In the public eye

There was no lack of hot conversational topics doing the rounds in Stockholm when Private Equity International visited in early September. Like, for example, whether the Swedish “social model” of welfare provision was under threat in light of the narrow poll lead held by the centre-right Alliance for Sweden ahead of the country's general election on September 17. The Alliance's subsequent victory will allow it to carry out an agenda that purportedly includes tax cutting and a privatisation programme. For those who like their current affairs conversations a little more frivolous, there was mileage to be had in the decision of the Swedish national soccer team's coach to drop three key players from a European championship qualifier following their alleged violation of a late-night curfew. Or, alternatively, you had the opportunity to follow up on the embarrassment suffered by Swedish broadcaster SVT in light of an infamous news update that was mistakenly accompanied by background scenes from a Czech adult entertainment movie. A “huge blunder”, as SVT admitted afterwards.

Amid such rich material, one might assume private equity would struggle to force its way into Sweden's national consciousness. But such an assumption would be wide of the mark: while buyout firms haven't exactly been the talk of the town, they have certainly managed to get themselves noticed.

The latest statistics indicate that this burgeoning public profile is not entirely surprising. Private equity throughout the Nordic region is experiencing a notable uptick. According to figures from data provider Dealogic, the total value of buyouts in the region reached $56.5 billion (€44.4 billion) in the first eight months of this year, compared with a total of $15.8 billion in the whole of 2005.

It doesn't take much investigative work to identify that the main contributor to this trend is a clutch of mega-deals sourced from the region's stock markets.

Neighbouring Denmark has hogged much of the limelight so far. Notably, telecom operator TDC was acquired for €10 billion in March 2006 in a deal led by Apax Partners, The Blackstone Group, Permira and Providence Equity Partners. This followed the €3 billion buyout of listed Danish facility services firm ISS by EQT and Goldman Sachs Capital Partners the previous year.

Now the focus is increasingly on Sweden. A month after the TDC deal was finalised, a €4 billion bid from EQT was sufficient to wrest medical technology company Gambro from the Stockholm Stock Exchange. Meanwhile, at the time of going to press, global private equity firm Apax Partners and Nordic buyout house Nordic Capital were engaged in a €1.7 billion battle to take control of Capio, another listed Swedish healthcare business.

There is not a tradition of hostile bids in this part of the world, so the use of defensive measures such as poison pills is, as far as I am aware, very rare if it exists at all

Niclas Högström

For various reasons, a number of these deals have come under close scrutiny. For example, in the case of ISS, some of the company's bondholders threatened to issue a lawsuit claiming the company had breached its legal obligations toward them after the deal led to an initial 20 percent drop in the bond price. The threats were only averted when the parties reached agreement after a series of intense discussions. The TDC deal then met with stiff resistance from a group of shareholders led by Danish pension fund ATP, which refused to sell its 5.5 percent stake and was highly vocal in its criticism of the deal.

Now it is Capio garnering attention given what is being interpreted as a bold approach by Apax and Nordic. Having had their initial offer rejected by the Capio board, the two private equity firms then took the same offer directly to the company's shareholders. Notably, according to a Wall Street Journal report, Barclays Bank and HBOS agreed to underwrite the debt financing for the deal without any demand for due diligence beyond what's already in the public domain.

So what accounts for this determination to pursue stock market targets, even when information is limited? Part of the reason seems to be that listed Nordic companies are simply more open to attack than their counterparts elsewhere in the world. For one thing, the regulatory framework is transparent and shareholder structures relatively open.

Says Niclas Högström, a private equity partner at Stockholm-based law firm Hamilton: “There is not a tradition of hostile bids in this part of the world, so the use of defensive measures such as poison pills is, as far as I am aware, very rare if it exists at all. There's nothing like the protection that exists in the US, for example, where there have been hostile bids for the last 30 or 40 years.”

Equally, it could be argued that the need to deploy ever-larger pools of capital, combined with an increasingly competitive new deal environment, are forcing GPs to consider PTP opportunities with greater urgency than might otherwise have been the case.

In auctions of larger deals, anecdotal reports suggest that the presence of 20 or more bidders is not uncommon. Partly, this is a product of the Nordic region having become increasingly attractive to overseas financial sponsors. In recent years, the likes of 3i, Apax Partners and Permira have all established premises in Stockholm, and some local professionals canvassed by PEI are expecting another new wave of entrants in the near future. Don't be surprised if one or two large US-based funds are in the vanguard of this development, they say.

Such is the depth of liquidity that there has been some discussion – as in other parts of Europe – about the size and status of companies that private equity might be capable of taking over. In a Swedish context, this means names such as Ericsson and Electrolux being touted as potential targets. One possible drawback is that if such deals were struck, private equity would find itself entering the realm of the national icon, with the concomitant danger of being on the receiving end of a backlash from those with no desire to see domestic champions falling into the hands of foreign and/or unfamiliar purchasers who might be viewed – whether fairly or not – as being driven primarily by short-term motives.

Recent pronouncements by former Swedish Prime Minister Göran Persson following the acquisition of a 5 percent stake in vehicle manufacturer Volvo by Cevian Capital – a Swedish hedge fund backed by Carl Icahn – may provide a foretaste of future battles for hearts and minds. “I'm very concerned,” he was reported as saying by Dow Jones. “In the longterm I see Volvo as a large Swedish creator of both jobs and economic growth. These venture capitalists will break the national capital structures into pieces.”

But it's not only private equity firms on the hunt for deals. A relatively new phenomenon, say observers, is that industrial buyers -until recently notable by their absence from auctions – are now coming back to the table to compete against the LBO funds.

Hamilton's Högström says this reflects a more pragmatic attitude on the part of industrial groups than they have demonstrated over the last couple of years . “Industrials have over the past years been left very frustrated because they have on multiple occasions made offers considerably below the winning bid,” he remarks. However, amid reports that the biggest cheques are no longer necessarily being written by private equity, it would appear that trade buyers have begun to place their strategic interests ahead of wounded pride.

In the mid-market as well as at the larger end, competition has increased markedly in recent times. Gustav Öhman, a Stockholm-based partner at Northern European buyout firm Industri Kapital, says that around ten years ago, there were only four or five serious mid-market investors with offices in Stockholm. Since then, he maintains, that figure has risen to between ten and 15, particularly as a result of overseas-based players seeking to diversify geographically.

But Öhman also argues that it's not just the number of GPs that has increased in recent years; it's also the number of opportunities: “Two to three years ago, there was a mismatch in the price expectations of buyers and sellers. In the last couple of years, those expectations have met in the middle and there has been a clear pick-up in activity.”

Deal flow has also been assisted by the abolition of inheritance tax at the beginning of 2005, maintains Niklas Sloutski, a senior partner at Accent Equity Partners, a Stockholm-based regional mid-market investor. Following the change, a report by Swedish investment bank SEB estimated that between 140,000 and 180,000 small domestic companies facing succession issues would undertake a transition in ownership over the ensuing decade.

It's time to decide whether you want to be an active buyer in this market or not, and different firms have different views on that

Christian Sievert

Sloutski confirms that the extent of the opportunity has not disappointed investors: “There are a huge number of succession capital situations, where entrepreneurs in their 60s are willing to retire and exit, while passing on the proceeds to their children. The recent tax reforms, minimising the immediate tax exposure post-sale, have further boosted this type of deal flow.” He adds that, of the last five deals completed by Accent, three were succession scenarios.

While foreign firms have taken their share of this activity, Öhman insists that many situations remain biased toward the involvement of home-grown funds. As an example, he cites the merger of Finnish daily goods retailers Tradeka Ltd and Wihuri Group that was concluded after more than a year of talks by Industri Kapital in May last year. The former business was owned by a co-operative, the latter by family interests and, says Öhman, involved “a lot of heavy lifting”. It was, he says, “the type of deal that you could only do if you were well plugged into local networks.”

To reinforce the advantage of ‘being local’, a number of Swedish private equity funds have focused on building up networks of Nordic business leaders to help them run portfolio companies and assist with strategic issues. Segulah, a Stockholm-based lower mid-market investor, has, since inception in 1994, built up a stable of some 40 industrial advisers to help it identify opportunities to grow its portfolio companies throughout the Nordic region. In total, says Segulah managing partner Christian Sievert, the firm has completed 24 platform investments and 52 add-on acquisitions.

One of the most notable examples of the strategy has been Powermill, a Finnish hardware repair services firm acquired by Segulah in 2004, when it introduced to the business Arne Sandström, the former CEO and COO of Eriksson, as chairman. The firm has gone on to acquire eight Nordic businesses in the last two years, taking its revenues from €8 million to €45 million in the process.

Segulah's current rate of investment reflects a confidence widely expressed by private equity professionals in Stockholm that, in spite of increasingly crowded sales processes, it is still possible to identify businesses from which sufficient value can be extracted to meet return expectations. However, economic conditions, which have long been benign, may be becoming a little more challenging. Such an indication was provided by the recent decision of Sweden's Riksbank to raise interest rates by 25 basis points to 2.5 percent in August. Market commentators expect the bank to raise rates at least twice more by the end of the year.

Sievert, for one, thinks there may be implications in this for the private equity market. “It's time to decide whether you want to be an active buyer in this market or not, and different firms have different views on that,” he says. “At Segulah, we're trying to find businesses with limited cyclicality and which can be managed through a downturn.” Such a sober assessment is not occupying everyone's mind, however. Private equity has become at alking point in Stockholm, and it's showing no immediate sign of retreating into the shadows.