M&A HIGHLIGHTS Q TEST & MEASUREMENT. Spotlight on the water treatment & testing sector

Transcription

1 M&A HIGHLIGHTS Q1 17 TEST & MEASUREMENT Spotlight on the water treatment & testing sector

2 TEST & MEASUREMENT M&A HIGHLIGHTS Q1 17 TEST & MEASUREMENT M&A HIGHLIGHTS Q1 17 QUARTER 1 HEADLINES Deal activity remained strong in the first quarter, with year-on-year volume growth of 33%, albeit volumes were down slightly from the record highs of Q4 16 The global outreach of the industry was confirmed with European deal volumes growing 29% in Q1 17 and cross-border deals increasing to account for 2% of all deals The water treatment and testing sector is heating up, with a 24% annual increase in deal volumes. Private equity are leading the charge in this highly innovative and high-growth sector, particularly in technology deals BDO s T&M share price index reveals growth of 79.8% in the five years to March 17, with trading multiples averaging 14.3x EBITDA STRONG M&A ACTIVITY CONTINUES INTO 17 The T&M sector had a strong start to the year with 89 deals in Q1 17. While this represents a 9% decline from the record volumes of Q4 16, the sector remains buoyant with a 33% increase on Q1 16 volumes. A significant increase in cross border transactions was observed with 46 cross border deals, representing 2% of total transactions. Europe increased M&A activity with 27 deals in Q1 17, representing a 29% increase on the last quarter of 16. The UK and US slowed, with a 38% reduction in UK deal volumes and a 17% reduction in the US compared to the last quarter of 16. Private equity volumes also declined, with 7 PE backed deals in Q1 17, compared to 12 in Q4 16. Despite the decline in deal volumes, there remains an expectation of a strong M&A market in 17, with market chatter suggesting strong appetite to transact. EUROPEAN DEALS DRIVE T&M MARKET IN Q1 17 INTERNATIONAL DEAL VOLUMES BY SELLER GEOGRAPHY Q1 1 Q2 1 Q3 1 Q4 1 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Source: MarketIQ M&A ACTIVITY SUMMARY - YEAR ON YEAR UK AND INTERNATIONAL M&A ACTIVITY BY QUARTER AND PE TRANSACTION ACTIVITY US & Canada Europe (excl UK) Asia/Pacific UK Other M&A ACTIVITY SUMMARY BY QUARTER UK AND INTERNATIONAL M&A ACTIVITY AND PE TRANSACTION ACTIVITY 89 deals 7 67 deals 19 deals 6 47 deals Q1 14 Q1 1 Q1 16 Q1 17 Private Equity involvement UK buyer or seller All other transactions Q1 1 Q2 1 Q3 1 Q4 1 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 All transactions UK buyer or seller Private Equity involvement

3 T&M TRANSACTIONS ANALYSIS CROSS-BORDER TRANSACTIONS RISE The international reach of the sector is becoming increasingly prevalent, with Q1 17 setting a new record of 46 crossborder deals. Cross-border transactions represented over half of all T&M sector deals in Q1 17, up 24% from Q4 16 levels. The weakening of the pound has led to increased overseas appetite for UK businesses, allowing them to make offers ahead of their domestic counterparts. 3% of UK target businesses were sold in cross-border deals, whereas 33% of deals completed by UK buyers were of overseas businesses. The UK, US, Canada and Germany were the key target countries for international acquirers, seeing 8, 7, 6 and 6 deals respectively. Europe continues to see high volumes of cross-border activity, with France, and Switzerland key bidder countries, while Germany and Italy have been key target countries. CROSS-BORDER TRANSACTION VOLUMES BY BIDDER GEOGRAPHY, Q US & Canada UK & Ireland Europe (excl UK & Ireland) Asia / Pacific Domestic Cross-border Other CROSS-BORDER TRANSACTION VOLUMES BY QUARTER Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Cross-border transactions Q1 DEAL HIGHLIGHTS Other transactions 3M Co acquired Scott Technologies Inc from Johnson Controls for $2bn. Scott Technologies manufactures airpurifying products, gas and flame detection instruments, thermal imaging cameras, and other life support products for firefighting and personal protection against environmental and safety hazards. The enterprise value is equivalent to 11x estimated annual adjusted EBITDA. Socotec France SA acquired Environmental Scientifics Group Holdings Ltd, which provides testing, inspection and compliance services in a range of sectors including recycling and waste management. NVM Private Equity backed the MBO of 1m turnover Thyson Technology Ltd, a specialist analytical and instrumentation business, which designs and constructs engineering solutions used in the analysis and sampling of gases and liquids for process industries engaged in activities such as water treatment, fossil fuel extraction, processing and distribution, green energy production, petrochemicals and nuclear. CROSS-BORDER TRANSACTION VOLUMES BY SELLER GEOGRAPHY, Q Domestic Cross-border Inflexion Private Equity Partners led the buy-out of Cawood Scientific Ltd, the UK s largest independent provider of analytical laboratory testing services for land based industries. Cawood serves over 3, customers across three divisions: NRM, Sciantec Analytical Services and Sci-Tech Laboratories. The company has circa 17 employees working in four laboratories in Berkshire, Yorkshire, Shropshire and Norfolk. Partnering with Inflexion will enable Cawood to continue its growth in a growing market, as agriculture is subject to increasing demographic challenges. US & Canada UK & Ireland Europe (excl UK) Asia / Pacific Other Eurofins Scientific SE, SGS SA and Bureau Veritas SA continued their consolidation of the TIC market with seven buys between them in Q1 17.

4 M&A HIGHLIGHTS Q1 17 TEST & MEASUREMENT SPOTLIGHT ON THE WATER TREATMENT & TESTING MARKET ACCELERATING GROWTH UNDERPINNED BY ROBUST MARKET DRIVERS According to the UN, global demand for water is expected to grow by % by 3. Growing water scarcity and the impact of global warming on the water cycle will drive accelerating and long-term demand for water treatment equipment, chemicals and services. The global water technology market is projected to reach US$12bn by, having grown by 4.3% CAGR since 1 1 The global water treatment chemicals sector is projected to reach US$24.9bn by, a CAGR of 4.% from 1 2 The water treatment systems segment, which encompasses technology and application services businesses, is projected to be worth US$.7bn by, a CAGR of 8.% from 1 3 KEY MARKET DRIVERS INDUSTRIAL MARKET Water scarcity Growing population Legislation & regulation Outsourcing Low-quality feedwater Demand for full water solutions Water reuse and recycling. 1 Global Water Intelligence 2 ASD Media 3 Markets & Markets MARKET DEVELOPMENTS Innovation plays a pivotal role in developing technologies to help meet the challenges faced by the sector. The UK Water Research and Innovation Partnership has identified major market opportunities and believes that there is immense scope for the UK to expand its global share in water technology innovation from 3% to at least 1% by 3 in markets such as wastewater reclamation, smart water, flood security and remote-sensing monitoring systems. A good deal of innovation is taking place in new treatment techniques, especially in reducing the need for energy and chemicals. Commercialisation remains dependent on large-scale uptake by industrial or municipal customers. The municipal market is larger, and offers greater economies of scale and opportunities for repeat business in the longer term, however it tends to be more conservative and cost-led. In contrast, the industrial market is smaller, but faster-moving and typically offers higher margins. M&A IN THE WATER TREATMENT AND TESTING SECTOR There have been rising levels of M&A activity in the sector, with 11 deals completed in 16, a 24% increase compared to deal activity levels in 1. Innovative technology is a major driver of M&A, accounting for 62% of all deals since January 1. 8% of technology deals are of targets with IP in water treatment, while other key areas of investment include flow control solutions, monitoring technology including leak detection, smart metering solutions and instrumentation. Deals in the service sector are dominated by providers of laboratory testing services, and suppliers of engineering and consultancy services. Other key areas seeing transactions include providers of hygiene services, inspection & monitoring and analytics. Private equity are very keen on the sector and have backed 64% of UK domestic transactions, the majority being technology deals. Strong appetite remains to invest both from financial buyers and corporates, many of which have been serial acquirers. Valuations in the sector are highly attractive, with the majority of quoted companies trading at multiples of between 11x and 1x EBITDA. PROJECTED WATER USAGE BY SECTOR KM3 8, 7, 6,, 4, 3, 2, 1, % increase Source: UKWRIP 1 3 Domestic, commercial and municipal Industrial Agricultural Total 123% 1% 67% 79% TOTAL WATER TREATMENT DEALS BY TARGET PRIMARY ACTIVITY Number of deals Q1 1 Q2 1 Q3 1 Q4 1 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Source: MarketIQ / BDO Analysis Technology Services Chemicals Integrated

5 TEST & MEASUREMENT M&A HIGHLIGHTS Q1 17 ECONOMIC OUTLOOK: GROWTH SUSTAINED T&M SHARE PRICES GROWING AHEAD OF MARKET SHARE PRICE PERFORMANCE COMPARISON 1 UK ECONOMIC GROWTH A NEW NORM? QUARTERLY UK GDP GROWTH Market capitalisation indexed at 31 January Jan-8 Jul-8 Jan-9 T&M share index FTSE 1 indexed S&P indexed Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Jul-16 Jan-17 1.%.9%.8%.7%.6%.%.4%.3%.2%.1%.% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: Capital IQ Source: ONS and OBR forecast March 17 BDO s T&M index reveals growth of 11.7% in the T&M sector during the six months to 31 st March 17, outperforming both the FTSE 1 index which saw 6.1% growth and the S&P index which grew by 9.%. During the five years to March 17, the T&M index has grown by 79.8%, compared to 67.8% growth in the S&P index and 26.9% growth in the FTSE index. Trading multiple valuations for the T&M index average 14.3x EBITDA, reflecting a robust and attractive sector. GDP was estimated to have increased by.3% during Q1 17, a contraction from levels seen over the previous year. The services aggregate was the main driver of slower GDP growth, while manufacturing increased by.% in the quarter. The OBR has trimmed its forecasts with.3% rises expected each quarter through 17 and.4% rises each quarter through 18. PMI REFLECTS VARYING CONFIDENCE HISTORIC MOVEMENTS IN PURCHASING MANAGERS INDEX (PMI) UK BUSINESS CONFIDENCE BOUNCES AT START OF YEAR BDO UK OPTIMISM INDEX 6 6 UK US EU Index POSITIVE GROWTH 4 Jun-14 Sep-14 Dec-14 Mar-1 Jun-1 Sep-1 Dec-1 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 8 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-1 Jun-1 Sep-1 Dec-1 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Source: IHS Markit All regions showed readings above the level which signals future growth. Europe saw accelerating growth and increasing confidence, leading to the highest readings since early 14. All 22 subsectors saw growth, with the best performance seen in sectors which hint at rising capex such as technology equipment and machinery & equipment. The US saw growth shift down a gear in Q1 17 to a six month low. The UK s PMI has contracted over the last quarter, following the two-year high recorded in December. Growth slowed in manufacturing, while the upturn in March was driven by the service sector, which recorded the best expansion since December. Source: BDO Business Trends Report The BDO Monthly Trends Indices are polls of polls that pull together the results of all the main UK business surveys. ( The BDO Optimism Index reached a high in January 17, with both the manufacturing and service sectors increasing. Confidence dipped in February and March, but still remains above late 16 levels. There are signs that the service sector may be in for a weaker 17 as domestic demand is likely to soften. However, manufacturers are likely to feel a boost as the weaker pound makes UK goods more price-competitive. In March 17 manufacturing confidence rose to its highest level since February 1.

6 FOR MORE INFORMATION: ROGER BUCKLEY M&A PARTNER +44 () SUSANNAH PERKINS M&A SENIOR MANAGER +44 () SIMON LING M&A DIRECTOR +44 () MATT GOODLIFFE M&A MANAGER +44 () This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC3127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright May 17 BDO LLP. All rights reserved. Published in the UK. HB919