European TIC businesses pursue global growth path

Private equity helps to drive internationalisation

An increase in the internationalisation of Testing, Inspection & Certification (TIC) businesses is being fuelled in part by greater involvement from private equity firms. A decade ago, the ‘big five’ strategic players in the TIC sector were leading Mergers and Acquisitions (M&A) activity. They are now being challenged by fast-growing buy-and-build (B&B) platforms, like Normec, Trescal and Phenna.

While strategic players focus their B&B approach on diversification of services as well as geographical expansion, private equity firms are in general also focused on building value to exit. There is substantial evidence that success in acquiring and integrating businesses from abroad significantly increases the exit multiples for B&B platforms. Normec and Trescal as speakers at our European TIC conference in March 2024 were two lively examples of this.

Internationalisation in the sector over the last decade is being enabled by intense levels of M&A activity. However, despite the rise of internationalisation, there is still significant opportunity for national players to grow, both organically and inorganically. There are lots of opportunities globally in the TIC sector in what is still quite a fragmented market.

Speakers at the European TIC Conference commented that every time they look in detail at a country, they find more and more new targets. This is also supported by new local regulations every year, a general increase in regulation and compliance and environment, social and governance (ESG) elements becoming more important for TIC businesses. As a result, newly founded niche players are stepping into the TIC market.

Achieving critical mass

When TIC companies expand abroad, they need to do so with sufficient critical mass in a specific region to succeed. Not least, in being able to keep up with changing country regulations governing TIC activities. In our experience, the scale required to reach critical mass varies by territory and activity. However, as a rule of thumb, 100 employees in a territory represents sufficient scale from which to expand and build capabilities.

As well as meeting the growth ambitions of TIC business owners, demand for greater internationalisation can also be client driven. Clients look to the convenience of TIC providers to mirror their global footprint. Global clients may also be keen to receive all of their TIC services from a single provider. Conference speaker Joep Bruins, CEO of Netherlands-headquartered Normec, for example, described his business expansion model as being based on offering clients a ‘one-stop-shop’ in the form of a range of different TIC sector-specific services.

The approaches that TIC businesses take to global expansion vary. Some concentrate on a single sector while others spread their nets more widely. Another TIC Conference speaker, Guillaume Caroit, CEO of France-based Trescal, outlined the benefits of working only in metrology. The company has expanded into 33 countries and now has 70,000 global customers. An alternative strategy is to target growth in a number of attractive end-markets. For example, Normec operates across nine countries and operates in the food, life safety, sustainability and healthcare sectors.

Intense M&A activity

Given the currently high levels of M&A activity in the TIC sector, competition among buyers is understandably intense. Businesses that succeed in their acquisition ambitions are generally those that articulate a very clear message to their target to convince them that they will be the right fit.

Currently, the internationalisation trend is dominated by companies from developed countries, predominantly Europe and the US. Although there are a large number of TIC businesses in emerging countries, particularly Asia, they have yet to really get a grip on the European or US markets.

Complex rules and regulations in developed countries can make them difficult markets for developing country players to crack. There are also cultural and reliability issues that new entrants to established markets may need to address. Furthermore, developed countries tend to offer fewer smaller-sized targets for an acquisitive outsider to begin building their TIC portfolio.

We expect the trend for cross-border acquisitions in both directions between Europe and US companies will continue to dominate in the coming years.
 

Routes to success

The routes TIC companies choose to take towards greater internationalisation vary. We are seeing a lot of M&A activity based on fairly aggressive B&B strategies. Both Normec and Trescal favour this path to success. Around half of Normec’s business is from acquired companies and it has bought over 60 businesses since starting in 2015.

Acquisitions give TIC businesses a ready-made foundation to scale up. They don’t have to start from scratch or rely on ‘greenfield’ expansion. Also, the highly skilled nature of the TIC sector sets a high entry bar in terms of the expertise and experience of personnel. It could mean businesses growing organically from the ground up may find they lack expertise in local regulations. On top of this, they could face a long wait to receive the necessary accreditation to run their testing labs.

Clearly, selecting the right target business is essential. Here, commercial due diligence work comes into its own. At Normec, a process-driven approach to deals relies on using the company’s well-established ‘integration playbook’. That way, Normec minimises transaction risks associated with integration by ensuring it undertakes sufficient due diligence.

In some cases, we have seen full integration slow down the B&B process for a TIC business on an expansionary trajectory. This can be frustrating and divert management time from the business of further expansion. However, the overall benefits of being able to integrate procedures and technologies can be significant.

Fully integrating a new add-on business is only one of the paths to success for growing TIC businesses. From a target’s point of view, some prefer to maintain a niche focus within their chosen TIC sector. Others prioritise maintaining their independence and brand recognition while being backed by a financially strong organisation.

Another approach we see regularly is to build a group of brands. Here, the acquired companies retain their original identities and, to a degree, their independence but are part of an over-arching global group structure. The advantages include greater flexibility to respond to changing local conditions as well as an autonomy that motivates staff and maintains customer loyalty.

Building value

Business value has to be supported by revenue growth and improvements in margins of the acquired business. Typically, organic growth of an acquisition needs to be at least double-digit, with EBITDA margins of 20% or higher. So, the better integrated the buyer and target are, the more likely they are to maximise value towards a profitable exit from a B&B platform for investors and owners.

Whatever routes TIC businesses take to grow, Capitalmind Investec offers a well-established track record of support. We have ongoing mandates advising numerous TIC businesses and to date have worked on more than 50 transactions in this space. We have supported all the major strategic buyers and private equity firms in the TIC market in closing transactions.

Read our full conference write up