Transformation from the carve-out of a network of materials-testing laboratories to a sharply-focused and integrated international provider of demanding testing and advisory services
Following proactive, early discussions with the chairman of Bodycote plc, CD&R carved-out the company’s technical materials-testing business, subsequently renamed Exova, which both CD&R and Bodycote believed could perform better as a standalone company. At the time of CD&R Fund VII’s acquisition, Exova had an international presence with approximately 130 labs and a broadly diversified customer base, yet each lab largely operated on an independent basis, with no meaningful integration, little sharing of best practices and suffered from significant gaps in senior leadership and functional infrastructure.
CD&R’s plan for Exova was clear: upfront investments in organizational streamlining, upgrades in functional management and the development of decision making tools would build the foundation for an attractive business model that could be scaled across the entire lab network and used as a basis for further market share gains. With those improvements and operating rhythms in place, the company has unlocked profits that historically had been held captive to legacy inefficiencies and completed a successful IPO in April 2014.
Key Achievements
- Put in place new senior leadership, including an execution-oriented CEO, to drive the reorganization and professionalization of the business
- Created the functional backbone of the company - from Finance, Sales and HR to IT and CRM
- “De-layered” the organization from six levels of management to four
- Closed or restructured underperforming labs
- Reconfigured the company’s sales force and approach to focus more acutely on customer needs and satisfaction
- Best practice cash management, significant reduction in DSOs
Company Profile
Exova is a leading provider of laboratory-based testing and related advisory services, operating from 121 laboratories in 23 countries worldwide. The Group focuses on providing its customers with technically demanding, value-added testing for a broad range of advanced materials, components, products and systems to ensure compliance with safety, performance and quality standards imposed by customers, accreditation bodies and regulatory authorities. In 2014, the Group served over 25,000 customers, the largest represented 3% of the Group’s total revenue.
Exova manages its business through three geographic segments: Europe (52% of the Group’s revenue in 2014), the Americas (35%) and Rest of World (13%), and operates across five business clusters: Aerospace, Oil & Gas and Industrials, Product, Health Sciences and Middle East. Within the Product cluster, the Group recognizes three principal sub-clusters, which are Fire Safety, Transportation and Calibration.
The expertise of the Group across each business cluster is underpinned by its core technical disciplines, which comprise calibration, chemistry & microbiology, corrosion & protection, fire technology, metal technology, polymers & composites and structures & systems.
Transaction Overview
CD&R’s deep experience with business transformations involving multi-location service businesses, particularly those that have been carved out from a corporate parent, was directly relevant to Exova. While cultivating a strong relationship with Bodycote’s chairman, CD&R concluded early in its due diligence of the business that a significant driver of expected returns could be achieved through the types of enhanced management practices that CD&R had successfully implemented in the past. Bodycote acknowledged that its materials-testing business was non-core, had languished from a lack of strategic commitment by its parent and that freeing up capital and management resources by divesting the business was a logical solution.
In October 2008, CD&R acquired Exova from Bodycote Plc for an implied enterprise value of approximately £442 million, including transaction fees, or 11.1x LTM PF EBITDA. CD&R Fund VII invested $440 million of equity. The total equity investment in the transaction represented approximately 55% of total net capitalization, with net debt to PF EBITDA of 4.9x at closing.
On April 11, 2014, Exova priced a £220 million initial public offering of 100 million shares at £2.20 per share, translating into a market capitalization of £550M and an enterprise value of approximately £700 million. CD&R Fund VII and affiliates sold approximately 29% of their stake in Exova. Pro forma for the transaction, CD&R funds continue to own 54% of the equity.