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TIC sector: a corporate finance perspective

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1 TIC sector: a corporate finance perspective
CEOC General Assembly - 14 May 2012

2 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 Agenda Notes: 1) TIC: Testing, Inspection, Certification

3 ABN AMRO at a glance 1 2 3 4 5 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 Amsterdam Frankfurt Paris New York 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 Product expertise 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 Robbert Claassen Managing Director, Corporate Finance Tel. +31 (20) Mob. +31 (6) All other core products including trade, finance, treasury, cash management and insurance

4 TIC sector deals 1 2 3 4 5 USD 730,000,000 Sale to Investcorp
April 2011 UK AUD 198,600,000 Rights Issue October 2009 Australia AUD 445,000,000 Acquisition of Amdel May 2008 Australia Undisclosed Acquisition finance Bodycote August 2008 UK EUR 1,078,000,000 Initial Public Offering October 2007 France USD 552,000,000 Project Financing August 2007 Turkey Undisclosed Sale of Inspecta to 3i August 2007 Finland Undisclosed Sale of subsidiary to Bridgepoint January 2006 Finland AUD 41,000,000 Takeover offer for CCI February 2005 Denmark EUR 64,000,000 Sale to Applus February 2005 Denmark

5 Continued growth expected in most TIC segments
1 2 3 4 5 Outlook Segment outlook Growing revenues at 3-6x GDP Larger players target 7-10% organic revenue growth Annual bps margin increase through: Back office off-shoring and rationalisation Use of scalability More value added services Lean management Market growth trends Profitability 2010E Market size (EUR bn) 07-11 12-15 12-15 Marine 3 Consumer products 7 Commodities 5 Gov. services 4 Industry 15 Org revenue growth EBITDA Margin ˜11% +220bps 9-12% bps 7-9% Construction 26 1) IVS 10 2) 3) Certification 4 Notes: period mentioned in most recent strategic updates Source: Bureau Veritas, SGS, Intertek

6 TIC market benefits from strong fundamental growth drivers
1 2 3 4 5 Global increase QHSE demand Increasing regulation Trend to outsourcing Meet international client demand Consolidation potential Full-Service concept

7 TIC sector attractiveness: cash generation and defensiveness
1 2 3 4 5 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 Entry barriers: Brand Network Accreditations Reputation Capital requirements Expertise Largest client <3% of revenues at BV and SGS e.g % retention rate in classification and management certification Scalability predominately in lab testing and IT systems 1 3 High and resilient cash flow generation 1 5 Low cyclicality Scalable business model 2 4 2 4 3 Diversified and sticky client base Substantial barriers to entry 5 Source: Company info, ABN AMRO analysis, annual reports

8 Attractiveness acknowledged by stock market
1 2 3 4 5 5 year share price performance (indexed) 1) 1) TIC sector composite based on: SGS, BV, Intertek, SAI Global, Eurofins, Campbell Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

9 TIC Sector best performing segment in Business Services …
1 2 3 4 5 Share price performance ( YTD) 1) 1) TIC sector companies included are: SGS, BV, Intertek, SAI Global, Eurofins, Campbell Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

10 TIC Sector valuation multiples are the highest
1 2 3 4 5 EV/ Sales (2012E) EV/EBITDA (2012E) 1) 1) TIC sector companies included are: SGS, BV, Intertec, SAI Global, Eurofins and Applus Source: date as of May 11, 2012; Factset, Company info, ABN AMRO analysis

11 The TIC market is still fragmented and is consolidating
1 2 3 4 5 Revenue 2011 (EUR m) – largest players Similar M&A strategy at key consolidators 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 1 1 1 Top 3 players represent less than 30% of global outsourced TIC market 2 3 1 Notes: 1) 2010 figures; 2) broker comments 3) estimate Source: Company info, Annual reports, ABN AMRO analysis

12 M&A activity coming back from slower 2009
1 2 3 4 5 Highlights Estimated number of transactions in the global TIC market 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 period, where PE players dominated the TIC M&A market Macquarie Largest deal EUR 130m EUR 193m EUR 500m EUR 1480m EUR 265m EUR 74m EUR 542m EUR 522m EUR m Soluziona RTD Itevelesa Increasing deal size of transactions

13 M&A expected to continue, as clear benefits exist
1 2 3 4 5 Market watchers expect continuation of M&A M&A drivers in TIC are threefold “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 Clear economies of scale and synergy potential The group had already made four acquisitions for a total consideration closed to £30m so far in 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 1 Benefits of a global network, especially in inspection services 2 Addition of fast growing new niches to the portfolio of services 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

14 Clear economies of scale and synergy potential
1 Clear economies of scale and synergy potential 1 2 3 4 5 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 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 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

15 Strong global network: proximity to clients and projects
2 Strong global network: proximity to clients and projects 1 2 3 4 5 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 “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 “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 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

16 Adding technology, accreditations, expertise, segments
3 Adding technology, accreditations, expertise, segments 1 2 3 4 5 Fill the gaps (some 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 “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 “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 “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

17 Some detailed examples of recent transactions
1 2 3 4 5 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 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

18 How to value a TIC company ?
1 2 3 4 5 Typically used by strategic buyers Typically used by financial buyers 1 2 3 4 Discounted Cash Flow Analysis (DCF) Comparable Company Analysis (CCA) Comparable Transactions Analysis (CTA) Leveraged Buy-Out Analysis (LBO) Description Valuation based on the discounted free cash flows of the company over the period generating abnromal returns Valuation based on the main trading multiples of comparable (listed) companies, e.g. SGS, BV, Sai Global Valuation based on the main multiples of recent and relevant comparable transactions Valuation based on IRR calculations assuming a certain (LBO) debt package available Value Drivers EBITDA growth NWC/Capex need ROIC vs WACC Competitive advantage period PER or PEG ratio Sales / EBIT(DA) focus No control premium or synergies in multiples FY0/FY1/FY2 Historical transactions Focus on sales / EBITDA multiples Often control premium or synergies included EBITDA growth (organic / acquisitive) Financing Entry / exit multiples

19 DCF: given long term growth and stable, high returns
1 DCF: given long term growth and stable, high returns 1 2 3 4 5 Predicting free cash flows 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) Measuring the opportunity cost of capital Peer company 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% Source: Company info, Annual reports, ABN AMRO analysis

20 Listed TIC players’ multiples are back to historic averages
2 Listed TIC players’ multiples are back to historic averages 1 2 3 4 5 EV/ EBITDA 2012E EV/Sales 2012E

21 Valuation multiples highly dependent on transaction size
3 Valuation multiples highly dependent on transaction size 1 2 3 4 5 Large size transactions Smaller targets Target Firm EV/ EBITDA Deal size EUR 1-50m EV/EBITDA 5-8x (Mar ‘11) (Nov ‘10) (Jun ‘10) (May ’10) (Sep ‘08) (May ‘08) (Dec ‘07) (Jul ‘07) (Jun ‘’07) (Dec ‘06) EV/EBITDA 8.6x – 13.5x

22 Fewer LBO/ MBO deals in TIC, available debt levels down
4 Fewer LBO/ MBO deals in TIC, available debt levels down 1 2 3 4 5 Target Firm Debt Multiple PE sponsors substantial TIC sector experience

23 Different transaction options exist
1 2 3 4 5 Transaction options Examples Trade Sale Bilateral Limited auction Full Auction Joint Venture/ Alliance / Merger Complementing geography or subsectors Equal size; “verein”, “stiftung” IPO Sizeable deals (Intertek, BV) Brings visibility, access equity capital markets; Floating of Applus ? (Secondary) LBO/ MBO; Popular sector for financial sponsors due to specific value drivers More limited benefit from leverage

24 Private equity vs. strategic buyers: some considerations
1 2 3 4 5 Strategic buyers Private equity 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 debt 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 Pros 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 x 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 x x x x Cons x x x

25 Thank you !


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