Deal Mechanic: Altor's prescription for success

In 2009 the Swedish government decided to call time on its state-run pharmacy monopoly and deregulate the sector, opening the door for private investors.

Of the nearly 1,000 pharmacies in the country, the government kept hold of 330 through state-run company Apoteket AB and supported independent entrepreneurs to acquire a further 150 under an umbrella structure named Apoteksgruppen.

The remaining pharmacies were carved up into eight “clusters”:
– clusters one and two, which held 170 and 200 pharmacies respectively across the country;
– clusters three, four and five, which were regional and held around 20 pharmacies each;
– clusters six and seven, which held around 10 pharmacies each and were based within hospitals;
– and cluster eight, which held 10 large pharmacies in big city areas.

Altor Equity Partners had a good idea of where the best opportunity lay for the firm to create an industry leader.

“We said all along that we needed to buy either cluster one or two, which were the largest clusters with around 170 and 200 pharmacies respectively, because we felt that we needed scale,” says Johan Blomquist, a director at Altor.

There were also complex rules on which clusters could be combined.

“The overall objective wasn’t really to maximise the proceeds for the government, it was more to create a pharmacy structure with enough competition and with serious buyers that would be good for Sweden going forward,” Blomquist says. After considerable diligence and analysis, Altor chose to acquire clusters one and eight using capital from its €2 billion Altor Fund III and created Apotek Hjärtat (Heart Pharmacy).

“This was not a typical transaction, because what you acquired was only stores. You didn’t buy any overhead or any management, so you needed to create a management team,” Blomquist says.

“I think that deterred some other buyers. You needed to have a management team and you needed to be comfortable that you had to create your central organisational structure from scratch.”

Altor brought together a team of three Norwegians, who had held operating and board roles within the Norwegian pharmacy market, which had also been through deregulation, and the former deputy chief executive of Swedish grocery retail firm ICA to create a central management team. Within a year the team had expanded to 70.

“It was like a management buy-in and a start-up at the same time. The only thing was that your turnover was SKr7 billion ($830 million; €740 million) to start with,” Blomquist says.

Altor’s plan to create, revamp and grow its new pharmacy business was comprehensive.

“We had to change everything,” Blomquist says. “Besides paying the purchase price for the business we overcapitalised it by a couple of hundred million [Swedish krona] to have cash available in the beginning to build up the business and rebrand it, change the IT systems and open new stores.”

Within the stores themselves Altor did concept upgrades and refurbishments, establishing the Apotek Hjärtat name from scratch and rebranding all of the pharmacies. Altor also implemented its own instore operations model, completely remodelling all of the processes and KPI systems used within the pharmacies to improve personnel management and efficiency.

“When you looked at the KPI scorecard for a store during the old monopoly [for instance], that KPI scorecard didn’t include sales or growth, because if you’re a monopoly it doesn’t matter if your customer buys it in this store or in another store, it’s sort of irrelevant,” Blomquist says.

This meant Altor also had to work hard on corporate culture change and staff education. “All staff went through a programme aimed at making them become more commercial than they had been, and as part of that process we also replaced a lot of regional managers.”

When Altor entered the pharmacy sector it had to grapple with an inefficient distributions system that had been supplying the state-run monopoly. Two distributors had been supplying the market, and pharma companies negotiated with these players to decide which would distribute their products. This meant two suppliers delivered to each pharmacy.

Alongside a third-party logistics solutions provider, Altor established a new warehouse facility and its own distribution platform, shifting all of the non-drug goods and many of the drug products onto the new platform to efficiently distribute to each of the Apotek Hjärtat stores.

Another element lost when the state-run monopoly came to an end was the customer loyalty programme. Apotek Hjärtat introduced a new programme, building to 1.5 million customers from zero within three years which, Blomquist says, is a Swedish record.

In 2014, prior to exiting the business, Apotek Hjärtat launched an online platform for non-drug products, non-prescription and prescription drugs. Besides the state-run Apoteket AB, none of the chain’s competitors had an online presence, and the capability was an attractive addition for prospective buyers.

“We had invested for the future, so there was growth to come from, among other things, the online platform,” Blomquist says.

Altor knew that following deregulation more pharmacies would enter the market. Keen to keep “at least our fair market share”, the firm opened a number of new stores, as well as making two large acquisitions of competitors.

The first was completed within the first year; one of the distributors had started a small chain of 30 pharmacies. The second took place in 2013 when Apotek Hjärtat acquired Vårdapoteket, a competitor owned by fellow Swedish private equity house Priveq, which had bought clusters six and seven, the hospital pharmacies. This amounted to a further 27 stores.

“The logic is very easy,” Blomquist says. “Firstly you have purchasing synergies in the non-drug assortment, and then you can basically take away the majority of the overhead costs because, for us, when you have the platform up and running, adding 30 more pharmacies doesn't necessarily increase our overhead costs that much.”

All in all, Apotek Hjärtat grew from around 200 pharmacies to more than 300 on exit.


Altor felt that Apotek Hjärtat would make a good IPO candidate and launched a dual-track process in 2014.

“We were the clear second in the market at 25 percent and we also were clearly the most profitable player in the market at that point in time,” Blomquist says.

Fairly late in the day Swedish grocery retail firm ICA, which had opened more than 50 pharmacies of its own in connection with their larger grocery stores, came forward as a potential buyer, eventually acquiring the business in November 2014 in a deal valuing Apotek Hjärtat at SKr5.7 billion.