Mid-sized buyouts in the Benelux What typically characterises a mid-sized buyout in the Benelux?

Definitely not its size! Compared to what is called mid-sized in, for instance, the UK or Germany, e25 million to e150 million can in generally be indicated as the mid-sized deal range in the Benelux. Distinctive is its international scope. Mid-market companies in the Benelux tend to be internationally orientated due to their limited home markets. This limits their dependence on one or two economies, forcing management teams constantly to seek cross-border growth opportunities, autonomously or via a buy-and-build strategy.

A classic Benelux mid-market buy-out thus requires international deal making skills and the ability to add value in a global environment. NeSBIC has broad experience in the execution of and value development in these international types of transactions. During the first half of 2002 NeSBIC supported two international buyouts: Incotec International and Akzo Nobel Inks.

In order to illustrate the international scope of mid-sized buyouts in the Benelux these two deals will be described below. Furthermore these examples show that as a professional private equity player it not only takes money to successfully execute a management buyout, but also skills to support the management in finding a solution for all financial, operational and strategic issues that are involved in this process in an international environment.

Incotec International

Lesley van Zutphen and Afke Slager of NeSBIC assess the deal

Incotec is a typical example of a (small) mid-sized buyout with all international ingredients, both from a deal execution as well as from a business point of view. The company was acquired via a management buyout from Nasdaq-listed Seminis Vegetables Seeds. Seminis is the world’s largest producer and developer of vegetable seeds. The execution process was extensive due to cultural Seminis is controlled and managed by a group of Mexican businessmen and time differences. Due to tight co-operation between NeSBIC, management and its advisers NeSBIC was able to bridge the differences and close the deal after seven months of negotiations.

Incotec is the worldwide market leader in adding value to vegetable seeds through various seed and coating technologies. Seed treatment is the overall term used to indicate a range of services focussed on improving plantability, seed germination and seed/crop quality. These technologies have become crucial in the process of growing seeds into healthy plants and securing a high yielding per square metre for the growers. This high yield is increasingly important due to the combination of the world population growth and the decrease in the availability of arable land. Furthermore, due to the high level of R&D investments involved in the refinement of seed by the seed producers, the value of (hybrid) seeds has increased substantial over the years. Growers therefore want to be sure that their seeds grow into healthy plants. Seed treatment has consequently become a key step in the value chain.

Did you for instance know that the value of one kilo of high quality tomato seeds can be over e100,000. As a vegetable grower you better be sure that these seeds grow into healthy tomatoes.

The company’s international scope arises from the consolidation and globalisation of the seed industries and the limited (Dutch) home market. The customers of Incotec are large global seed companies like Monsanto and Syngenta. Incotec is able to serve these customer from production facilities on almost each continent; Europe (NL), USA (California), South America (Brasil) and Japan. The possibility of creating a foothold in Africa is currently being investigated. Heart of the company is the central R&D department in the Netherlands. In addition local R&D departments are indispensable, since the type of treatment a seed needs depends on local climate and soil conditions.

Did you ever eat a delicious salad in the hot desert of Las Vegas? Most probably Incotec was involved in the germination process, since salad seed does not germinate above 28C degrees.

The growth opportunities for Incotec are multiple. The growth of the seed treatment market is fuelled by the general growth of the seed industries, the introduction of new technologies, the increasing value of seeds and the focus on safety and health issues. In particular opportunities will arise in Asian and African countries, where the awareness of seed treatment possibilities is growing. Since Incotec has a strong position in the value chain, the competition is limited and the entry barriers for the seed treatment market are high, growth will certainly follow for Incotec. The big challenge for this relatively small mid-sized company is how to act as a multinational and manage this international growth.

NeSBIC has particular experience supporting companies in this process. NeSBIC strongly believes in adding value to its portfolio companies and has a hands-on approach. Before the closing of the transaction a strategic business plan is drawn up, including an operational plan for optimising the operational performance immediately following completion. In the case of Incotec this included, among other things, the introduction of treasury management, renewed global financial reporting and monitoring systems, and implementing a global ERP-system. Furthermore organisational improvements were necessary to prepare the company for further growth.

An international Supervisory Board consisting of three experienced businessmen with industry knowledge was installed to support the management in its strategic development of the company. Incotec aims to triple the company’s operational performance in five years. With current performance running well above budget, the implementation of the strategic and operational plans and tight co-operation between NeSBIC, management and supervisory board, NeSBIC strongly believes this target can be met. By taking such a structural approach, NeSBIC aims to realise a substantial increase in shareholder value within several years, and thus sound returns for its investors.

Akzo Nobel Inks

Zoran van Gessel and Jeroen Vos of NeSBIC assess the deal

In January 2002, NeSBIC completed the management buyout of Akzo Nobel Inks from the Dutch stock listed company Akzo Nobel. The decision to invest was made after all preconditions for management to realise attractive returns in three to five years time had been fulfilled. These preconditions included: creating the most favorable deal structure, developing a strategic business plan and having an operational tactical plan with ample operational improvement potential ready to roll out immediately after completion.

With 37 production and mixing facilities and a strong network of distributors, Akzo Nobel Inks is a global producer of inks for the packaging, newspaper and commercial printing industry with strong local presence in Europe, and a global leading position in the market for narrow web label printing inks. The primary manufacturing and mixing facilities are found in Scandinavia, the US, Germany and the UK. In 2000 the company employed about 900 people and had consolidated sales of e190 million.

Although Printing Inks delivered a positive financial performance in 2001 under difficult market circumstances the company no longer fitted within the product portfolio of Akzo Nobel. Consequently, the company had been put up for sale.

During the process of deal structuring NeSBIC actively secured some vital elements for Akzo Nobel Inks companies to continue to operate under their respective names in the future, with no interruption in services to its customers. As Akzo Nobel Inks has approximately 900 employee’s worldwide insurance arrangements and pension schemes needed to be renewed. Moreover the introduction of a share participation plan for employees was executed to show appreciation for their commitment, create a sense of ownership and give them an opportunity to benefit from a potential value increase of their business.

Before the decision to invest was ultimately made, NeSBIC convened with management to set up a strategic business plan, which included all issues that need to be covered in running an independent business after the MBO. Their ambition to grow the business (both autonomously and through acquisitions) and become one of the leading players in the industry (primarily in terms of profitability, capital management, quality of products and customer focus) was strongly supported by the NeSBIC team. As a strong, stand-alone company, Akzo Nobel Inks would be able to further concentrate and focus on the development of the core areas, as well as strengthening the position as market leader in many product niche areas, such as water-based inks for envelopes and UV curing inks for metal decoration.

The strategy of Akzo Nobel Inks’ management fitted well within a consolidating global industry wherein solving client problems and minimising total product cycle costs rather than delivering products is becoming more and more important. Moreover NeSBIC had already identified interesting follow-up acquisition targets that would strengthen Akzo Nobel Ink’s position in some countries while offering substantial synergies.

After the MBO an operational improvement plan was set up together with co-investor H2 Equity Partners and management, which involved not only top management but employees of all traits in a rigorous process of idea generation and identification of improvement potential along all different functions within the company. Primary goal of the plan is to double the companies’ operating margin in three years without running out of pace. Most importantly, the process will be driven from within the company itself, with private equity investors lending a supporting hand.

With current performance being in line with the operating margin target, Akzo Nobel Inks is set for a successful new phase in its over 100 year-old existence. With the support of a dedicated team of investors, management and employees strive to become a perfect example of how private equity players can add value by creating the environment to run the business successfully.