Nordic players await distressed carve-out uptick

Almost exactly a year ago, as coronavirus spread across Europe, divestment processes for non-core assets, like a lot of other M&A activity, were forced to pause.

Leif Lupp, managing director for the Nordic region at carve-out specialist Aurelius, describes the situation in Q1: "We saw some processes that tried to adjust for the pandemic, adjust sales and earnings, categorising the pandemic as a one-off event that would be over and done with within a couple of months. But we have not seen many of these processes concluding, because everyone realised that the risks and the uncertainty in the short and medium term were too large. Assets simply could not get valuations that were attractive to the seller, so most of the processes were put on hold." A couple of processes, he says, restarted in Q3, with most of them either still ongoing or being postponed again and restarting in Q1 2021.

Anssi Kariola, managing partner at Finland-based GP Verso Capital, says the impact on valuations has been significant: "How do you value a business that is not performing due to the pandemic but has historically been performing well? Of course, when things go back to normal they will perform again, but we do not yet know if things will return to the same normal."

Healthy divestment
The situation could not look more different for corporate divestments, where activity picked up in the second half of the year. The aggregate deal value of carve-outs last year stood at €2.76bn, the second highest figure of the decade, lower only than the 2011 figure of €3.4bn, and most of these processes were not for distressed assets.

The largest of these deals was Christian Hansen's Natural Colors division, which was acquired by EQT in September. According to Unquote sister publication Mergermarket, the vendor was looking to net around €600m, based on 2019/20 EBITDA of €50m, but ended up selling the asset for €800m.

"There was a lot of focus on high-growth, high-quality assets in Q3 and Q4," Lupp says. "Some corporates successfully used this situation in the market to monetise on some of these carve-outs, with Christian Hansen selling its Natural Color business being one example."

Kariola says it could also be that expectations are higher because of the performance of the public markets, and the amount of capital ready to be deployed across the board: "We are seeing the result of too much money in the market rather than it purely being based on forecasting or business performance."

Once the changes to the insolvency regime are reversed, everyone's expecting that this will trigger a wave of insolvencies and distressed M&A" – Leif Lupp, Aurelius

Many GPs had expected the pandemic to lead to a surge in distressed M&A led by companies looking to restructure. But the availability of support has so far helped to prop up troubled companies.

Many Nordic countries have extended the financial support available to companies until later into 2021 or even 2022. Additionally, an extension for insolvency filing has meant that companies that are distressed do not have to file for insolvency just yet. Data from Eurostat published this week showed a 20% drop in the number of companies in the eurozone that filed for insolvency compared with the same period in the previous year.

Lupp says: "Once the changes to the insolvency regime are reversed, everyone is expecting that this will trigger a wave of insolvencies and distressed M&A."

Additionally, Lupp says Nordic banks, which were jointly supporting the economy in the first wave of the pandemic, are being more focused on their balance sheets now. "We are getting some first signals that banks will take a closer look at waiving covenants again in terms of breach, and may not as easily provide additional liquidity compared with last year," he says.

Notable PE-backed Nordic carve-outs (2020)

Target	GP	Date	Sector	Country	Value
Chr Hansen Natural Colors	EQT	Sep 2020	Speciality chemicals	Denmark	€800m
Max Matthiesen	Nordic Capital	May 2020	Insurance brokers	Sweden	€250-500m
Heimdal Security	Marlin Equity Partners	Mar 2020	Software	Denmark	€25-50m
Jurk Service/Jurk Stalmontage	Ceder Capital	Jul 2020	Business support services	Sweden	€25-50m
Empower IM	Klar Partners	Jun 2020	Software	Finland	€25-50
Gateway	White Park Capital, Navigator Capital	Aug 2020	Software	Sweden	< €50m
Embriq	Magnesium Capital, Commonfund Capital	Aug 2020	Software	Norway	€37.4m

source: Unquote Data

Transitional year
The ongoing pandemic, in addition to continued government support until later into the year, could result in distressed M&A activity in 2021 mirroring the previous year. Even at normal times, says Lupp, turnaround deals in the Nordic countries take a little longer to come to fruition than in other regions: "In the Nordic region, the banks are more supportive and business relationships generally have a more long-term focus."

However, things could be about to pick up. EY's 2020 Global Corporate Divestment Study showed that 96% of activist investors will recommend that a target company divest non-core or underperforming businesses in the next 12 months, up from 64% previously, and that close to 80% of corporates planned to initiate a divestment in the next two years.

Kariola, whose firm plans to complete three carve-out deals in 2021, believes "there is a large number of carve-outs out there".

Lupp says: "To me, 2021 will be something of a transitional year, where we will still have the pandemic introducing uncertainty into deals, at least in certain sectors. But we expect an increase in carve-out activity for the second half of the year, which should continue well into 2022, making the Nordic carve-out market continuously attractive."

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