 2009
“Amdel brings the technical expertise and commercial base to assist
the group in becoming a leading global player in minerals testing and
inspection services. The acquisition perfectly complements that of CCI
Holdings and Cesmec.”
CEO Bureau Veritas, May 2008
“The combination of Moody and Intertek provides a platform for the
enlarged group to further develop its service offerings and network
within the oil and gas industries specifically, but also to the wider
energy and industrial markets. Intertek will now have a leading position in
providing quality and safety services to the assets, processes and products
for the energy market”
Wolfhart Hauser, Chief Executive Officer of Intertek; March 2011
5
Some detailed examples of recent transactions
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2
3
4
Target
• General de Servicios ITV SA
• Stork materials Technology
• Stewart Holdings Group Limited
• Kiwa
Acquirer
• SGS Group
• 3i
• Campbell Brothers Ltd
• NPM Capital
Seller
• Fomento de Construcciones y
Contratas
• Stork industry Services
• Close Brothers Private Equity
• ABN AMRO Participaties
Description
• ITV Spain business currently
manages 43 vehicle inspection
centers and has 600 employees,
whereas ITV Argentina operates 32
vehicle inspection centres and has
employs 173 people
• Provides support for every kind of
industry with accredited materials
testing, product testing, failure
analysis and consulting
• Provides inspection and analysis of
metals, minerals, ores, solid fuels
and recycling scrap, and the
provision of geochemical services to
the mining and exploration industry
• Certification, training, inspection,
consultancy, research and
technological services
Transaction date
• 29 December 2010
• Announced: 24 November 2010
• Announced: 30 June 2011
• Announced: 11 July 2011
Deal value
• EUR 180m
• EUR 150m
• GBP 146m
• EUR 220m (estimate)
Target financials
• Sales 2010: EUR 64m
• Sales LTM: EUR 88m
• n/a
• Sales LTM: EUR 132m
• Based in US and Europe
• EV / Sales 2010: 2.8x
• Present in Europe and China
• Operates 270 labs and has 900 staff
in North America, Africa, Asia and
Europe
• EBITDA LTM: EUR 15m
Transaction
multiples
5
• EV / Sales LTM: appr. 1.7x
• EV / EBITDA LTM: appr. 10.3x
• EBITDA LTM: EUR 16m (20m)
• n/a
• EV / Sales LTM: appr. 1.7x
• EV / EBITDA LTM: 13.8x (ca 11x)
Source: Mergermarket, ABN AMRO estimates
More level playing field between strategics and PE? PE deals up to EUR 250m typically financed by local banks via
club deals; PE still important player in bidding for platform acquisitions with clear buy and build potential
How to value a TIC company ?
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Typically used by strategic buyers
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3
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Typically used by financial buyers
1
2
3
Discounted Cash Flow
Analysis
Comparable Company
Analysis
Comparable
Transactions Analysis
Leveraged Buy-Out
Analysis
(DCF)
(CCA)
(CTA)
(LBO)
4
Description
Valuation based on the
discounted free cash
flows of the company
over the period
generating abnromal
returns
Valuation based on the
main trading multiples of
comparable (listed)
companies, e.g. SGS,
BV, Sai Global
Valuation based on the
main multiples of recent
and relevant
comparable transactions
Valuation based on IRR
calculations assuming a
certain (LBO) debt
package available
Value Drivers
•
•
•
•
• PER or PEG ratio
• Sales / EBIT(DA) focus
• No control premium or
synergies in multiples
• FY0/FY1/FY2
• Historical transactions
• Focus on sales /
EBITDA multiples
• Often control premium
or synergies included
• EBITDA growth
(organic / acquisitive)
• Financing
• Entry / exit multiples
EBITDA growth
NWC/Capex need
ROIC vs WACC
Competitive advantage
period
1
DCF: given long term growth and stable, high returns
1
2
3
4
Predicting free cash flows
 Forecasts needed for revenue growth and profitability margins
 Measure free cash flows after necessary investments, e.g. lab-equipment, inspection instruments, premises, net working
capital, technology
 Understand period of competitiveness specific TIC segment (using e.g. Porter analysis)
Measuring the opportunity cost of capital
Peer company
Intertek
Bureau Veritas
SGS
Levered Equity Beta (ABN AMRO analysis)
0.65
0.61
0.75
Levered Equity Beta (Bloomberg)
0.88
0.45
0.79
Levered cost of equity
6.7%
6.9%
4.8%
Unlevered cost of equity (in peer's currency)
6.0%
6.3%
4.5%
Source: Company info, Annual reports, ABN AMRO analysis
5
2
Listed TIC players’ multiples are back to historic averages
1
2
3
4
EV/Sales 2012E
EV/ EBITDA 2012E
2.4x
12.1x
2.4x
11.4x
2.4x
11.3x
2.3x
10.9x
2.3x
10.7x
1.9x
9.4x
5
3
Valuation multiples highly dependent on transaction size
12.8x
(Mar ‘11)
10.3x
(Nov ‘10)
10.9x
(Jun ‘10)
12.9x
(May ’10)
11.1x
(Sep ‘08)
(Dec ‘07)
(Jul ‘07)
8.6x
10.9x
11.8x
(Jun ‘’07)
(Dec ‘06)
3
• Deal size EUR 1-50m
EV/ EBITDA
(May ‘08)
2
Smaller targets
Large size transactions
Target Firm
1
13.5x
10.4x
EV/EBITDA 8.6x – 13.5x
• EV/EBITDA 5-8x
4
5
4
Fewer LBO/ MBO deals in TIC, available debt levels down
Debt Multiple
Target Firm
2.8x
(Sep '08)
5.0x
(Aug '08)
5.1x
(Dec '07)
5.5x
(Aug '07)
7.5x
(Jul '07)
7.6x
(Jan '07)
(Jan '06)
(Nov '04)
(Nov '04)
2
3
4
5
PE sponsors substantial TIC sector
experience
(Jul '11)
(Nov '10)
1
5.4x
7.2x
7.6x
10.2x
Different transaction options exist
Transaction options
Trade Sale
• Bilateral
• Limited auction
• Full Auction
Joint Venture/ Alliance / Merger
• Complementing geography or
subsectors
• Equal size; “verein”, “stiftung”
IPO
• Sizeable deals (Intertek, BV)
• Brings visibility, access equity capital
markets; Floating of Applus 13-14 ?
(Secondary) LBO/ MBO;
• Popular sector for financial sponsors
due to specific value drivers
• More limited benefit from leverage
1
Examples
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3
4
5
Private equity vs. strategic buyers: some considerations
Cons
Pros
Strategic buyers
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2
3
4
Private equity
 Tend to be able to pay a higher acquisition price because of
revenue or cost-based synergies
 Can move more quickly in due diligence because they have
industry expertise
 May be able to pay cash or equity and have little need or risk of
raising debt
 More experienced in M&A processes, as buying and selling
companies is their business
 Unlikely to waste time in the process, in general no motive to
prolong process – e.g. to gain access to commercially sensitive
information
 If already invested in the sector – may be able to act as a
strategic buyer
 May put a new management team in place that can help with
various management issues
 Have capital to invest – recent lack of opportunities mean that
increasingly PE investors have funds available
x Have multiple considerations when buying a company, whereas
financial buyers are purely focused on return on investments (IRR
and money multiple)
x May have a more complex internal governance review processes
x May lack experience in M&A, this could delay execution process
x
May lack synergies resulting in lower price
x May have much shorter investment horizon, possibly leading to
short term (3-5yrs) strategic decisions
x If first investment in relevant sector, may take time post
acquisition to understand the business thoroughly
x If existing management is not strong, might be replaced by
PE’s own management team – may lead to substantial initial
dislocation internally
x May use substantial debt leverage, need for strong financial
discipline
5
Thank you !