Bluebox Testing, Inspection & Certification Report
August 18, 2017
M&A Update, August 2017
Testing, Inspection & Certification (TIC) companies operate across multiple industries and are especially prevalent in the food, chemical, manufacturing, pharmaceutical and energy sectors.
Increasing regulatory requirements and a spate of high profile health & safety breaches (e.g. the tragedy at Grenfell tower, VW’s diesel scandal & horse meat in supermarkets) are providing opportunities for businesses in the TIC space as more companies look to outsource compliance to third party specialists. In addition, more complex products are increasing the demand for services from external supply chain compliance experts. As trade with emerging economies has expanded, there has been an increased demand for testing services to adhere to international standards. All of these factors have contributed to strong sector growth predictions of 5-6% CAGR between 2016 and 2022. This growth is calculated to bring total market value to £86 billion over the same period.
There are key characteristics of businesses in the sector that have made acquisitions very attractive. The fragmented nature of the market, low capital expenditure ratios, recurring revenues, and the non-cyclical nature of businesses, has attracted several trade and financial investors to the sector.
Recent Activity
The fragmented nature of the TIC industry provides significant opportunity for further consolidation. The strong M&A activity during the last year confirms this. The UK market saw 11 deals in the sector, with the food & drink subsector being well represented in the past 6 months. The largest acquisition was Element acquiring Exova for £764m, with further notable deals including LGC’s acquisition of BRC Global Standards and Inflexion’s acquisition of Cawood Scientific, who in turn have acquired Mambo-Tox.
Transaction multiples for mid-tier companies have reached up to 17x operating profits. With investors willing to pay premiums to participate in the likely growth to come from market consolidation.
Mapping the Industry
The TIC sector is highly fragmented, with the top 8 players representing only 38% market share. More than 50% of the market is composed of small and mid-sized companies. The market is highly acquisitive, with 150-200 deals worldwide each year and larger players being particularly active.
SGS Group (Switzerland) and Bureau Veritas (France) are currently the market leaders, with £4.77bn (9% of the market) and £3.86bn (7% of the market) of revenue in 2016 respectively.
A few big players, such as Intertek (UK), Dekra (Germany) & DNV GL (Norway), follow behind them. The top 10 players are all based in Europe, leading to strong consolidation and exit opportunities.
Bolt-Ons
Bluebox’s own research in the market confirms that many private equity firms are aware of the fragmentation in the market and the potential opportunity it represents.
Over the past 18 months, Inflexion Private Equity has made regular acquisitions in the sector, either through direct investments or ‘bolt-ons’ by existing portfolio firms. In late 2015, the firm acquired Alcumus, a tech-enabled compliance risk management services provider, and British Engineering Services, a testing & certification services provider, to the engineering industry. Both firms have subsequently acquired smaller players in their respective markets. The Alcumus deal is also representative of the new digital tools and available data that are transforming the industry by adding value to businesses in accessing their supply chains.
Fragmented markets present opportunities for a relatively larger participant to ‘hoover-up’ the market by acquiring firms that allow the expansion of their current operations or provide complementary services to their current customers. Inflexion’s portfolio companies Alcumus and British Engineering Services are both examples of this having acquired smaller players, Santia and Nortest, respectively.
The Race to Tech
Looking forward, industry participants will continue to feel increasing pressure to improve their technological capabilities. For workflow management and analytical needs, this can be done through the commercial arrangements, but for products and services that are able to completely replace certain testing functions (e.g. sensors, virtual reality, etc.) it is probable that companies will want to bring this expertise in-house through acquisitions.
As companies begin to make acquisitions to stave off the threat of replacement by tech-based newcomers, they will need to make strategic investments in order to keep up with competitors. This will create a very hospitable environment for technology focused operators within the TIC industry, as they see their valuation multiples rise significantly.
Alternate View: Regulation
The global trend over the past 25 years has been towards increasing the prevalence of international standards regulating company operations, particularly those countries within the EU.
However, one possible threat to broad TIC industry growth is the anti-globalisation rhetoric primarily coming from politicians who backed the ‘leave’ vote in the UK and the Trump administration in the US. Both have talked publicly about repealing large swathes of regulation in a bid to aid businesses. If these statements were to ever materialise into actual legislation, there would be a clear impact on the current demand for testing and certification services.
Who’s Buying?
The industry has seen both trade and financial acquirers. Due to the mature nature of the sector in the UK, a large proportion of activity involves trade companies looking to consolidate their current position in the market. However, private equity houses are also betting on the growth of the sector and looking at the market fragmentation as an opportunity.
The past 12 months have shown an even split between domestic and foreign interest, with only half of the bidders being UK based. Foreign interest has come from the USA, France, Germany, Italy and Australia.
