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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.


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


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


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

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raTU

V Sud

TUV Su

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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


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


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X X X X X X X

X X X X X X X

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Mar

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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


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


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


David WolfeSenior Partner, Russia


Pieter VeldtmanDirector, South Africa


Horacio FaccaManaging Director, USA

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

Richard HoldenDirector, United Kingdom


Jan Willem JonkmanManaging Partner, Netherlands


Ervin SchellenbergManaging Partner, Germany


Leonardo AntunesManaging 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 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


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

Contact Us...

AustraliaAustriaBelgiumBrazilBulgariaCanada

ChinaColombia

Czech RepublicDenmarkFinlandFrance

GermanyIndiaItalyJapan

LuxembourgMexico

NetherlandsNorwayPolandRussia

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

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

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