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TIC sector: a corporate finance perspective. CEOC General Assembly - 14 May 2012. Agenda. Notes: 1) TIC: Testing, Inspection, Certification. ABN AMRO at a glance. 1. 2. 3. 4. 5. Corporate Finance & Equity Capital Markets.

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Tic sector a corporate finance perspective

TIC sector: a corporate finance perspective

CEOC General Assembly - 14 May 2012


Agenda

Notes: 1) TIC: Testing, Inspection, Certification


Abn amro at a glance
ABN AMRO at a glance

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5

Corporate Finance & Equity Capital Markets

  • 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

Amsterdam

Frankfurt

Paris

New York

  • 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

  • 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

Robbert Claassen

Managing Director, Corporate Finance

Tel. +31 (20) 6282200

Mob. +31 (6) 51478238

E-mail [email protected]

  • All other core products including trade, finance, treasury, cash management and insurance


Tic sector deals
TIC sector deals

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USD 730,000,000

Sale to Investcorp

April 2011

UK

AUD 198,600,000

Rights Issue

October 2009

Australia

AUD 445,000,000

Acquisition of Amdel

May 2008

Australia

Undisclosed

Acquisition finance Bodycote

August 2008

UK

EUR 1,078,000,000

Initial Public Offering

October 2007

France

USD 552,000,000

Project Financing

August 2007

Turkey

Undisclosed

Sale of Inspecta to 3i

August 2007

Finland

Undisclosed

Sale of subsidiary to Bridgepoint

January 2006

Finland

AUD 41,000,000

Takeover offer for CCI

February 2005

Denmark

EUR 64,000,000

Sale to Applus

February 2005

Denmark


Continued growth expected in most tic segments
Continued growth expected in most TIC segments

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Segment outlook

Outlook

Market growth trends

Profitability

  • 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

2010E Market

size (EUR bn)

12-15

12-15

07-11

3

Marine

7

Consumer products

5

Commodities

4

Gov. services

15

Industry

26

Construction

1)

10

IVS

2)

3)

4

Certification

Notes: period mentioned in most recent strategic updates

Source: Bureau Veritas, SGS, Intertek


Tic market benefits from strong fundamental growth drivers
TIC market benefits from strong fundamental growth drivers

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Global increase QHSE demand

Increasing regulation

Trend to outsourcing

Meet international client demand

Consolidation potential

Full-Service concept


Tic sector attractiveness cash generation and defensiveness
TIC sector attractiveness: cash generation and defensiveness

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  • Entry barriers:

    • Brand

    • Network

    • Accreditations

    • Reputation

    • Capital requirements

    • Expertise

  • Largest client <3% of revenues at BV and SGS

  • e.g. 90-95% retention rate in classification and management certification

  • Scalability predominately in lab testing and IT systems

  • EBITDA margins 18-27% of top 6 listed players

  • Cash conversion ratio’s of top 3 players typically reach > 80%

  • None of the global top 3 has reported organic revenue declines in any year since 2000, although some segments are cyclical

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1

High and resilient cash flow generation

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5

Low cyclicality

Scalable business model

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Substantial barriers to entry

Diversified and sticky client base

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Source: Company info, ABN AMRO analysis, annual reports


Attractiveness acknowledged by stock market
Attractiveness acknowledged by stock market

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5 year share price performance (indexed)

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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


Tic sector best performing segment in business services
TIC Sector best performing segment in Business Services …

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Share price performance (2005-2012 YTD)

1)

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


Tic sector valuation multiples are the highest
TIC Sector valuation multiples are the highest

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EV/EBITDA (2012E)

EV/ Sales (2012E)

1)

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


The tic market is still fragmented and is consolidating
The TIC market is still fragmented and is consolidating

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Revenue 2011 (EUR m) – largest players

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

  • Small to medium sized targets mainly (90% < EUR 30m revenues)

  • Deal size increases however (Moody, Inspectorate)

  • M&A focus on commodity sectors and industrial sectors recently

  • Also M&A focus exist on filling the gaps: i.e. add missing segments or (emerging) countries

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Top 3 players represent less than

30% of global

outsourced TIC market 2

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Notes: 1) 2010 figures; 2) broker comments 3) estimate

Source: Company info, Annual reports, ABN AMRO analysis


M a activity coming back from slower 2009
M&A activity coming back from slower 2009

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Highlights

Estimated number of transactions in the global TIC market

  • 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 2005-2009 period, where PE players dominated the TIC M&A market

Macquarie

Largest deal

EUR 1480m

EUR 500m

EUR 250-300m

EUR 522m

EUR 542m

EUR 74m

EUR 265m

EUR 130m

EUR 193m

Itevelesa

Soluziona

RTD

Increasing deal size of transactions


M a expected to continue as clear benefits exist
M&A expected to continue, as clear benefits exist

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Market watchers expect continuation of M&A

M&A drivers in TIC are threefold

“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

  • “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

Clear economies of scale and synergy potential

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

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Benefits of

a global network, especially in inspection services

2

Addition of

fast growing new niches to the portfolio of services

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“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


Clear economies of scale and synergy potential

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Clear economies of scale and synergy potential

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  • 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

“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


Strong global network proximity to clients and projects

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Strong global network: proximity to clients and projects

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  • 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

“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


Adding technology accreditations expertise segments

“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

“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

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Adding technology, accreditations, expertise, segments

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  • 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 oflaboratories 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

“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


Some detailed examples of recent transactions
Some detailed examples of recent transactions

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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
How to value a TIC company ?

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Typically used by financial buyers

Typically used by strategic buyers

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Discounted Cash Flow Analysis

(DCF)

Comparable Company Analysis

(CCA)

Comparable Transactions Analysis

(CTA)

Leveraged Buy-Out Analysis

(LBO)

Valuation based on the main multiples of recent and relevant comparable transactions

Valuation based on IRR calculations assuming a certain (LBO) debt package available

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

  • Historical transactions

  • Focus on sales / EBITDA multiples

  • Often control premium or synergies included

  • EBITDA growth (organic / acquisitive)

  • Financing

  • Entry / exit multiples

Value Drivers

  • EBITDA growth

  • NWC/Capex need

  • ROIC vs WACC

  • Competitive advantage period

  • PER or PEG ratio

  • Sales / EBIT(DA) focus

  • No control premium or synergies in multiples

  • FY0/FY1/FY2


Dcf given long term growth and stable high returns

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DCF: given long term growth and stable, high returns

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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


Listed tic players multiples are back to historic averages

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Listed TIC players’ multiples are back to historic averages

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EV/Sales 2012E

EV/ EBITDA 2012E


Valuation multiples highly dependent on transaction size

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Valuation multiples highly dependent on transaction size

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Smaller targets

Large size transactions

Target Firm

EV/ EBITDA

  • Deal size EUR 1-50m

  • EV/EBITDA 5-8x

(Mar ‘11)

(Nov ‘10)

(Jun ‘10)

(May ’10)

(Sep ‘08)

(May ‘08)

(Dec ‘07)

(Jul ‘07)

(Jun ‘’07)

(Dec ‘06)

EV/EBITDA 8.6x – 13.5x


Fewer lbo mbo deals in tic available debt levels down

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Fewer LBO/ MBO deals in TIC, available debt levels down

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Debt Multiple

PE sponsors substantial TIC sector

experience

Target Firm


Different transaction options exist
Different transaction options exist

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Transaction options

Examples

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


Private equity vs strategic buyers some considerations
Private equity vs. strategic buyers: some considerations

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Strategic buyers

Private equity

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

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

Pros

May lack synergies resulting in lower price

May have much shorter investment horizon, possibly leading to short term (3-5yrs) strategic decisions

If first investment in relevant sector, may take time post acquisition to understand the business thoroughly

If existing management is not strong, might be replaced by PE’s own management team – may lead to substantial initial dislocation internally

May use substantial debt leverage, need for strong financial discipline

Have multiple considerations when buying a company, whereas financial buyers are purely focused on return on investments (IRR and money multiple)

May have a more complex internal governance review processes

May lack experience in M&A, this could delay execution process

x

x

x

x

x

x

Cons

x

x


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