TIC sector: a corporate finance perspective

CEOC General Assembly - 14 May 2012

Agenda

1. Introduction

2.

3.

The outlook for the TIC 1) sector is good

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

Robbert Claassen

Managing Director, Corporate Finance

Tel. +31 (20) 6282200

Mob. +31 (6) 51478238

E-mail robbert.claassen@nl.abnamro.com

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

Product expertise

• 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

• 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

New York

Amsterdam

ParisFrankfurt

1 2 43 5

AUD 198,600,000

Rights Issue

October 2009Australia

TIC sector deals

AUD 445,000,000

Acquisition of Amdel

May 2008Australia

USD 730,000,000

Sale to Investcorp

April 2011UK

EUR 1,078,000,000

Initial Public Offering

October 2007France

USD 552,000,000

Project Financing

August 2007Turkey

EUR 64,000,000

Sale to Applus

February 2005Denmark

Undisclosed

Acquisition finance Bodycote

August 2008UK

Undisclosed

Sale of Inspecta to 3i

August 2007Finland

AUD 41,000,000

Takeover offer for CCI

February 2005Denmark

Undisclosed

Sale of subsidiary to Bridgepoint

January 2006Finland

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Org revenue growth

EBITDA Margin

˜11% +220bps

9-12% +100-150bps

7-9% +100-150bps

Continued growth expected in most TIC segments

Outlook

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

Marine

Consumer products

Construction

Commodities

Gov. services

Industry

IVS

Certification

3

7

26

5

4

15

10

4

2010E Market

size (EUR bn)

Market growth trends

07-11 12-15

1 2 43 5

12-15

Profitability

Segment outlook

Notes: period mentioned in most recent strategic updatesSource: Bureau Veritas, SGS, Intertek

1)

2)

3)

TIC market benefits from strong fundamental growth drivers

Global increase QHSE demand Increasing regulation Trend to outsourcing

Full-Service concept Meet international client demand

Consolidation potential

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TIC sector attractiveness: cash generation and defensiveness

High and resilient cash flow generation

Low cyclicality

Substantial barriers to

entry

Diversified and sticky client base

Scalable business

model

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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

2

1

5

4

3

1

2

34

5

Source: Company info, ABN AMRO analysis, annual reports

Attractiveness acknowledged by stock market

0

20

40

60

80

100

120

140

160

180

200

1-May-07 1-May-08 1-May-09 1-May-10 1-May-11 1-May-12

TIC Sector CompositeFTSE 350 Support Services FTSE 350

1 2 43 5

5 year share price performance (indexed)

1) TIC sector composite based on: SGS, BV, Intertek, SAI Global, Eurofins, CampbellSource: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

1)

TIC Sector best performing segment in Business Services …

Share price performance (2005-2012 YTD)

-29%

-17%

13%

14%

26%

54%

57%

63%

154%

214%

General staffing

Distribution

Security services

SpecialistStaffing

BPO/ HR

General BPO

FacilityManagement

Financialoutsourcing

BPO/ IT

TIC

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1) TIC sector companies included are: SGS, BV, Intertek, SAI Global, Eurofins, CampbellSource: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

1)

0.2x

0.6x

0.7x

0.7x

0.8x

1.1x

1.8x

1.8x

2.3x

2.3x

Generalstaffing

Distributors

Securtityservices

SpecialistStaffing

FacilityManagement

General BPO

BPO/ HR

BPO/ IT

Financialoutsourcing

TIC

TIC Sector valuation multiples are the highest

EV/ Sales (2012E) EV/EBITDA (2012E)

6.2x

6.3x

6.5x

7.4x

7.7x

8.2x

8.6x

9.9x

9.9x

11.0x

Securtityservices

Generalstaffing

FacilityManagement

BPO/ HR

General BPO

BPO/ IT

Distributors

SpecialistStaffing

Financialoutsourcing

TIC

1 2 43 5

1) TIC sector companies included are: SGS, BV, Intertec, SAI Global, Eurofins and ApplusSource: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

1)

• 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

705

767

829

842

855

896

923

1,108

1,296

1,417

1,678

1,749

1,859

3,359

3,993

The TIC market is still fragmented and is consolidating

1

Similar M&A strategy at key consolidatorsRevenue 2011 (EUR m) – largest players

1

1

1

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) estimateSource: Company info, Annual reports, ABN AMRO analysis

3

M&A activity coming back from slower 2009

Estimated number of transactions in the global TIC market

5461 63 66

37

59

43

18

84

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012YTD

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

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EUR 130m EUR 193m EUR 265m EUR 74m EUR 542m EUR 522m

RTDSoluziona

Increasing deal size of transactions

La

rge

st

de

al

EUR 250-300mEUR 1480m

Macquarie

Itevelesa

EUR 500m

Highlights

M&A expected to continue, as clear benefits exist

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

2

1

3“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

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

“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

1 2 43 5

Market watchers expect continuation of M&A M&A drivers in TIC are threefold

Clear economies of scale and synergy potential

“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

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 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

1 2 43 51

Strong global network: proximity to clients and projects

“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

“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

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

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

1 2 43 52

Adding technology, accreditations, expertise, segments

“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

“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

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

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“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

Some detailed examples of recent transactions

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

• Based in US and Europe

• 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

• Operates 270 labs and has 900 staff in North America, Africa, Asia and Europe

• Certification, training, inspection, consultancy, research and technological services

• Present in Europe and China

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

• EBITDA LTM: EUR 15m

• n/a • Sales LTM: EUR 132m

• EBITDA LTM: EUR 16m (20m)

Transaction multiples

• EV / Sales 2010: 2.8x • EV / Sales LTM: appr. 1.7x

• EV / EBITDA LTM: appr. 10.3x

• 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

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How to value a TIC company ?

Typically used by financial buyersTypically used by strategic buyers

Comparable Transactions Analysis

(CTA)

Comparable Company Analysis

(CCA)

Discounted Cash Flow Analysis

(DCF)

Leveraged Buy-Out Analysis

(LBO)

Value Drivers • EBITDA growth• NWC/Capex need• ROIC vs WACC• Competitive advantage

period

• EBITDA growth (organic / acquisitive)

• Financing • Entry / exit multiples

• Historical transactions • Focus on sales /

EBITDA multiples • Often control premium

or synergies included

• PER or PEG ratio• Sales / EBIT(DA) focus• No control premium or

synergies in multiples • FY0/FY1/FY2

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

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

Valuation based on the main trading multiples of comparable (listed) companies, e.g. SGS, BV, Sai Global

Valuation based on the discounted free cash flows of the company over the period generating abnromal returns

Description

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21 3 4

DCF: given long term growth and stable, high returns 1 2 43 5

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%

Peer company

1

Source: Company info, Annual reports, ABN AMRO analysis

Predicting free cash flows

Measuring the opportunity cost of capital

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)

Listed TIC players’ multiples are back to historic averages

EV/Sales 2012E EV/ EBITDA 2012E

9.4x

10.7x

10.9x

11.3x

11.4x

12.1x

1 2 43 5

1.9x

2.3x

2.3x

2.4x

2.4x

2.4x

2

Valuation multiples highly dependent on transaction size

Smaller targets

(Mar ‘11)

(May ‘08)

(Nov ‘10)

(Sep ‘08)

(Jun ‘10)

(May ’10)

(Dec ‘07)

(Jul ‘07)

(Jun ‘’07)

(Dec ‘06) 10.4x

13.5x

11.8x

10.9x

8.6x

11.1x

12.9x

10.9x

10.3x

12.8x

• Deal size EUR 1-50m

• EV/EBITDA 5-8x

Large size transactions

Target Firm EV/ EBITDA

EV/EBITDA 8.6x – 13.5x

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10.2x

7.6x

7.2x

5.4x

7.6x

7.5x

5.5x

5.1x

5.0x

2.8x

(Nov '04)

(Nov '04)

(Jan '06)

(Jan '07)

(Jul '07)

(Aug '07)

(Dec '07)

(Aug '08)

(Sep '08)

(Nov '10)

(Jul '11)

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

PE sponsors substantial TIC sector

experience

Debt MultipleTarget Firm

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Different transaction options exist

Trade Sale

• Bilateral• Limited auction• Full Auction

IPO

• Sizeable deals (Intertek, BV)• Brings visibility, access equity capital

markets; Floating of Applus 13-14 ?

Joint Venture/ Alliance / Merger

• Complementing geography or subsectors

• Equal size; “verein”, “stiftung”

(Secondary) LBO/ MBO;

• Popular sector for financial sponsors due to specific value drivers

• More limited benefit from leverage

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ExamplesTransaction options

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

Private equity vs. strategic buyers: some considerations

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 debtP

ros

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

Co

ns

Strategic buyers

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

Private equity

x

xx

x

x

x

x

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x

Thank you !