M&A: a divided field
While the biggest players are scaling back their acquisitions, the healthy appetite of second-tier firms is driving an active M&A scene.
Key players have all pledged significant funding for M&A and announced ambitious short-term targets. For example, SGS completed 12 transactions in 2017, moving it closer to its strategic plan of acquiring revenues of CHF 1bn (c. €867m) by 2020. And RINA is looking to spend around €200m ahead of an IPO in the next three years.
M&A has, however, become more challenging. The largest listed companies are mainly focusing on small tuck-in deals. This partly reflects the lack of sizeable targets in a fragmented sector, but also the premium price of largescale transactions, which offer less scope for value creation.
In addition, some high-profile acquisitions – such as Bureau Veritas’s purchase of Maxxim at the top of the oil and gas market (10.7x EV/EBITDA) – have underperformed.
Meanwhile, however, second-tier and private equity-backed businesses are still highly acquisitive. These companies are often better placed to justify the price of larger deals, through expansion of their geographical and sector reach. A good example is Netherlands-based ACTA Holding BV’s purchase of Helsinki-headquartered Inspecta Group Oy for €200m (14.0x EV/EBITDA).
The power of PE
Private equity groups are responsible for many notable transactions. In the last two years, high-profile deals have included PSP and Partners Group’s investment in Cerba (12.0x EV/EBITDA), Apax’s buyout of the remaining stake in Unilabs (11.8x EV/EBITDA) and BPAE’s public to private purchase of SAI Global (9.4x EV/EBITDA).
Private equity groups are increasingly open to looking at smaller platforms, provided they help build sector leadership with a strategic geographic footprint. Inflexion’s recent investment in Cawood Scientific, a specialist in the food, environmental and veterinary segments, is an example of investors’ appetite to acquire niche operators.
A key attraction of the sector is the potential for multiple exit options. In the main this comes in the form of a sale to a larger private equity fund or a well-capitalised trade purchaser. This was the case with 3i’s disposal of ESG to SOCOTEC, and US-based Incline Equity Partners’ recent disinvestment of AmSpec Holding Corp, a petroleum specialist, to Olympus Partners (12.0x EV/EBITDA).
In some situations, an IPO is a credible alternative. However, the post-float performance of Exova (IPO’d 12.0x EV/ EBITDA, taken private at 9.4x) and Applus raises questions over the operational gearing while a company is listed on the public markets.
Private equity-backed trade platforms will continue to be a key source of deals in the next two years. The investment by 3i and CITIC Capital in Germany-based Formal D, a specialist TIC provider to the automotive sector, is a prime example. The business will look to build presence in the US and Asia and to reduce its reliance on Europe, which still represents 75% of revenues. Other 2017 examples include LLCP’s platform FlexXray, and Spectrum Equity’s purchase of Ireland-based The Digital Marketing Institute.
The last few years have seen increasing convergence as instrumentation and controls manufacturers have looked to augment products and access faster-growing, highe-margin activities by buying services businesses.
One of the best examples is Spectris plc, which built on its acquisition of Millbrook Group (12.0 – 13.0x EV/EBITDA) in 2016 through the purchase of Concept Life Sciences in January 2018 for £163m (c. €185m). The deal is seen as highly complementary to the activities of Malvern Panalytical, which forms part of Spectris’s test and measurement division. Other examples include Horiba – which purchased Mira Ltd (14.0x EV/EBITDA) – as well as Danaher and ITW Inc.
Global growth paths
Emerging markets, especially China, present significant opportunities for M&A. These territories have become attractive through the development of indigenous industries and subsequent acceleration in exports, the introduction of stringent standards and rapid urbanisation.
In addition, the rise of the middle class has led to an increase in private consumption and a demand for both safety and product quality. This in turn offers growth opportunities in areas such as food and consumer goods testing. A prime example is the acquisition of TÜV Rheinland’s food analysis laboratories in China and Taiwan by Germany-based Tentamus Group.
Overlapping M&A strategies among several of the global consolidators are likely to influence pricing in the coming year. Virtually all of the Europe headquartered TIC players are still subscale in the US relative to global footprint, and are also keen to build presence in the fast-growing Chinese market. Food, consumer, agriculture and automotive markets will be particularly attractive.