Supply and Demand Trends: I - Laboratory Association Of New

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The Environmental Lab Market:
Recent Trends and Developments
Food
Steve Maxwell
Laboratory Association of New Hampshire
June 20, 2013
Recreation
Historical Perspective
2
 The industry developed following the landmark environmental legislation of the
late 1970s and early 1980s
 Growth was rapid during the 1980s, and in to the early 1990s, and many firms
exhibited strong profitability
 This growth and profitability drove rapid entry into the business
 By mid 1990s, a sustained period of over-capacity began to emerge
 Price competition gradually became widespread, and increasingly fierce,
facilitated by on-going productivity and automation advances
 With excess capacity, it became easier to grow via acquisition than by
construction of new “green-fields” capacity
 Hence, a long period of industry consolidation commenced
Consolidation Trends
3
 Even as early as the late ‘80s, firms embarked upon consolidation strategies –
on the premise of fragmentation and economies of scale
 Enseco was the first “mega-company” – consolidating three major labs, and
then going to the public markets in the late 1980s
 With continuing add-on acquisitions, Enseco merged with IT Labs, and was re-
formulated as Quanterra in the early 1990s
 STL emerged in the late 1990s, eventually acquiring a weakened Quanterra and
some fifteen other companies, to become the dominant industry player – with
over $350 million in revenues
 TestAmerica later merged with STL, and remains the largest player
 Key acquisition-based players today include Eurofins and ALS
The Current Situation
4
 Over-capacity seems to be a permanent feature of the industry
 Although M&A activity remains strong, this is still a very fragmented industry
relative to most other businesses
 Price competition has remained fierce, with only very occasional lulls in
intensity – there is always someone happy to bid lower
 Although long predicted to do so, the excess “fringe” capacity never seems to go
away
 Productivity advances have been extraordinary and continuous
 Private equity firms have tried their hand at the business
 Yet, there always seems to be at least one or two acquisition-based companies,
interested in trying to expand in the business
Top 25 Labs - 2012
5
Company
TestAmerica
Pace Analytical Services*
ALS Lab Group*
Accutest Laboratories
EMSL Analytical
Eurofins U.S. Holdings*
Microbac Laboratories*
Alpha Analytical
Environmental Science Corp.
GEL Laboratories LLC
SGS Environmental*
QC Labs
Spectrum Analytical
Bureau Veritas/U.S. Labs
Energy Laboratories
Calscience Analytical
Benchmark Water Monitoring
Sherry Laboratories*
Phoenix Environ. Labs
Integrated Analytical
REI Consultants
PDC Laboratories
ENCO, Inc.
Ana-Lab Corporation
Curtis and Tompkins
Total
Company
Headquarters
Location
Ft. Washington, PA
Minneapolis, MN
Houston, TX
Dayton, NJ
Westmont, NJ
Des Moines, IA
Pittsburgh, PA
Westborough, MA
Mt. Juliet, TN
Charleston, SC
Wilmington, NC
Southampton, PA
Agawam, MA
Novi, MI
Billings, MT
Garden Grove, CA
Columbus, OH
Daleville, IN
Manchester, CT
Randolph, NJ
Beaver, WV
Peoria, IL
Orlando, FL
Kilgore, TX
Berkeley, CA
Annual
Environmental
Revenues
Number of
Employees
$258.0
$102.0
$102.0
$85.0
$65.5
$62.0 (e)
$35.0
$33.0
$28.6
$26.5 (e)
$21 (e)
$20.6
$16.4
$16.1
$15.0 (e)
$15.0 (e)
$11.6
$11.5
$10.9
$9.8
$9.4
$9.1
$9.0
$8.9
$8.8
2255
935
850
630
528
dnr
dnr
239
252
dnr
dnr
207
160
100
dnr
dnr
110
100
82
65
104
91
91
91
67
$990.7
Longer Term Revenue Trends
6
TestAmerica
Pace Analytical Services
ALS Lab Group
Accutest Laboratories
EMSL Analytical
Eurofins U.S. Holdings
Microbac Laboratories
Alpha Analytical
Environmental Science
QC Labs
Spectrum Analytical
Bureau Veritas/U.S. Labs
Benchmark Labs (3Stone)
Sherry Laboratories
Phoenix Environmental
Integrated Analytical
2007
2008
2009
2010
2011
2012
$300
$68.5
$13+$41+$10.7+
$18.4 = $83.1
$62+$20.8 =
$82.8
$46.7
$29+$17.6+$9 =
$55.6
$35
$16.8
$27.0
$18.4
$20
$18.6
$30*
$10.3
$8.6
$11.3
$277
$77
$35.5+$41.9+
$14.0 = $91.4
$63.5+$21=
$84.5
$54.2
$32.0+$19.7+$
9 = $60.7
$40
$17.7
$29.0
$18.8
$17.2
$17.7
$23.6
$12.5
$9.1
$11.2
$255
$77
$37+$39.4+
$15.3= $91.7
$60.5+$19 =
$79.5
$53.4
$31.5+$17.4+
$8 = $56.9
$40
$17.7
$28
$18.5
$16.6
$14
$15.0
$12.6
$8.5
$9.3
$265
$86
$55.4+$41.6
= $97
$82.5
$278
$98
$97
$258
$102
$102
$85
$85
$60.6
$33+$15.7+$8
= $56.7
$35
$24.2
$27
$17.6
$16.1
$17
$11
$10.2
$10.1
$8.9
$61.5
$34+$16.6+
$8 = $58.6
$35
$28.8
$28
$19
$15.4
$16.2
$11.2
$10.7
$9.5
$8.8
$65.5
$62 (e)
$35
$33
$28.6
$20.6
$16.4
$16.1
$11.6
$11.5
$10.9
$9.8
Longer Term Revenue Trends
7
Key Strategic Questions
8
 There are a number of key strategic questions, or paradoxes, about the lab
industry which remain generally unanswered. For example:

Centralized vs. de-centralized systems

Big labs vs. small labs

Optimal sales and marketing strategies

Specialization vs. diversity of analytical service offerings
New Markets, Growth Opportunities
9
 Because of this constant situation of excess capacity and severe price
competition, most firms have looked far and wide for growth and
diversification opportunities in other areas
 Within the general environmental sector, some firms have focused on
radiological testing, air testing, dioxin work, or other specialties
 But when a new or more attractive market emerges, many firms quickly rush
into it, erasing any higher profit opportunity
 Some environmental labs have also looked farther afield, at other analytical
service industries, including food, pharmaceutical, mineral and drug testing,
as well as various other new sectors – but generally without much success
 Today, many firms are gearing up to test “emerging” contaminants
Merger and Acquisition Trends
10
 Because of the continued fragmentation of the business, many different
players have attempted consolidation strategies
 But in retrospect, few if any can be judged to be successful
 Just as in laboratory and instrumentation capacity, there always seems to be
an excess of sellers in this industry as well
 This – along with the general growth and profitability prospects for the
business – has worked to keep valuation levels low
 For the last fifteen years or so, valuation levels have hovered around the 3.5 to
5.0 times true trailing EBITDA – although there are of course exception well
below and somewhat above that range
 No particular reason to expect significant change in the future
Ownership Transition Issues
11
 Ownership transition is important in a private firm – liquidity for owners,




reduced uncertainty for employees, orderly transition for the business
Alternatives include various types of internal ownership transfers, as well as a
partial or total sale of the company to a third party
Internal transfers often allow the firm to maintain its independence and
“culture,” continuity in terms of employees and clientele, and may provide a
stronger incentive to more entrepreneurial employees , but may be more
difficult, time-consuming or contentious to consummate – may be more
difficult to “do business with friends,” and the “selling price” will typically be
lower for the selling or exiting principals/shareholders
External sales may bring a higher price to sellers, greater career opportunities
for employees, and greater access to capital resources or new markets and
clients, but may also lead to a gradual or perceived loss of independence or
culture
change is never comfortable -- some people may feel threatened, or may be
worried about their jobs
The Valuation Process
12
 The value of a private illiquid firm is typically calculated by constructing
certain “multiples” for similar transactions or for similar companies – or
companies with a known market value – and then applying those multiples to
the firm to be valued
 The multiples most commonly utilized are ratios of cash flow, but sometimes
revenues, operating profits, or book value are also used It is important to
realize that these are only rough rules of thumb – each individual deal is
different
 The actual value paid will depend on a wide range of issues specific to the
individual buyer and seller:
 “strategic” value – regarding sector, geography, capabilities, etc.
 recent financial performance
 strength of management
 diversity and strength of clientele
 future business development opportunities
Alternative Deal Structures
13
 Most transactions are done with some combination of cash, debt and stock
 Most smaller deals only include components of cash (current vs. future) and
stock
 Cash is always “king” but sometimes there can be strong upsides in accepting
the buyer’s stock as deal currency
 Sellers should always make sure they have tax advice when considering
different sorts of deal structures
 “Earn-outs” are very common in this industry, but can have both strong
advantages or disadvantages:
 Works to keep the selling firm motivated, to achieve the earn-out
 But seller is judged on management and performance of a business that he
or she no longer really controls
 May be difficult to accurately measure performance
Common Seller Mistakes
14










Waiting for better financial prospects
Limiting the field of potential buyers
Entering unilateral discussions prematurely
Communicating the asking price
Not knowing or fully qualifying the potential partner/buyer
Disclosing an insufficient amount of information at the outset – invitation to
renegotiate price later
Allowing the buyer to gain access to important information prematurely –
especially competitors
Creating a less-than-urgent pace
Failing to administer a competitive process
Not hiring the proper team of advisors
Why Many Deals Go Bad
15
 A lack of strong strategic guiding principles – too much focus on the “hunt”
 A lack of clear ground rules about the combination “process”
 Not enough attention to the details – lots of moving parts in a deal
 Poor communication and stakeholder outreach
 Overly aggressive growth or financial performance targets – setting impossible




objectives
No explicit consideration of the integration process in the financial forecasts
A general cultural disconnect – often difficult to mesh two companies where
operating styles, philosophies and cultures vary
Management keeping information too close – get the employees involved and
motivated to make things work
Deviating from the plan, or allowing the wrong changes to the plan
The Future Outlook?
16
 The environmental testing business remains a critical – if vastly under-






appreciated – component of stronger and more sustainable environmental
stewardship
The demand and criticality of environmental sampling and testing will continue
into the long-term future – although the revenue size of the business may not
expand very quickly
We are likely to see at least marginal growth in certain field, mobile and realtime testing technologies which will also moderate future growth in the fixedlaboratory portion of the business
As the regulatory, technological and marketing complexities of the business
continue to grow, the smaller and weaker capacity will gradually drop out of the
business
New sub-markets may develop, but they will quickly be filled
Transaction prices are not likely to improve appreciably
Some firms will have a good business in this market, but they must
continuously figure out how to sell smarter and operate cheaper
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