In its 2019 report (which covered M&A transactions through December 2018), Livingstone commented that the industry has experienced an incredible level of consolidation over the last decade. Since this trend has continued, many of the key takeaways from the last TICC report continue to hold true:
- The industry has benefitted, and will continue to benefit from, increased regulatory tailwinds on a global basis
- Targets with unique, difficult-to-replicate services and scale continue to fetch outsized valuation metrics, often stretching TEV/EBITDA multiples into the mid-teens (and sometimes higher)
- The largest market participants have instituted a greater emphasis on operational performance optimization, including integration of previously acquired targets, as well as organic growth via greenfield strategies to build new laboratories (e.g., Intertek only completed on deal in 2019, the December closing of Check Safety First Limited, which provides Intertek with a foothold in the travel and tourism sector)
- Operating leverage related to scale continues to generate a competitive advantage within the industry. Illustrating this point, the FDA recently announced a proposed rule to establish laboratory accreditation within the food testing sector, a requirement that will favor professionalized, well-established industry participants
- Private equity investors continue to be attracted to TICC companies’ asset-light business models, favorable regulatory tail winds, recurring/repeat revenue characteristics, and fragmented industry characteristics (especially in the U.S., which is behind Europe in terms of industry maturity and consolidation)
In addition to these continuing trends, we also saw evidence that large strategics have begun to acquire ancillary services outside the industry’s traditional TICC offering in 2019. We view these off-shoot acquired targets as evidence of two themes: (i) years of aggressive M&A activity within the TICC sector has significantly reduced the number of attractive “for sale” core service targets; and (ii) large strategics have demonstrated a willingness to consider creative service extensions to continue their M&A strategies. These adaptations are a natural evolution in an M&A market characterized by constrained supply and practically unlimited demand.
Time will be the final judge regarding the success of these broader-focus M&A strategies, but we believe these themes may continue to proliferate in 2020 and beyond as these acquisitions succeed in achieving, or fail to deliver, expected outcomes.
SGS’s 2019 M&A activity may provide the best example of this M&A strategy shift. In 2019, SGS completed 12 reported acquisitions, five of which included targets that provide non-traditional TICC services. The acquisitions listed below demonstrate a shift in SGS’s M&A strategy, indicating an enhanced focus on higher value-added services, highlighted by the disposal of Petroleum Service Corporation in June 2019.
January 2019: Leansis Productividad, Spain LeanSis Productividad provides operational and manufacturing training and capacity building services to over 200 clients across Spain. This acquisition provides SGS with immediate growth opportunities in Spain, and will help SGS gain valuable and scalable expertise in the field of organizational capacity building. In addition, LeanSis Productividad diversifies SGS’s product offering and complements its training portfolio, in line with SGS’s Certification & Business Enhancement strategy.
February 2019: Floriaan B.V., Netherlands Floriaan provides fire safety consulting and engineering services to industrial and real estate companies across the Netherlands. This acquisition complements SGS’s existing Environment, Health, & Safety business capabilities, and provides immediate growth opportunities in the field of fire safety.
June 2019: i2i Infinity Ltd., United Kingdom i2i is a leading software as a service (SaaS) provider of electronic certificates of origin in the U.K. Through its proprietary and innovative software, i2i provides customs compliance services. In a world of increasing trade and customs complexity, the acquisition of i2i aligns with SGS’s Governments & Institutions division’s strategy to act as a facilitator of global trade compliance through digital solutions.
July 2019: Maine Pointe LLC, USA Maine Pointe is a supply chain and operations consulting firm delivering business process optimization and improvement through its proprietary methodology Total Value Optimization (TVO)™. Its services focus on procurement, logistics and operations with a customer base across industrial & manufacturing services, chemical, consumer & packaged goods, oil & gas including many related private equity relationships. This acquisition significantly accelerates SGS’s inroads into more advanced consultancy services in Certification & Business Enhancement.
July 2019: Vircon Limited, Hong Kong Vircon operates in the fast-growing Building Information Modelling (BIM) market in Hong Kong and elsewhere in the North East Asia region. SGS currently operates a joint venture with Vircon, and the acquisition of 20% of the Vircon shares will further strengthen the business cooperation between Vircon and SGS. This acquisition provides SGS with further access to the BIM market for both public and private sectors, giving SGS early insight into the design stages of major government capital works projects in the region.
Additional noteworthy 2019 trades include: Marshfield Labs’ sale to IDEXX Laboratories, Inc. (November 2019; undisclosed); QC Laboratories, Inc.’s sale to Sintavia, LLC (July 2019; undisclosed); SGS’s sale of Petroleum Services Corporation to Aurora Capital Partners (June 2019; $335 million TEV; 1.1x TEV/revenue); and Bwise Beheer B.V.’s sale to SAI Global Pty Limited (March 2019; $200 million TEV).
M&A Activity Notes
Public strategics collectively closed 43 publicly-announced deals in 2019, 30 fewer than the year prior. Of these parties, ALS Limited (3), Applus Services (4), Bureau Veritas (3), Eurofins Scientific (7), and SGS SA (11) closed 28 (65% by count) of the total.
For their part, PE investors continue to be attracted to TICC companies, which continue to be characterized by asset-light business models, favorable regulatory tail winds, recurring/repeat revenue characteristics, and fragmented industry characteristics (especially in the U.S., which is behind Europe in terms of industry maturity and consolidation). By Livingstone’s count, the number of PE-backed platforms increased by six over the course of 2019, excluding any investments that were not publicly announced. Notable PE transactions include: Bridgepoint Advisers’ acquisition of QualiTest Ltd. from Marlin Equity Partners; Saw Mill Capital’s acquisition of DPIS Engineering, LLC; and Hamilton Robinson Capital Partners’ acquisition of Tanknology Inc.
TICC Public Companies
During 2019, publicly-traded TICC sector companies’ collective TEV/EBITDA multiple increased 22% (from 13.2x to 16.0x) and their indexed stock prices increased by 29%. These significant increases were off recent lows at the end of 2018, levels last experienced in early 2Q2017. In addition, public TICC stocks tracked closely with the S&P 500 (which slightly outperformed the TICC index) and the FTSE All-World Index (which slightly underperformed the TICC index) in 2019.
During this same period, public TICC companies’ market-cap weighted stock price trends were highly correlated with those of both the S&P 500 and the FTSE All-World indices. This high correlation is in direct contrast to trends experienced in 2017 and 2018 trends. In 2017, TICC significantly outperformed both market indices (38% versus 18% for the S&P 500 and 22% for the FTSE), whereas in 2018, TICC significantly underperformed both market indices (-21% versus -7% and -12%).
TICC public company stock prices have continued to increase in 2020, up 5.0% during January.
With the last decade in the rearview mirror, Livingstone expects the sector to continue to see both strategic and private equity M&A activity this year. Hindsight, as they say, is 2020.