Multiples continue to climb in Nordic region as activity booms

The Nordic region was home to 53 deals in Q1 this year, up from 41 in the preceding quarter, and significantly in excess of the 21 deals recorded in Q1 2020, according to Unquote and Clearwater International data. Furthermore, deal value in the region soared to €12bn in Q1 2021, compared to €4.7bn in the previous quarter, and €724m in Q1 2020.

Tomas Almgren, Clearwater International partner in Sweden, says the market is booming, with strong appetite on both the buy- and sell-side. His fellow partner in Clearwater's Denmark office, Lars Rau Jacobsen, highlights how optimism is soaring in the market: "There are many sellers who thought their businesses would get into financial distress or would even be at risk of going bankrupt last year, so they trimmed their operations; but things are looking better now, with demand even stronger than before in many sectors. Similarly, buyers last year expected challenging market conditions, so they focused on trimming their own operations, expanded their credit lines, etc. Many put extra capital aside to be ready for a great recession, but that didn't happen. So now they are looking to put that capital to work for acquisitions."

The average entry multiple for PE deals, which has always been high in the Nordic countries compared to other regions of Europe, climbed even higher in Q1 this year to 12.1x, compared to 11.8x in Q4 2020 and 11.2x in Q1 2020. The consumer sector in particular has been frothy, Jacobsen says: "A lot of consumer deals, especially in e-commerce, have seen very strong valuations. But it is connected to the growth these businesses are seeing – we have seen triple-digit growth in many of these businesses, as the trends seen in e-commerce over the years accelerated during Covid-19."

Notable e-commerce deals Clearwater advised on recently include Sinful, an online retailer of adult toys and related products, which was acquired by Polaris; Kaffekapslen, a retailer of coffee capsules, which was acquired by Ceder Capital; and electronics accessory retailer AV Cables, which was acquired by FSN Capital-backed Kjell & Company.

The trend of PE-backed companies going public also continued in the first quarter, particularly in the TMT sector, but companies choosing this route are mostly smaller businesses raising capital to fund their growth, says Jacobsen: "In Denmark, companies choosing the IPO route are mostly high-growth, small-cap businesses. We haven't seen a lot of the large-cap IPOs yet, because going with strategic or PE buyers still tends to be the most attractive exit route from a valuation perspective."

Almgren adds: "We have seen a lot of e-commerce businesses going down the IPO route following PE ownership in Sweden. They have been successful, but we have seen valuations that are similar or at least close on our sell-side M&A mandates. I also agree with Lars that large IPOs haven't materialised yet in Sweden."

ESG back on the agenda
ESG has also been a key deal driver, says Jacobsen. "Companies who are positively affected by ESG trends and drivers – especially sustainability – are extremely popular right now. This was also the case last year, but we really are seeing a strong focus on businesses that have a value proposition connected to ESG. We aren't seeing any presentations going out to investors that don't address the ESG or sustainability angle. It is one of the first things we discuss, and we see a lot of new PE funds where part of the strategic focus area is to invest in ESG-driven business models."

As these trends and Q1 numbers highlight, normality has returned to the Nordic region for the most part. However, Almgren says that inflation – from property to industrial goods – could become a concern in the long run: "Although there has been some money-printing in Sweden, we have been more conservative than most other countries. But we are still importing some inflation from the EU and the US, meaning that the Swedish krona has appreciated very strongly against the dollar in particular. It is good for companies that import and sell, such as e-commerce businesses for instance, but if you are an exporter, this could be an issue. And we are quite export-driven; our largest companies are Volvo and Ericsson, which drive the underlying economy to an extent."

Based on their pipeline, however, both Almgren and Jacobsen predict strong deal volumes in Q3 and Q4. Jacobsen says: "If we look at our pipeline, we expect just as strong activity in Q3 and Q4 as we had in the first two quarters. For businesses unaffected by Covid-19, it is a good market, with low interest rates, lots of financing and capital, and good businesses."

Jacobsen adds: "It is unclear what valuations we will see going forward, but I don't expect them to go lower. What we are not seeing is unhealthy valuations, because we aren't seeing unhealthy financing structures in the deals we have done, at least. If we continue to see a stable environment, I expect the valuations to be at a similar level, which is high and therefore enticing from a seller's perspective. But even from a buyer's perspective, we are in an environment where we have stability and very strong growth, which makes these valuations acceptable."

This article is an extract from the latest Clearwater International Multiples Heatmap report, which can be downloaded here

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