From state monopoly to private equity dominance

For anyone who has read the news over the past year, with all the public rage and frustration over the financial services industry, the sell-off of large parts of Sweden's pharmacy network this Autumn had a somewhat surprising outcome. The SEK 6bn deal, which ended 38 years of state monopoly in the sector, saw the Government sell two-thirds of the Apoteket AB network to four buying consortiums, three of which were private equity (pages 32-33). New owners include Altor, Priveq and Investor Growth Capital, Segulah, and Finnish industrial buyer Oriola-KD Oyj. Oriola-KD paid SEK 1.56bn in cash for the 171 pharmacies they acquired.

"We were surprised: we expected more trade buyers," says Louise Nilsson, partner at Priveq Investment, of the outcome. Priveq acquired two clusters, representing a total of 24 outlets, alongside Investor Growth Capital.

It is not hard to see the attraction for private equity. The de-regulation of the Swedish pharmacy monopoly has opened a market worth SEK 30bn. Segulah partner Percy Calissendorff also points to the stable growth rate in the industry, which historically has seen higher than average GDP growth. Segulah secured three smaller regional clusters, centred around the urban areas of Stockholm, Gothenburg and Malmö, with a combined turnover in excess of SEK 3bn.

He explains that the sales in pharmacies today are comprised of roughly 80% prescribed drugs, which represent the stable underlying cashflow; 10% OTC (over the counter non-prescriptive drugs); and 10% trading products, such as toiletries, which have a higher growth rate and a higher margin.

"This last segment carries great potential," says Fredrik Stromholm of Altor, which now controls the dominant player, re-branded Apoteket Hjartat, after its acquisition of two of the eight clusters. Apoteket Hjartat controls 208 outlets nationwide, with a turnover exceeding SEK 7bn and 1,500 staff. Altor is planning to open a further 100 outlets nationwide, while a refurbishment of existing venues is also under way. "We are ready to work," Stromholm declares.

Holding on for profits
Admittedly, Altor does expect a longer than average holding period. Nilsson concurs: "It is a process that will take time." She adds that Priveq treats this is a form of start-up.

Surely, the spearheading and de-regulation of an entire market sector, particularly one that has been under state control for such a long time, carries added risk? Not necessarily. "For us, the biggest risk was that the sell-off wouldn't happen," Nilsson says. Furthermore, neither Calissendorff nor Stromholm perceive any eminent political risk. "The industry will always be regulated," Stromholm says, as prescription drugs form such a large share of revenues.

Nonetheless, as medium-term owners, these financial investors must exit at some point and this will by no means be a certain success. All are reluctant to be drawn on their plans, citing the dangers of "speculating". However, these are three fund managers with very good track-records - it is unlikely that they entered into these investments without clear exit options.

As industrial buyers withdrew from the bidding process one by one, a major divestment door opened for the financial buyers staying in the competition. Large pharmacy operators in Europe could prove potential buyers a few years down the line. In Norway, the Alliance pharmacies, which opened after the de-regulation of the Norwegian pharmacy markets in 2001, have recently been re-branded Boots Alliance. British Boots was acquired by a private equity consortium led by KKR in a EUR16bn take private in 2007. The private equity backers have led an aggressive European expansion, including its foray in Norway and the acquisition of German distributor of oncology products Megapharm in 2008. The way from Norway to Sweden is short.

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