2017: TIC industry resilience
The TIC sector stayed on course through a year of political turmoil and some challenging economic conditions.
The state of the market
The global TIC market is valued at around €200bn. It is expected to grow at a CAGR of 5% between 2017 and 2023, with variations by sector.1 In light of the challenges facing the wider economy, this represents a very positive outlook.
The market is highly fragmented. The largest three players – SGS, Bureau Veritas and Intertek – hold a combined market share of less than 25%. The top 10 players account for less than 40% of the market.
In the last decade, the three top operators mentioned above have expanded swiftly into new geographies and sectors, becoming diversified global majors. Second-tier companies such as Dekra, ALS and UL have also gathered scale and international presence while remaining more sector-focused. There is a long tail of regional companies operating in niche disciplines.
A challenging start
2017 started with further downgrades of oil and gas related earnings and a relatively challenging outlook. Weak demand and low prices continued to affect the industry. However, living with lower oil prices and a weaker minerals sector was certainly nothing new, and the industry has largely recalibrated itself.
The TIC sector was influenced by a complex political landscape. The Trump election victory suggested a shift towards protectionism in the US and the growth of anti-regulation sentiment. And on a global scale, the rate of change and the impact of government policy was uncertain, with any dilution in standards naturally having an impact on growth prospects. Despite all of these headwinds, though, the sector continued to thrive and the prospects in 2018 and beyond remain good.
The fog of Brexit
In the UK, uncertainty over the European single market and the Single Standard model continued after Article 50 was triggered. The consensus was that European and UK regulation would continue to lead the world, but the UK’s role has the potential to vary significantly across sector verticals.
Those firms dependent on the UK being the default centre for European operations had to take a hard look at the road ahead. Meanwhile, the underlying uncertainty about public infrastructure spend and currency volatility was also high on the agendas of TIC boards.
Looking through a wider lens, the Brexit vote has undoubtedly caused a moderate slowing of the UK economy. A pattern of subdued consumption and investment activity has emerged amid higher inflation. However, sterling depreciation, healthy net exports and improved global trade momentum have offset the impact. Brexit scenarios will of course have different economic consequences.
The slow progress in the EU–UK negotiations will mean further uncertainty in 2018. Again, this is something the sector has weathered previously, and we see no reason why TIC businesses will not continue to perform well in the short and medium term.
2017 continued to be active on the M&A front. In the second half of the year, the completion of Element/Exova was followed by the announcements of Eurofins/EAG; Applus back on the acquisition trail (both Eurofins and Applus raised equity on the back of their acquisitions); DNV Foundation buying back in the Maryland minority; and continued sponsor auctions for Asiainspection and Atesteo, among others.
There was healthy private equity investment in firms of all sizes, driven in part by some generally favourable financing markets and willing bank support for TIC.
Given the broadly benign macroeconomic and financing backdrop, it is reasonable to expect the M&A scene in the sector to remain busy in 2018.
1: Source: Bureau Veritas 2016 Annual Report.