Nordic remains open for business


The Nordic banks are believed to be relatively unaffected in terms of direct exposure to the US sub-prime market and most do not have a significant overhang of un-syndicated debt. That is good news for the private equity market in the region, although deals with transaction values above €1bn are still going to be difficult. For mid-market and smaller deals, however, buyout directors are more positive.

Nordic banks such as Handelsbanken, Nordea and SEB have traditionally been less involved in the underwriting of deals and acted more often as lenders.

“Overall, the Nordic banks’ exposure is pretty small and they’re still open for business,” says Graham Oldroyd, head of Bridgepoint’s Swedish office.

Simon Wakefield, global head of acquisition finance at SEB Merchant Banking, says: “The Nordic banks are in rather a good position in the current market because, unlike many other banks, they have not been left holding large underwriting commitments.”

The banks are taking advantage of the current climate by raising interest rates and tightening terms, as well as showing caution over syndication. Generally, for deals under €100m the Nordic banks are happy to underwrite individually, while in the €100m to €500m bracket they will form clubs among themselves taking, say, €50m each.

Oldroyd says that for deals over €500m, five or more banks would be needed and, as the Nordic region does not have a large number of such banks, these transactions can be more difficult to fund.

“You might need to bring in a non-Nordic bank and that extra layer of complexity makes it more difficult,” he says, adding that in the €200m to €500m range the banks are definitely being more selective in what they will back and any company with a volatile trading history or other risks will find it hard to access finance.

Christian Sievert, managing partner of Stockholm-based Segulah, says: “There’s been a significant impact on the larger deals, which have more complex structuring and involve more parties. But in the lower mid-market of up to €250m transaction size, where we operate, we haven’t seen a dramatic change so far.”

He adds that in the mid-market leverage is generally fairly low relative to cashflow, adding: “We’ll probably see a tightening of terms, but that’s at the margin. What we’re seeing is an adjustment in the price of risk.”

Generally, advisers to vendors of companies worth more than €500m are telling them to delay transactions until market conditions improve. As for deals worth more than €1bn, the market is effectively closed at the moment.

Of course, all these caveats apply to private equity buyers, and that means potentially good opportunities for trade buyers with a strong balance sheet and with cash to invest. Prices are falling but there is probably some way to go, says one buyout director.

“There’s always a lag between an event such as the current credit squeeze and the attitude of vendors,” he says. “Many vendors will have been advised in the spring that their company would fetch a certain figure and it takes time for them to adjust their expectations.”

There were a number of IPOs expected to come to market in the autumn, but which are now likely to be deferred until early next year when investment bankers hope the market will be better. Currently, stock markets in the region are volatile and institutional investors in IPOs are saying they will expect significant discounts on any flotations to reflect the perceived increased risk.

Deferring these flotations, however, could create its own problems if there is a glut of new issues early in 2008. About 12 potential IPOs are likely to be postponed but some, such as 3i’s facilities management company Coor, are still likely to go ahead because of their attractiveness as market leaders.

A number of potential IPO candidates are also likely to adopt a dual-track approach, by preparing for flotation while also inviting bids from trade buyers.

Steffen Thomsen, a director at 3i in Denmark, says that he expects 3i still to be active. The firm takes both minority and majority stakes in companies, he says, adding that when it comes to minority stakes the current climate could present opportunities.

“We invest alongside existing owners and, if they are less keen to sell in the current market, they may be looking more for expansion capital,” Thomsen says.

3i was involved in the acquisition of ferry operator Scandlines in June, which it acquired along with Allianz Capital and a German trade buyer. But Thomsen points out that 3i is more usually involved in deals in the €100m to €500m range, which are less affected in the current market.

His firm has been fairly active in the region this year. Other deals in recent months include the acquisition by 3i of Finland-based telecommunications company Eltel Networks from Industri Kapital and the purchase of Finnish testing, measurement and certification company Inspecta from a Finnish investor.

In June the firm, along with Litorina Kapital, sold its stake in Swedish queue management systems company Q-Matic to private equity house Altor.

Significant transactions in the region have also included the sale by Hilton of its Scandic Hotel Chain to Swedish buyout house EQT for €833m. The company is the largest hotel operator in the Nordic region.

Among other deals were Nordic Capital’s purchase of auto accessories manufacturer Thule Group from Candover, and Industri Kapital’s sale of copper wire rod manufacturer Elektrokoppar to industrial buyer Liljedahlsbolagen.

In other developments, the Swedish government is still pushing forward with its privatisation plans. In June, parliament approved a government plan to sell Vin & Sprit, which makes Absolut vodka.

The centre-right government had already received permission to sell stakes in bank Nordea, telecoms company TeliaSonera and stock exchange operator OMX. The privatisation programme could raise about US$22bn over three years and will be used to pay down debt.

The programme was announced last year by the then incoming Prime Minister Frederik Reinfeldt after the social democrats lost power. The Swedish government has stakes in 54 companies employing 188,000 people. Of the 54, only an energy company and a mining enterprise have been excluded, as those sectors are regarded as strategic.

The most attractive asset is likely to be Vin & Sprit, which could fetch up to US$5bn. Trade buyers such as Pernod Ricard, Diageo and Fortune Brands are thought to be mulling possible bids. Private equity players are also likely to be interested.

Oldroyd says the privatisation process has taken the government longer than it expected but the recent appointment of former UBS corporate financier Hakan Erixon is likely to spur the process. Erixon will be number two to Karin Forseke, former boss of Swedish investment bank Carnegie.

“The Swedish government now has two relatively big hitters in charge of the process, which shows it means business,” says Oldroyd.

When it comes to the legal and regulatory environment in the region, much attention has focused on the Danish government’s tightening of the rules governing the offsetting of interest payments. On July 1, new regulations came into force in Denmark reducing the degree to which interest payments could be offset against profits to DKr20m (€2.7m) per company. Before this, there was no limit.

The move was taken in response to concerns that following some LBOs the government was losing out in a major way over the amount of corporate tax paid. The government estimated it was losing about DKr2bn (€270m) a year due to tax breaks on highly leveraged transactions.

In some cases, according to the government, the interest-offsetting rule was allowing up to 85% of companies’ corporate tax liabilities to be avoided in the first year.

The decision is retroactive, so could involve previous buyouts. One that could be affected is the buyout of telecom company TDC in 2005 by a group of private equity houses. The transaction was the largest European LBO at the time.

The Danish moves could have implications for other countries, as the tax regime governing private equity investment has recently come under scrutiny in the US, the UK and other territories. Germany is also considering a reduction in tax breaks on interest payments in highly leveraged deals.

Steffen Thomsen of 3i says he believes the changes will not have a major impact on investment, as they will be factored into the price and borne by the vendor. He acknowledges, however, that the measures could give trade buyers a slight advantage in auctions if they were using more equity in their bids.

“For houses like ours, it will not make a big difference because we focus on changing management and developing businesses, rather than using tax issues to make returns,” he says.

But of greater importance when it comes to influencing deal flow in the coming months will be the market conditions. One concern is that the credit squeeze may affect not just companies raising debt, but also consumers. This spill-over has already been seen in the UK, where some mortgage holders have seen increases in their payments, and a similar trend could occur in the Nordic region.

Another risk is that the US could suffer an economic slowdown. “The Nordic region is very export-oriented, so a slowdown in the US could affect growth here,” says Oldroyd.

Christian Sievert remains cautiously optimistic about the outlook. “We’ve been around for 13 years, through good times and bad, and been able to do a few deals each year,” he says.

Currently, the economy in the region is strong and the impact of the credit squeeze, at least in our part of the market, is only happening at the margins, so I still see deals being done.”