Scandinavian Deal Prospects Improve

While warmer parts of Europe have endured a worrying few months, Nodic countries, have become hotspots for deals. Earlier this year, US technology group Cisco completed its US$3.4bn purchase od Norwegian networking company Tandberg, easily the largest acquision of a Nordic company from outside the region over the past 12 months.

And going the other way, in earliy May, Norsk Hydro adreed to buy Brazilian miner Vale's aluminium assets. This US$4.9bn deal was the biggest purchase ever by a norwegian company of an overseas business. It provides Norsk with bauxite supplies for a century, as well as the world's largest alumina refinery. Vale agreed to take partial payment in Norsk shares, giving it a 22% stake in the Norwegian company. This suggests that the deal could be a precursor to the Brazilian group building a precence in Europe, rather than just Norsk moving away from its domestic roots.

On a smaller scale, cash deals, funded by bank debt, are starting to appear as regular feature, rather than rare occurrence. Private equity firms are dominating the agenda here, with non-Nordic investors stepping in to conduct secondary buyouts. For example, Vision Capital has acquired consumer finace provider Nordax Finas from Palamon Capital Prtners for US$105m, and HG Capital recently bought disability care provide Frosunda from Danish invesror Polaris.

"In the fourth quarter of 2009 activity from more normal M&A picked up. Before then, it was mainly restructuring work,” says Claes Zettermarck, a partner at law firm White & Case. “Nevertheless, deals are proving more time-consuming, with potential buyers undertaking more diligence and analysis."

Underpinning this is the increased willingness of banks to fund leveraged deals once more. One adviser said that the largest buyout seen this year, the €950m purchase of nursing home operator Ambea by German firm Triton and US partner KKR Hom 3i, "would not have been possible without Nordea". The bank, which has operations throughout the region, is the most active lender in the market at present and has been funding many of the increasing number of transactions seen. Perhaps most healthily, real estate adviser Catella has seen a noticeable increase in property instructions so far this year.

"Last year, there were just €3.3bn worth of commercial property transactions in Sweden” says Anders Nordvall, a partner at Catella. "After just 3-1/2 months of 2010 we are already at €2bn, so there is a noticeable change." He adds that property rental prices in central Stockholm never fell as much as in London, for example, where the real estate bubble was relatively more inflated. “We have only seen prices down 15% rather than the 50% experienced in other areas of Europe,” Nordvall says. This is in part because Nordic banks, chastened by their experience in the early 1990's, which saw many saved by the state, did not become as over-enthusiastic about lending against real estate either. "Deals were only leveraged up to 50% maximum in many cases," says Nordvall. "Sweden has proved to be relatively stable over the last 18 months,” says Simon Wakefield, director of acquisition finance at SEB. "The country’s national debt is low [at less than 40% of GDP] and it is not in the euro, so the currency has been free to float." He adds that the level of debt available for deals has risen this year, saying: “If you say the noram level of leverage in LBOs has historically been between four and six times Ebitda, at the peak it went up to between six and eight times before tumbling to a low 3.5 times, now it is around four to five times for quality assets."

SEB, which is the only major Nordic bank to consider funding buyouts across Europe, has backed a number of the most recent secondary deals, such as Herkules' purchase of sports clothing group Odlo from Towerbrook and HG Capital's buyout of Frosunda. It is also active on several other similar mandates.

The market was pretty quiet for most of 2009, only really reviving when Swedish state succeeded in selling off national pharmacy chain Apoteket in several parcels to various private equity consortia. SEB advised on this compex sale. "This was a very complicated process, with eight clusters of phamacies being marketed," says Carl Montalvo, head of corporate finance for SEB in Sweden. "In total approximately 300 pharmacies were sold representing a third of the swedish market." This, and other deals, meant last year was reasonably active for SEB. This year Montalvo is optimistic about activity too. "We have a wave of mandates from small and medium sized to large corporations who are keen to do deas and seking opportunities to grow," he says.

Deals with any scandinavian involvement since 1997

However, it is a moot point whether deals will actually be executed, even by those with stronger balance sheets more able to carry out transactions. While the stock market has risen, earnings have not increased at the same pace, and in many cases the outlook for such earnings are less favourable. For these reasons, the expected crop of IPOs across the region has not materialised, with investors reluctant to buy debt-laden private equity-backed groups. "Private equity firms are by and large content with how their portfolio companies are performing and are not generally interested in discussing exits," says Thomas Westin, head of corporate finance at Nordea. “People were optimistic to speculate about exits this year. However, a lot of debt is going to have to be refinanced during 2011 to 2013.” Westin is also seeing a lot more interest from private equity firms, such as IK. EQT and Nordic Capital, willing to discuss the new opportunities. “There is more interest than in the last two years," he says. Many of these firms have large funds to invest. The forthcoming election means the current Swedish government’s privatisation programme is on hold. There has been talk that the new management of state energy company Vattenfall is pressing for the group to be privatised. At some stage struggling airline SAS, which is part state-owned, is also likely to become part of a larger group. Lufthansa is the most common suitor cited. In the meantime, private work is keeping advisers busy. "Since February we have been very active, with mandates from both the buy and sell side," says Fredrik Bergholm of Catella Consumer. “I expect activity to increase after the summer with regular deals and all those that should have been carried out in the last 18 to 24 months being started too." The economic situation remains tougher in Finland and Denmark. "There is still some distance between buyers’ and sellers’ expectations,” says Soren Brinkmann, a partner of Danish law firm Lett. "There have been lots of investigations but few deals executed because of disagreements over valuation."

There was more of a property bubble in Denmark. And this has affected the ability of local banks to lend. Brinkmann expects further consolidation among banks, saying: "Two years ago, there were 180 Danish banks. Now there are still 120. However, in Sweden, whose population is three times larger, there are only 25." In the meantime, most of the focus win be on the large Danish companies, bought out at the peak of the market by private equity firms. Ingredients producer Christian Halvesen and fire services company Falcke have said they intend to float. Facilities manager ISS and telecoms company TDC are expected to follow. Brinkmann believes that secondary buyouts could be an alternative option, saying: "There have been rumours to this effect with Falcke. However, I think Christian Halvesen has alternatives to floating too. I'm cautiously optimistic deal activity will jump in 2010."

Christopher Spink June 2010.
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