Q&A with Niklas Sävås, Redeye: Swedish serial acquirers

Last week, I sat down with Niklas Sävås, a senior equity research analyst with Redeye to quiz him about Swedish serial serial acquirers, and specifically: drivers of their supply; valuations; and why size matters. for those of you that don’t have 12 minutes to spare to see the full video below, check out the edited transcript. 

Why are so many listed serial acquirers in Sweden?

AP: The first thing that jumps out at anyone who studies this subject is the sheer size of the peer group. Over two dozen names in the public domain, and at least as many that are privately held. What’s going on?

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NS: You won’t be surprised to hear that the number one driver of the increase in supply are the high returns achieved by the incumbents. The multiple arbitrage: buying at 5-8X EBITDA vs. being valued at 15-25X EBITDA. Success begets success.

AP: What sort of barriers to entry are there? Does one need “incumbent lineage” to succeed – raise capital and get cracking with M&A?

NS: Not necessarily. Many of these HoldCo builders come from private equity. Meaning they’ve been doing M&A for a long time. They have good networks. Another type of business builders come from an industrial background. They source on their own, which takes a long time to get to a scale. Teqnion is a case in point.

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What drives valuations?

AP: As a group, the acquirers trade at premium to the broader market. But what explains divergence within the sample? 

NS: The market is quite efficient and the names that trade at a premium are the ones that have been at it for a really long time.

There are companies that have been buying for consistent – low multiples, have maintained consistent leverage and shown positive organic growth. For 20 years. 

It’s fair to say that company size drives premium too. You could argue this shouldn’t be the case because if you’re smaller, you should be able to grow faster and for longer. However, this maxim doesn’t really apply in our case. Let’s say a super sized acquirer has 150 business units. You have hundreds, if not thousands of sourcing agents that are trawling the market for new deals. Whereas if you’re just starting out and you have 2 people in the HoldCo, you’re naturally limited by what you can do. 

It takes time to build trust and credibility

NS: Yet another reason why upstart acquirers often don’t grow in a linear, let alone exponential fashion, is the time it takes to build a good reputation with the brokers they are so reliant on. Ditto with the sellers – especially when vendor financing and share consideration come into play. How do you convince the sellers these are worth much if you don’t have a track record or reputation? 

The incumbents’ bargaining power has probably increased in lockstep with their “certainty premium”, versus a few years ago when price sensitivity was generally lower. If a seller has sold to a serial acquirer that promised the world but where the share price is now down 70-90% he won’t be happy.

Are there compelling reasons to be listed?

AP: I have noticed that the median market cap of the companies included in our previous article is almost $800M. There are a few names in the $300-400M market cap range, but almost none below that mark. Does it make sense to be listed as a micro-acquirer?

NS: Conceptually, there shouldn’t be compelling reasons to be listed as a serial acquirer. If you do it right, you become self-financing at one point, you shouldn’t need much external funding. We see plenty of examples of this in the Swedish market where companies has decided to stay private. Still, if you’re listed, you tend to get better deals from lenders. Another factor is that you are able to use the share to incentivize your employees.