SGS Steps Up Pace Of Dealmaking; No Deal With Major Rival Seen

Even as SGS SA (SGSN.VX) Monday stepped up the pace and size of dealmaking to meet its 2014 financial targets, analysts say the goods inspection industry's three giants are likely to shy away from a major merger.

Geneva-based SGS's EUR180 million play Monday for Inspeccion Tecnica de Vehiculos' automotive division is the latest in a string of recent deals, and shows consolidation in the highly-fragmented inspection and certification industry is heating up, according to analysts.

SGS itself has been a copious industry acquirer in recent months, buying Chinese Yan Tai HuaJian Inspection Engineering Co. Ltd., M-Scan, a U.K.-based company for chemical and biochemical testing, and last week Atest SA, a Swiss energy and rail inspector.

At the same time, inspection and certification deals are getting bigger: SGS's French rival Bureau Veritas (BVI.FR) was responsible for the splashiest of recent deals, acquiring U.K. peer Inspectorate for GBP540 million in June.

Shortly after selling Inspectorate to Bureau Veritas, 3i Group PLC (III.LN) bought Netherlands-based Stork Materials Technology for EUR150 million. Last week, Carlyle Group bought Velosi For EUR105 million. And SGS's EUR180 million acquisition of ITV is the largest the Swiss company has done in years.

"We believe as well that the company is proving that it is able to accelerate the pace of acquisitions," Bank Vontobel analyst Jean-Philippe Bertschy said. He rates the stock at hold with at CHF1,800 target price.

SGS's shares were little-changed on the news. At 0932 GMT, the stock was CHF2 higher, or up 0.1%, at CHF1,664, amid a 0.4% rise in the broader Swiss blue-chip market.

Under Chief Executive Chris Kirk, who was brought in late in 2006 to push dealmaking, SGS needs to step up the pace of its acquisitions even more, in order to meet 2014 financial goals, including revenue of 8 billion Swiss francs ($8.16 billion), operating income of CHF1.6 billion and earnings per share of CHF140.

"ITV is SGS's biggest transaction in years, but it still corresponds to only 1.7% of group revenues. To reach its objectives for 2014, SGS has to turn more aggressive in terms of acquisitions as in the past," Helvea analyst Chris Burger said. He rates the stock at neutral.

Still, the Swiss firm is likely to revisit a big merger with one of its main rivals Intertek Group PLC (ITRK.LN) or Bureau Veritas, Vontobel's Bertschy says, which represents a shift from past years, when SGS wasn't shy about lusting after a major, transformational deal such as Veritas.

The reason the two big rivals are no longer as attractive targets to SGS as they once were is that Veritas has a much stronger focus on oil-and-gas and minerals after the 2008 acquisition of Amdel in Australia in 2008 and then more recently Inspectorate, making for overlap with the Swiss company. Bureau Veritas is controlled by France-based investment company Wendel Investissement (12120.FR).

Intertek would also present considerable overlap--even after the U.K. company blew off takeover talks Norway's Det Norske Veritas--in particular in oil-and-gas and consumer testing.

"There are plenty of different targets, even if they are hard to identify. They can buy the technology from these smaller companies and replicate it throughout their network," Vontobel's Bertschy said.

SGS spokesman Jean-Luc de Buman was not immediately available for comment; in July, CEO Kirs said SGS was "not focused" on a transformational deal with a major peer.

-By Katharina Bart, Dow Jones Newswires; +41 43 443 8043; katharina.bart@dowjones.com

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