Itevelesa: Facts and perception

April 7, 2021

Miguel de Cervantes is widely regarded as the greatest writer in the Spanish language, and one of the world's pre-eminent novelists. One cannot underestimate his importance for and in the Spanish culture, similar to Shakespeare’s importance for the English and Goethe’s for the Germans. Logically, Cervantes was selected for the flipside design of Spain’s 10, 20 and 50-Eurocent coins.

He is best known for his novel Don Quixote, a work often cited as both the first modern novel and one of the pinnacles of world literature. In search of adventure and glory, Don Quixote excels in fierce battles and heroic deeds – at least in his perception and memory, whereas the real events turn out to be less dramatic, but often tragicomical, such as the fight against windmills. In Don Quixote, Cervantes illustrates and reminds us that “facts” and “perception” can differ considerably.

At least until now, this is still a blog about Testing, Inspection and Certification, and not about Spanish literature. We only had to think of Cervantes when we read the news that all of the German TÜVs are considering a bid for Itevelesa, currently owned by Hayfin Capital and put up for sale.

Why this? The deal seems to be a rocksolid opportunity: a regulated activity with attractive profitability and stable cashflows, in a country “just around the corner” in the Eurozone, fitting well to existing activities. The Spanish vehicle fleet has grown nicely in the last five years and can be expected to grow at 1.5-2.0% p.a. going forward, getting closer to Italy in terms of cars per capita. Expected acquisition price multiples of 9 to 12, maybe 13, feel modest and acceptable, and acquisition price would be recouped after 8-10 years. What can go wrong with this?

It will not surprise frequent readers of this blog that we prefer to take a slightly different view on this acquisition opportunity. The very appealing stability of the business seemingly reduces risk and uncertainty, and apparently allows reliable forecasts – as one would like to believe. But even this business is subject to forces beyond Excel formulas. From our point of view, it is thus quite important to consider the backdrop on European and national level, reflecting the big picture of politics and macroeconomics.

EU enthusiasts may dismiss the following as Swiss sneer or Brexit bravado, but let’s face it: the EU is not in a good shape, as numerous episodes such as the Covid vaccine disaster or the repeated succumbing to Turkish refugee bullying have shown – leaving aside the internal fractions of North vs. South and East vs. West. At the moment, it’s a political zombie, with depressing economic growth. An inconvenient truth can be found in the World Bank’s GDP statistics: The Euro area and the US economy were the same size 25 years ago, but the latter significantly outperformed the former and is now (depending on currency base year and PPP) about 25-50% larger. Even worse, since the end of the GFC, GDP in the Euro area has more or less stagnated.

But maybe, with Mesdames Lagarde and von der Leyen, things will get better from here on, thanks to initiatives such as the “European Green Deal”. However, maybe not for Vehicle Inspection: if the European Commission is serious about moving “towards near-zero emission transport as soon as possible” (Commission Vice-President Frans Timmermans at a recent ACEA event), it might feel compelled to simply ban combustion-engine vehicles or bluntly limit the overall size of the car fleet. Why? Because according to e.g. Greenpeace, if the EU wants to reach the emissions reduction targets it has committed to in the Paris Climate Accord, it will have to get all combustion-engine vehicles off the road by 2040 – and halve the remaining fleet of fully electric vehicles.

Admittedly, this is just one potential scenario, and not even the one with the highest probability. Perhaps more likely is that Marine Le Pen takes the Élysée in next year’s French presidential elections, installing a mega-eurosceptic at the very heart of the European project. Don’t think so? 48% of French voters do. This would unleash centrifugal forces of a different kind, most likely trigger “Eurocrisis Squared” and sound the death knell for the Euro. For Spain, this would mean to return to the Peseta, which would likely instantly be subject to significant devaluation.

So, macroeconomically, on the European level, we’re faced with a lovely set of scenarios: either continued zombiedom, or a politically successful EU that destroys the very basis of the SVI business, or an imploding EU and Euro that leads to a massive devaluation of assets in “Eurocrisis countries”.

In addition, on the national level, things do not look so bright, either. The Spanish economy never managed to fully recover after the Financial crisis and continues to stand on a wobbly foundation. Side effect of this: Youth unemployment persistently sits above a frightening 30%. Moreover, the very fabric of Spanish state is unraveling, faced with separatist movements in Catalonia and the Basque country. The political system is becoming more and more polarized, with right-wing party Vox as the main beneficial. Spain is not a failed state, but seems to be falling apart in slow motion. Not the kind of stability you would like to have for a business so dependent on government decisions.

Seriously: against this backdrop, why would anyone invest in a low-growth business in a country like this, at such high price? Just because you have been there on holiday a few times and believe you know the country?

In contrast to word on the street, we’re not obsessed with denouncing SVI, but this just does not seem to be the best destination for deploying capital. And for the TÜVs, it would be a huge investment and mean to put many eggs in one basket. An alternative strategy could be to spread the investment across a number of targets, e.g. in Asian economies destined for further growth.

Finally, ask yourself one question: If Spanish SVI is such a great business, why does Hayfin want to exit right now, in the middle of a global pandemic? It could very well be that you have read part of the answer.

Sustainability TIC: Becoming

March 15, 2021

Sustainability is the word in TIC these days – one only has to read the FY2020 results presentations of the larger listed players. Bureau Veritas even chose to elaborate on the topic as one of its strategic focus areas, on no less than 12 pages. The only challenge so far has been that many of the TIC services performed in this field were, let’s say, “not very compulsory”. In the absence of real regulatory requirement or tangible economic incentive, it was easy to dismiss them as “feelgood activities” and “greenwashing” – and not even entirely wrong doing so.

The voluntary nature of much of “Sustainability TIC” also complicated calculating the business case, and the “Sustainability” growth story built on optional “nice-to-haves” did not appear too compelling. In a way, it was and is all built on the idea that people want to live, act and consume in a more sustainable way, fighting climate change and reducing environmental impacts, and that in their function as consumers will reward companies that live up to that expectation.

A nice narrative, undoubtedly, but maybe not fully in line with reality, as e.g. the European Investment Bank’s recently released Third Climate Survey – probably unintentionally – confirms ( Its results in a nutshell: Only a minority is willing to commit to a permanent drastic change of their behavior and consumption patterns, with the largest group being 43% of respondents willing to reduce or abandon air travel. Maybe climate change awareness – or painful memories of Ryanair’s seat pitch, post-crisis economic necessity or the result of Instagram and #vanlife. And after all only relevant once or twice a year, for most people.

Tougher decisions with an impact on everyday life, such as giving up meat, abandoning the car or canceling the Netflix subscription, appear even less popular, acceptable for only approx. 20-30% of respondents. N.B.: Ironically, surprisingly, and in contrast to the media frenzy around “Fridays for Future” and “Extinction Rebellion”, especially the age group between 15 and 26 years is least willing to say goodbye to burgers, Ibiza, videostreaming and cars…

Can such shaky ground be a viable foundation for the future of the industry, replacing today’s rock-solid cash machines such as Oil & Gas Opex services? Doubtful. However, beyond the wishful thinking of voluntary behavioral change, Sustainability gradually becomes part of regulation and is made compulsory. And that opens the door for the TIC industry and its services.

A good example for that is the Swiss-Indonesian Agreement on Economic Partnership, finally accepted and cleared in a referendum eight days ago. The key political roadblock on the way to this agreement was palm oil: One of Indonesia’s main agricultural export products, met at least with scrutiny and often with outright opposition due to massive environmental damage it has created and creates; most of us have seen the unsettling images of burned-down rainforests and disoriented Orang-Utans lost in a desolate landscape.

Both countries were thus faced with a severe conflict of interest: For Indonesia, palm oil is a tool for fighting poverty, for Switzerland (and the rest of the West), importing palm oil from cleared rainforests is an environmental no-go. For bridging that gap, negotiators had to come up with a novel solution.

In the end, a clever mechanism was found: The agreement contains a mechanism on preventing exports of palm oil from cleared rainforests and rewards sustainable production. Import taxes are only lowered for palm oil that was certified as sustainable under the rules of a trustworthy scheme by a neutral 3rd party – economically incentivizing eco-friendly production. Suddenly, for Indonesian palm oil farmers, sustainability certification pays off, in hard currency.

Only such a gradual ingraining of Sustainability into regulation will turn it into a reliable TIC business, one that will justify the high hopes associated with it. This will happen, maybe increasingly and faster if novel ideas such as the Swiss-Indonesian accord are successful, but it will take time. Until then, we don’t believe the hype: This industry is still built on the greasy ol’ TIC stuff that unfortunately doesn’t look and sound that fancy and avant-garde.

Lloyd's Register Energy divestment: Applied Fission

October 15, 2020

Some say that the inauguration of the futuristic HQ extension in Central London was the most exciting thing that happened around Lloyd’s Register in the last 25 years. Even today, the building with its “structural expressionist” style is a tourist sight and hotly debated among architecture aficionados. Maybe it is this unglamorous steadfastness that helped the inventor of ship classification and probably the oldest TIC company of them all survive the wars, political turmoil and numerous economic crises of the last 260 years.

Last week though, LR made headlines again, at least in the world of TIC, when announcing to sell its Energy business to UK midmarket PE firm Inspirit Capital. This not only means that Lloyd’s Register divest around 16% of group revenue (GBP 144m in 2018/19), but also constitutes a noteworthy strategic u-turn, seven years after the acquisition of Senergy.

The decision does not come as a total surprise – especially not to the readers of this blog, a notorious and long-standing proponent of more focus in TIC. When considering that Senergy achieved revenues of GBP 121m at the time of acquisition in 2013, it becomes obvious that the then envisioned growth failed to materialize. It just did not work as planned, and so LR now pull the plug. Rare bold decision-making in an industry fraught with leniency and wishful thinking.

It will be interesting to see what Lloyd’s Register will be able to achieve with the remaining portfolio, essentially now “Marine” and “Certification”. Growth opportunities in the first one look constrained with already pre-Covid limited growth of global fleets, de-globalisation and a petrified competitive landscape. That leaves Certification as the only possible growth avenue – with strong competitors however such as BSI.

From a more general point of view, as LR went from four to just two segments in a mere five years (LR Rail sold to Ricardo plc in 2015): is there still room for something like corporate strategy or is this just a thinly-masked downward spiral?

Beyond Lloyd’s Register, the decision could have a few other interesting ramifications:

  • What does that mean for RINA’s new strategy, more or less a Mediterranean adaptation of LR’s blueprint, that was supposed to propel the company to an IPO? Gut feeling: maybe a revision will be necessary…
  • If LR are serious about Certification, will this lead to higher competitive pressure in that segment and further consolidation, culminating in an “ISO endgame”?
  • Will eventually someone acquire or merge with SAI Global’s Assurance business?
  • Or are we going to see further consolidation in the ship classification segment – maybe even a merger of some kind between LR and DNV-GL?

In a broader context, we expect more of that to come – at first sight surprising, but at closer inspection compelling portfolio cleanups in TIC that will open up new opportunities for investors and pave the way for further industry consolidation.