TIC: the new pecking order
Jan 20, 2019
The scope for adeptic’s traditional ranking of the leading global TIC players resulted from a simple logic: Include any large TIC provider with revenue of around or more than EUR 1bn. More or less, this meant to cover the “usual suspects”: The “Big 3” trinity of SGS, Bureau Veritas and Intertek, plus the few other listed players, the “Germans”, the “ship guys” DNV-GL and LR, and UL. So far, this monitoring of the “Top 13” delivered a relatively comprehensive picture of what is going on in the industry.
When revisiting our ranking, mulling over expected 2018 results and analyzing the long-term evolution of the industry landscape, we arrived at a few interesting observations and conclusions:
- The “Big 3” officially have become the “Big 4”, as Eurofins can be expected to cling the 3rd place in the ranking with an expected revenue of EUR 3.8bn, slightly more than Intertek (EUR 3.5bn 2018e). Eurofins continues its astonishing rise through the ranks, and could begin to take on Bureau Veritas soon - a clear statement how valuable a focused business model can be if paired with courageous execution (or how far big and risky bets can take you, depending on where one would like to position in the current debate around Eurofins' true viability)
- Listed players now occupy the industry’s front row – 12 years ago, the No. 3 and 4 in TIC and 7 of the 10 largest industry players still were foundations. Now, the four largest TIC players and 5 of the Top 10 are listed. In general, foundations slowly but steadily lose ground in TIC. The only reason why their importance in the ranking stays relatively stable is the absence of “commercial predators” large enough to replace them
- However, “foundation ≠ foundation”: DEKRA, TÜV SÜD and especially UL are expected to have done quite well also in 2018, whereas we believe that TÜV Rheinland’s and especially DNV-GL’s results will be mediocre again. In the case of DNV-GL, revenue might even have fallen below EUR 2bn
A 2018 TIC industry ranking like this would nicely confirm our main message of “focus” – those in TIC adhering to a clear-cut and concentrated strategy fare better than the rest. Satisfying maybe, but our considerations did not stop there:
- CCIC, the largest Chinese TIC provider, probably achieved a revenue of EUR 1.3bn in 2018. Our modeling is based on datapoints from other major TIC players, but still fraught with a bit of uncertainty. The company could very well be even more of a heavyweight, with potential revenue of EUR 1.5bn or even 1.8bn. This means that the TIC industry finally has to acknowledge that China is not just a source of revenue, but also of competition
- The “Tier-2 TIC players” continue to push forward. Element, Socotec, BSI, KIWA and RINA all achieve more than EUR 500m of revenue. They have become too big to swallow or to crush for most Tier-1 players, and they have built a few strong market positions (cp. Element in Aerospace testing). Not considering them would leave the picture incomplete
Thus, the case for extending our industry view to the “Top 20” is clear. And this heralds uneasy news for the “old Top 13”: Life is not getting easier.
CFO in TIC: Hot seat
Jan 4, 2019
Looking back at 2018, the year has not only seen a historic heatwave and drought across most parts of Europe, but also the unexpected, one could say sudden departure of both Bureau Veritas’ and Intertek’s Chief Financial Officers. One might speculate what the reasons behind these oustings are.
In the case of Bureau Veritas’ Nicolas Tissot, who joined in May 2016 from French re-insurance company SCOR, it might seem plausible that the Board of Directors was looking for a candidate with more “TIC smell”/experience and a stronger BV-internal network. The choice of Francois Chabas would fit into this narrative, as he has spent more than 15 years with the company, slowly fought his way up the ranks and knows the business very well, having worked in several functions. In that case, the TIC industry would once again have demonstrated how much of a “peculiar animal” and “closed shop” it is. On the other hand, for example Matthias Rapp at TÜV SÜD, who joined from Automotive supplier Webasto, shows that outsiders can successfully find their way into the industry even if entering it on Board level.
Edward Leigh’s case appears to be a bit more complicated. If he were thrown under the bus in order to pacify investors’ mood and stabilize the stock price, as a scapegoat for Intertek’s mediocre half-year results, then this would have yielded exactly the opposite result, as the slide continued. Was there a desire to replace him with somebody more loyal? One argument for this might be the fact that his successor Ross McCluskey just joined two years ago from Inchcape. He was probably onboarded by his back-then and now-again CEO André Lacroix, who has displayed a clear preference for surrounding himself with Inchcape people. However, McCluskey might very well just have been hired because he had already demonstrated his competence. Did Leigh display an unpalatable level of disobedience, maybe in connection with the “ambitious” / “optimistic” financials around the Alchemy acquisition? Unknown.
Apart from such poignant yellow press-style narratives though, there are some hard facts which might explain this. The stock price developments of SGS and Bureau Veritas in particular have not been stellar since 2013, moving sideways in the long-run at best. For their strategic anchor investors, this lack of value creation (apart from dividend payouts) cannot be satisfying. Intertek’s stock price has skyrocketed in the Lacroix age, but has recently tumbled. Some investors could be worried that this is more a straw fire than really sustainable, especially as the “Resources” division is still ailing, not making progress and no strategy beyond “fix it somehow” in sight.
In other words: Pressure on TIC executive teams is mounting, as it gets harder and harder to credibly keep the dream alive. And before biting the bullet themselves, TIC CEOs, like their counterparts in other industries, tend to sacrifice somebody else first to placate the gods.
Taken from this angle: Carla, buckle up…?
Socotec: More than just words, apparently
Dec 7, 2018
Socotec is another vivid example of Private Equity involvement and strategies in TIC. Its parent Cobepa acquired a 67% share in the company in February 2013, in deal together with French private equity company Five Arrows Managers. Until mid-2016, the Belgian investment company then patiently observed a steady, but rather sluggish growth – revenues stood at EUR 516m in 2015, a mere EUR 40m more than three years ago. Cobepa then chose to install a new CEO, who subsequently embarked on a more aggressive growth strategy with a significant M&A element. The target is to achieve a revenue of EUR 800m by 2020 and to “become the European leader in TIC in the Construction and Infrastructure sectors” by then.
Since Hervé Montjotin’s arrival, things have developed more dynamically, with the acquisition of Environmental Scientifics Group alone adding EUR 110m of revenue to the group’s accounts. We have noted two interesting themes:
- Socotec aims to build additional national platforms in Europe; the acquisitions of ESG in the UK, ZPP in Germany and DIMMS in Italy are intended to strengthen or create such. Interestingly, Socotec does not appear to be too picky if a “platform target” only fits in a broader sense. The business models acquired range from specialized construction engineering and construction-related ground inspection services in Germany, to environmental services in the UK, to surveying and environmental measurements for infrastructure and Oil & Gas in Italy.
We think that this flexible strategy accounts very well for the nature of the “Industrial TIC Services” segment, which is more or less a national play. Socotec’s expansion strategy is based on a consistent general theme, but does not attempt to build some kind of Pan-European structure that is difficult to make work anyway.
- With the acquisition of AJA Registrars, Socotec is driving its (Management) Certification business outside Europe. One may criticize that this does not really fit to the self-set Europe-focused goal, but we think that Socotec has recognized an opportunity here and snapped up an interesting target.
On a side note: In Germany, the Group now claims to “operate from 17 locations, with 800 people generating more than EUR 80m in revenue” – enviable even for larger non-German TIC players, maybe especially for those who recently have decided to more or less withdraw from the German Industrial TIC Services market. Germany could become a battlefield for Industrial TIC Services, in particular if Socotec really turns out to be the “last man standing scale provider of highly routine services”, as some believe.
Our takeaway: Socotec is another PE-amplified second-tier player that is gearing up and who could begin to really hurt the incumbents. Be it complexity or complacency that has deterred them from doing so far until now, the Tier-1 TIC players should finally acknowledge that something is happening on the lower decks. Socotec’s ambitions appear modest to date, but who says that this has to stay this way – especially if a new PE parent requested an even faster pace of expansion?
This could entail a fight for market share in Industrial TIC Services, which are not really growing anymore in Europe, maybe at some point escalating to a price war. Or, as those from other industries would call it: Competition.