1. Large, growing and fragmented market? TIC!
The global TIC services market [i] comprises a very broad range of businesses. These groups include diversified global ‘majors’ (e.g. SGS, Intertek, Bureau Veritas), large and fast-growing international players (e.g. Eurofins, Element, Socotec, UL, KIWA), and hundreds of mostly local, small and mid-sized specialists.
Notwithstanding the continued strong consolidation in the industry – for example 90 acquisitions by giant SGS alone since 2012 – the market remains highly fragmented as a result of the number of players. It is estimated that the top three ‘majors’ (above) account for only 15% of the outsourced market, and the next top 20 players only 40% – leaving nearly half of the outsourced TIC market-share split between the many remaining specialists.
Currently, the global TIC market is estimated to be worth $230bn, of which $100bn is outsourced [ii]. That figure is expected to grow, however, with experts suggesting that the market will expand at 5% CAGR from 2015-2020. This anticipated growth is likely to be driven by:
It is anticipated that these underlying market growth drivers will also continue the trend of fragmentation – providing a significant opportunity for continued M&A activity in the sector. Strategic buyers continue to look for acquisitions to enhance their service capabilities by entering new end markets, developing niche technology, or new testing techniques for example. Competitively, private equity investors are seeking strong platforms to execute ‘buy-and-build’ strategies – which currently TIC represents.
In terms of value, although spreads have narrowed as the sector matures and transactions become more intermediated, the prevailing valuation multiples continue to provide arbitrage opportunities, in addition to platform synergies. Smaller transactions can range from 7x – 10x EBITDA, whereas proven platforms and listed companies trade at 12x – 20x EBITDA. As above, it’s thought that this trend will continue.
2. Resilient, scalable and tech-enabled model
As mentioned, a key reason for the growth of the TIC market is its predominantly tech-enabled model – providing the central consolidation of risk management for organisations and outsourcing liability for compliance. This tends to mean regular, or long-term subscription-like contracts as a revenue model for providers.
This less cyclical demand for services, and more regular non-discretionary spend from organisations, means that TIC providers of all sizes can establish strong niches by focusing on specific markets or activities, and are highly scalable. Providers can continue to generate new client wins and high retention by investing in service capabilities that are resilient and technology driven, and that address critical needs such as:
In addition to addressing TIC market movements, service providers are also increasingly investing in dedicated teams to undertake key account management and formalised client renewal processes.
3. Attractive financial metrics set to continue…
It is not uncommon for premium TIC businesses to see organic revenue growth in the high single to low double digits. Strong revenue growth often allows TIC businesses to drive improved profit margins – making them increasingly appealing – by leveraging a semi-variable cost-base through:
- Improved lab utilisation
- Better route density (e.g. on-site inspections and audits)
- Driving efficiency through the use of technology (e.g. automating basic / repeatable processes)
- Improved knowledge sharing to reduce duplicated effort
- Operational cost leverage from HQ functions
Sector EBITDA margins range from c. 10% (for e.g. commoditised, people intensive inspection services) to c.40% for differentiated, tech-enabled, mission critical services. These financial metrics will continue to drive the increasing appeal of the sector.
It is clear that the TIC market is large, growing and fragmented, and comprises businesses that are resilient and scalable. This is making TIC businesses generally highly cash generative and therefore, well suited to private equity backed leveraged buy-outs.
The outlook for M&A in the TIC sector is subsequently strong. Strategic buyers have strong balance sheets and are trading at historically high valuation multiples so with M&A as a critical aspect of their strategy – ‘we expect to see them drive growth through expanded capabilities, broader geographic footprint and scale’ efficiencies. Financial buyers continue to invest in long term consolidation strategies, supported by a fragmented market and access to record amounts of debt and equity funding.
In short, sector operators should continue to ‘TIC’ the M&A box.
[i] The TIC market is broadly defined as including:
- Health & Safety: Products, services and software directed at HSE (UK), OSHA (US) and other regulatory compliance requirements for public and worker safety related issues, management and reporting
- Testing & Certification: Testing, inspection and analytical services directed at product and food assurance, safety, chemical and nutritional composition as required by FDA (US), FSA (UK) and other similar regulators around the globe
- Environmental Services: Engineering, analytic and implementation services directed at environmental compliance, management and reporting
- Corporate Compliance: Governance, risk and compliance software and services that simplify, automate or enhance enterprise risk mitigation, reduce manual administrative tasks and ultimately lower the costs of risk management and reporting
[ii]SGS 2018 Investor Presentation