Carve-outs return to prominence in Nordic PE

Private equity was a key driver behind Nordic M&A growth last year, participants agreed at the Mergermarket Nordic M&A and Private Equity Forum in March 2018. Additionally, high levels of dry powder have enabled private equity players to inject large amounts of capital in assets across market sectors.

One of the key areas of interest for GPs recently has been corporate divestments, which are typically seen as providing good opportunities for growth and value enhancement. An increasing number of financial buyers are eyeing carve-out deals as acquisition opportunities, resulting in increasingly aggressive deal terms as corporates and institutional fund managers bid against each other in auctions.

The Nordic private equity market saw a combined EV of around €15bn last year, an 18% increase on the same period in 2017, and this aligns with the rising number of carve-out deals, according to Unquote Data. In the first quarter this year, the Nordic region saw six carve-out deals from a total of 33 buyouts, representing the highest level (18%) since Q1 2015. Last year a total of 13 carve-outs were recorded from a total of 118 deals (11%), while there were nine carve-outs from a total of 107 deals (8%) in 2016. This was preceded by 16 carve-outs in both 2015, which recorded 89 deals, and 2014, which saw 108 transactions in total.

There are many companies for sale in the Nordic market and the situation is reminiscent of 2007, said Kristina Patek, head of M&A at Tieto, speaking at the Stockholm event. Tieto has a long history of acquisitions and many monitored targets, she said, but competing with private equity is a challenge.

Works both ways
Market sources expect high levels of M&A activity to continue, but there are signs of more bilateral discussions than last year and an increased focus on corporate carve-outs.

IK Investment Partners' Alireza Etemad said there are two key drivers accelerating corporate divestments. "Firstly, one of the drivers is a favourable valuation environment, which many believe the current market reflects," he says. "Secondly, new CEOs in large corporates often have a chance soon after taking up their position to review the business and make strategic changes. We see both of these factors in play in the Nordic region at the moment."

Speaking at the Stockholm event, Ebba Lepage, vice-president of M&A and corporate finance at Stora Enso, sees a similar situation. There have been many sell-offs of non-core assets, and corporates are mindful of businesses' strategic fits, she said, which aligns with where the company sees its future growth. For example, with demand for replacing plastics with biodeposits, Stora Enso is looking at highly technology-orientated companies to boost its position in the industry.

When you let these companies blossom in their own right, you often see good opportunities for growth and value enhancement" – Alireza Etemad, IK Investment Partners

Meanwhile, IK recently carved out PwC Sweden's business services division, which provides accounting, payroll and related advisory services, in February 2018. IK was attracted to the deal due to the division's base of around 27,000 customers and the close contact it cultivates with the market, IK partner Etemad told Unquote at the time.

Other IK current portfolio companies in the Nordic region acquired via carve-out deals include fuel management service Veritas Petroleum Services, which was bought from Det Norske Veritas, kitchen and bathroom fittings manufacturer Nobia, and survival and personal protection suit manufacturer Hansen Protection, which had already been carved out when IK acquired it, but used to be part of Helly Hansen.

"We look at the Nordic markets from a sector perspective and do not necessarily prioritise one specific sector over another. That said, Triton has identified specific buy-and-build opportunities in companies in the Nordic consumer and construction sectors," says Thomas Hofvenstam, a member of Triton's Investment Advisory Committee.

OptiGroup, backed by Triton Fund II, completed seven add-ons in 2017, including Stadsing and PacProduction. Flokk, a Triton Fund IV company, made three add-on acquisitions in 2017, and recently also signed an agreement to acquire office chair manufacturer Profim.

Corporate carve-outs present specific challenges by their very nature, due to the separation process. Yet private equity houses have a track record of enhancing focus on a business that has been considered non-core in its previous ownership.

Says IK's Etemad: "When you let these companies blossom in their own right, you often see good opportunities for growth and value enhancement. For the corporates that divest these companies, it is often also a very positive experience, both in terms of short- and medium-term value, but also reputationally."

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