Denmarks year in the sun

While the Nordic region has become one of the big attractions of European private equity in recent years, last year was Denmark’s chance to shine. Compared with Sweden, the country’s economy is small and the private equity industry is less developed. But thanks to a couple of huge deals last year, Denmark staked a claim to becoming a leading private equity market.

Of course, the US$15.6bn public-to-private of Danish telecoms company TDC and the US$5.1bn take-private of facilities service group ISS bloated the total deal value figures for Denmark. TDC is being acquired by a consortium of PE houses comprising Apax, Blackstone, Providence, KKR and Permira. ISS meanwhile, was purchased by Nordic house EQT and GS Capital Partners.

“Last year broke a lot of records for the Danish market, but whenever TDC is in the frame you tend to see that happen,” says Dan Kjerulf, a partner at local fund-of-funds Danske Private Equity.

He points out that the TDC deal is set to become the largest LBO anywhere after the infamous RJR Nabisco deal in the 1980s.

Kjerulf says that it is not the first time the telecoms company has been a record-breaker, noting that Danske Bank was involved in TDC’s global share offering in 1994, which at the time was the biggest such offering anywhere.” But when you strip out the TDC deal and the ISS transaction, the Danish numbers drop a lot, but it was still a very good year and came on top of another good year in 2004,” he says.

According to executives such as Kjerulf, in terms of long-term trends it is more a question of the Danish buyouts market catching up with other countries than a case of Denmark becoming a big hitter on its own.

The country has been helped, as has the rest of the Nordic region, by favourable macroeconomic conditions. The region has been experiencing sustained economic growth, fuelled by domestic consumption and exports, and GDP growth this year is forecast to top 3%.

But to put things into context, with its 5m population Denmark is clearly unlikely to rival the larger economies of Europe in terms of buyouts. Yet the last couple of years do suggest that the economy can generate a regular stream of good transactions in areas such as healthcare, telecoms and industrials.

Thomas von Koch, senior partner at EQT, says he expects Danish buyout figures in 2006 to fall back to what they would have been last year without the TDC and ISS transactions. But the take-privates of TDC and ISS are important, he says, in that they give an indication of where private equity more generally is headed.

“They suggest that, in a few years time, a lot of the blue chips globally that are currently safe from private equity will become targets,” he says.

While the Swedish private equity market is more mature, the high levels of activity in Denmark recently show that it is catching up quickly, says von Koch. “Denmark has always been a very open, trading economy and that culture bodes well for the development of private equity,” he says.

Among the biggest deals in Denmark last year two were secondary buyouts carried out by Nordic private equity houses – Nordic Capital’s €1bn acquisition of pharmaceutical company Nycomed from DLJ Merchant Banking and Blackstone, and Industri Kapital’s reported €400m purchase of work clothing supplier Kwintet from a group of investors led by local house Axcel.

According to Danske’s Kjerulf, Denmark is an attractive market for small to mid-market buyouts as there are a lot of good family businesses and the Danish business community is open to private equity. “A lot of the smaller to medium-sized companies are family owned or semi-institutional owned and they’re suitable targets for private equity,” he says.

Mads Ryum Larsen, a partner at Industri Kapital, points to differences in the nature of the Danish private equity market compared with Sweden, notably the fact that a relatively high proportion of the Danish buyouts have been public-to-privates and sales of privately held businesses, whereas in Sweden there has been a higher proportion of spin-offs from industrial conglomerates.

Larsen also notes the significant role in developing the Danish market played by local institutional investors and by the leading Nordic-wide private equity houses. “In the last couple of years a lot of the larger Danish institutions, which were investors in the stock market, have become private equity investors,” he says.

Among these institutional investors are a handful of relatively large pension funds, such as ATP. Although the Danish economy is relatively small, its pension funds are concentrated in a few, large funds that have been instrumental in providing capital for private equity.

Larsen says: “We’ve also seen a lot of activity in Denmark by Nordic houses, notably Industri Kapital, EQT and Nordic Capital, and the development of informal networks between these houses and the local business community and institutional investors.”

Among the specifically Danish houses, Axcel is one of the longest established. It has close links to the Nordea group, one of Denmark’s main financial companies. The house was set up in 1994 and invests in mid-sized companies.

Axcel’s strategy includes investing in family owned companies that are going through a generational change. It also focuses on Danish companies that are capable of becoming European leaders, such as door manufacturer Vest-Wood, which was acquired by a consortium led by Axcel in 2002 following a take-private.

From its base in Denmark Vest-Wood has grown into a business with nearly €500m of turnover through organic and acquisitive growth, the latest being the purchase of Austria’s largest manufacturers of doors last year. Its biggest markets are the Nordic countries and Germany.

Exits made by Axcel last year included the sale of Glud and Marstrand, a metal packaging producer, to ABN AMRO Capital and the sale of specialist telecoms company NetTest to Japanese trader buyer Anritsu.

Axcel’s main rival domestically is Polaris, which emerged from the Danske financial group. Because it has been around for less time, Polaris had not been able to demonstrate the same impressive exits record as Axcel but has nonetheless been showing success, say observers, and has half a dozen investments in companies with an aggregate turnover of around €1bn.

It raised a new fund in 2005 and extended its geographical reach to include southern Sweden. Among its investments last year were Swedish door-to-door delivery service Jetpak and southern Swedish IT business AddPro.

According to Danske’s Kjerulf, the openness of the Danish economy and corporate world is a plus factor in attracting private equity investment. Danish industrial companies do not have much in the way of takeover defences, he says, and are pretty open in their ownership structures, as there are clear, unequivocal squeeze-out rights. If a prospective purchaser obtains the requisite percentage of shares, it is very difficult for it to be prevented from acquiring the business, although the process can take time if there is opposition.

“Some of the older companies have A and B shares to ward off takeovers but any company listed in the last 30 years will not have such protection,” says Kjerulf.

Another advantage of the Danish market for buyout investors is that it is relatively business-friendly in areas such as hiring and firing. A system of “flexicurity” was implemented in Denmark in the early 1990s, and has since been exported in varying forms to other Nordic countries.

Flexicurity is an attempt to bring together the concepts of flexibility and security, so it allows employers to hire and fire easily but provides high unemployment benefits and a right of the unemployed to training. The idea draws on Denmark’s tradition of “social dialogue” and was initially promoted by social democrat politicians. It has been hailed a success because it helped bring down Denmark’s unemployment rate by 50% within five years.

“The big advantage of a system like flexicurity is that it allows new business owners the freedom to carry out restructuring,” says Kjerulf.

There are other factors contributing to Denmark’s attraction to investors. Last year, Denmark topped the Economist Intelligence Unity’s country survey on business competitiveness, which measured government policy, macroeconomic stability, infrastructure and funding opportunities. One of the particular benefits highlighted was the flexible and highly trained workforce.

High personal tax rates, however, can put employees off working overtime, although in another sense high income tax is a factor that supports private equity investment. This is because industrial managers find it very hard to acquire significant wealth through salaries, and are therefore extremely attracted to the idea of an equity stake in their businesses.

EQT’s von Koch says: “The personal tax rates mean that management teams are often highly motivated to make buyouts a success, so if the buyout house can support that motivation through focusing on the bottom line, it can lead to a very successful outcome.”

But not everything in the garden is rosy. Some executives point out that there are tax inefficiencies in terms of the restrictions faced by buyout houses on getting tax credits relating to portfolio companies.

Another obstacle is that, although acceptance of private equity has been growing in recent years, it is still perhaps concentrated among the larger corporates.

“There’s still a significant part of the business community, especially among smaller companies, that does not really welcome private equity because it does not want to give up control,” says one banker.

Industri Kapital’s Mads Ryum Larsen says: “It’s true that there is a segment of the business community that has opposed private equity – accusing it of not adding value – but increasingly. Denmark is welcoming such investment and the very large deals we saw in 2005 will only serve to establish private equity more solidly.”