Today's presentation on the intention to split NKT Holding into two listed companies and the acquisition of ABB's high-voltage cables business. Today, I am pleased to present Jens Due Olsen, Chairman of the Board, NKT Holding, and Michael Hedegaard Lyng, Group Executive Director of NKT Holding and President and CEO of NKT Cables. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Speakers, please begin.
Good morning, everyone, and welcome to our investor meeting. As mentioned, I am Jens Due Olsen, Chairman of NKT Holding, and with me here I have Michael Hedegaard Lyng, who is CEO of NKT Cables and also Executive Director of NKT Holding. We will both present today, and I suggest we briefly take you through our presentation, following which there will be a Q&A session. Before we begin today's presentation, please observe our safe harbor statement. Now I am flipping to page number four. We have two important announcements today. In the past, as you know, we have made acquisitions for our companies when these were value-creating, and we have also sold activities when the value we could realize was higher than what we could generate in continued ownership. We have increasingly prepared our company for a split.
Lately, we have changed our governance model in that we have changed the role of our holding activities to being shared service functions and working for the companies and directly for the Board of Directors, and the Board of Directors have in turn since then acted as Board of Directors directly for the individual companies. Hereby, we have improved the strategic dialogue between our board and the individual management teams. This has led to faster and better strategic decision-making, improved governance in general. It has shortened the distance between you, shareholders, and operations, and it has also improved bottom-line ownership in our companies.
While we have prepared our company for a breakup, the size of our individual activities has implied that we have not been able to execute a breakup, as in particular, NKT Cables has been too small to be a viable standalone entity relative to the competitors and the markets we operate in. With today's announcement that we have agreed to take over ABB's cable business, NKT Cables will be a viable standalone business entity and amongst the market leaders in the industry, a position Nilfisk already has in its industry. Michael Lyng will take you through the details of the transaction. A brief summary here is that we will pay an enterprise value of EUR 712 million. In addition to this, we will pay another EUR 124 million later as payment for a state-of-the-art cable- laying vessel. The strategic merits of this, Michael will come back to.
We will become a key player in the increasingly important DC market. We are currently developing this technology internally, a project that at best will take us several years at significant cost. Meanwhile, we will not have access to the market. We will acquire a strong order backlog that we, together with our existing business, can use to increase earnings and capture synergies. We will become a stronger player in the market for offshore wind energy and for the development of the interconnection grid in Europe. Flipping to page five. This is how our new structure will look like. We will create two listed companies, Nilfisk and NKT Cables. Cables will comprise the existing NKT Cables and the ABB acquisition and NKT Photonics as well, as NKT Photonics is not yet ready to be an independently owned company.
Nilfisk is a leading professional cleaning company with a strong global position. There are ample organic growth opportunities and value-creating M&A opportunities that Nilfisk will continue to pursue. Furthermore, Nilfisk's asset-light operating model and attractive earnings profile result in high cash conversion. Currently, Nilfisk has revenues of close to EUR 1 billion and an EBITDA of almost EUR 100 million. In addition to its attractive medium-voltage and low-voltage market positions in selected pockets of Europe, the new NKT Cables will be a leading AC and DC high-voltage player and strongly positioned for the growing offshore wind industry and the development of the interconnector grid in Europe. Apart from the strong technologies and strong backlog, the company will also realize significant synergies from the acquisition. The combined company will have revenues of more than EUR 1.7 billion and an EBITDA of approximately EUR 152 million.
While NKT Photonics is not in scope today, we continue to have strong expectations for our activities in the Photonics segment. We have step-changed our market position and earnings potential and continue to see strong organic growth and value-creating M&A opportunities here. The next four to six months will be quite busy. Flipping to page six, here is a page on the tentative timeline. Today, we are announcing the agreement to acquire the ABB business and the intention to split NKT Holding, pending closing of this transaction. In order to close, we need competition authority approval. This filing we are preparing as we speak. We estimate it can take us four months or longer to obtain the appropriate approval. Meanwhile, we will conclude on the appropriate structure of the split. In principle, there are two models. There is a demerger model or a spin-off of a subsidiary model.
We will conclude on this in order to be able to execute at the time of closing or soon thereafter. Meanwhile, we will also issue 10% new shares and prepare all the governance measures that are necessary in order to operate two separately listed entities. While there is no guarantee in the timing of this, at this time, we do expect to be able to conclude this on or before our AGM on March 30, 2017. With this brief overview, I would like to hand it over to Michael Lyng, who will take us deeper into the merits of the transaction.
Thank you, Jens, and I would like to echo what you just said. The acquisition of ABB Cables is truly a landmark transformation, not only for NKT Holding, but also for NKT Cables. It is the largest ever in NKT Cables' 125 years history. NKT Cables operate in an industry where innovation and scale is instrumental, and ABB's Cables business is the perfect strategic match to our business. In addition to this, we have also signed an agreement for long-term strategic partnership with the ABB Group. We are excited about the great opportunities to create a leading power cable company in Europe and globally. On the next couple of slides, I will take you through the transaction overview and introduce ABB Cables and the rationale behind the acquisition before we then jointly take the Q&A session in the end. Let me start by giving you the transaction overview.
These slides provide you the main highlights of the transaction. The enterprise value is EUR 712 million, and the implied EBITDA transaction multiples after realizing the synergies is 6.5x , based on 2014- 2016 expected earnings. This makes most sense since we are operating in a cyclical business. On top of the enterprise value, we will, as Jens mentioned in the beginning, need to pay for a state-of-the-art, new cutting-edge vessel with a value of EUR 125 million to be paid in first quarter 20 17, where we expect the vessel to be delivered. So total enterprise value is EUR 836 million or approximately DKK 6.2 billion .
This deal is fully financed, so financing is in place. On top of that, we expect to raise new capital at a later stage, less than 10% new equity, as well as dispose our treasury shares to obtain a prudent capital structure. Also we will, with immediate effect, stop our current share buyback program. We expect and foresee significant synergies of around EUR 30 million, which I will return to later. Closing is expected in Q1 2017, conditional upon regulatory approvals. Our operational outlook for 2016 remains unchanged. In addition to the previous communicated one-offs of EUR 10 million for 2016, the transaction will add EUR 2 million with a further EUR 9 million being added at closing. So what kind of business are we then taking over? On the next slide, we give you a snapshot of ABB's Cable business.
They are definitely in the premium segment of the AC and DC high-voltage cable business, focusing on the higher margin project business with best-in-class manufacturing facilities situated in Karlskrona in Sweden, approximately a three hours drive from Copenhagen. On top, we expect a new cutting-edge cable- laying vessel to be delivered next year, which will provide installation risk mitigation and increase our operational flexibility. ABB also have a strong revenue backlog of EUR 1.1 billion, and that creates visibility for the next couple of years. Last but not least, the general outlook for the European high-voltage cable market looks promising, driven by offshore interconnect investments, but also traditional onshore DC growth, in particular relating to the SuedLink project in Germany. Next slide, please. It is fair to say that ABB has been pioneering within DC technology and extruded DC cables.
On our left-hand side of this slide, you will find a picture of the best-in-class high-voltage cable factory facility based in Karlskrona in Sweden. During the last couple of years, ABB has invested significantly in this business, in the plant, in order to make it a state-of-the-art facility from beginning with test facilities, development facilities, to installation capabilities. So end-to-end process, it is really a state-of-the-art facility that will fit nicely into our state-of-the-art facility in Cologne. On your right-hand side is a model of the new cutting-edge cable-laying vessel. This vessel is important because it will minimize installation risk and increase the operational flexibility, which is crucial in order to win new large orders. And as said before, the vessel is expected to be delivered in Q1 2017.
If we look at the next slide, there is an overview of landmark projects that ABB Cables have delivered or are currently delivering. There are some well-known names on the list here. ABB Cables has a strong track record of delivering on landmark projects. Some of the important ones are listed here, where I would like to highlight the DolWin1 and DolWin2, very large projects with the blue-chip customer, TenneT. Also worth to highlight here is the NordLink interconnector project between Norway and Germany, is also for TenneT, but also together with the Norwegian state-owned company, Statnett. Here we are using the latest 525 kV DC technology, one of the first 525 kV projects ever. There are also other well-known customers on the list here, Statoil, DONG Energy , et cetera. If we look at the next slide here, it is describing the strategic rationale behind this acquisition.
There is definitely a strong strategic rationale for combining ABB Cables and NKT Cables. ABB Cables is a leading player within DC high-voltage power cables, which will enable NKT Cables to enter into this higher margin market with a strong growth potential. Combined, we will create a leading high-voltage power cable. I would also like to mention here that as part of this transaction, we have also signed an agreement with ABB, where we will focus on a strategic partnership together, focusing on future projects within interconnectors and onshore transmission projects. This will secure future cooperation between the two companies. Together, we will have a complete product offering to our customers, including DC technology. Many of you know that the DC technology is a segment that we have focused on with our curing facility in Cologne.
We have not had the technology, and a s Jens said in the beginning, it would have taken us a couple of years before we would actually be a player in that market. With this acquisition, we have a fully fledged product offering starting beginning of 2017. ABB Cables' order backlog of EUR 1.1 billion increased the visibility, and it corresponds to approximately 2.4 years' sales based on ABB's 2015 revenue. We acquired best-in-class manufacturing facilities that can be optimized further together with our Cologne facility. Last but not least, we have a common Nordic heritage and culture and a strong organizational fit. Let's move into more detail about the first five elements. On the next slide, you can see a composition of expected revenue. The combined revenue in 2015 would nearly double in percent share into the higher margin business from now around 27% to 47% to a total combined pro forma sales.
This is also reflected into the pro forma 2015 EBITDA margins, which will be lifted from currently 9% to 11.4% measured in standard metal prices. It goes without saying that these numbers are before any synergies and before the expected positive impact from the cable- laying vessel, which will be delivered in first quarter 20 17. On the next slide, the split of ABB Cables order intake from 2013 - 2015 actually indicates how we can gain access to their DC technology, which are suited for the interconnectors as well as the interesting offshore wind farm markets. 70% of their order intake is based on that new technology. This technology is something that gives us many new opportunities in NKT Cables, so this is a great step for us.
The acquisition also makes us gain access to the interest growing interconnector segment, constituting 55% of their order intake. On the next slide, you can see our product offering today, NKT Cables, ABB Cables, and when we are joining forces. It illustrates where NKT Cables has been lacking competence and where ABB Cables contributes with new technologies and turnkey project experience. As you can see from the table, we will fill out that gap and combined, creating a comprehensive product portfolio, as well as adding strong installation and turnkey experience and capabilities. Fully fledged product offering to the European market, but also to the global markets. On the next slide is a composition of backlog. It creates good visibility up to 2019. It's a pretty large order backlog, and it corresponds to approximately EUR 1 billion.
That creates good visibility for project executions in 2017 and 2018, and combined with our existing good visibility in Cologne, I'm happy to announce that we will have some busy years in front of us. If we look at the next slide, you can see the best-in-class manufacturing facilities. I'm also proud to say here that the plant in Karlskrona, combined with the plant in Cologne, is a perfect match. Both of them are state-of-the-art manufacturing facilities, and it is probably the most modern factories within the entire cable manufacturing world. Combined with the new vessel coming on stream beginning of next year and our existing logistics center in Rotterdam, we will have the opportunity really to meet customers' expectations. The next slide indicates the synergy potential. The annual synergies are expected to be approximately EUR 30 million, with full impact by end of 2018.
These synergies are, among others, creating a more efficient production plan between the facilities. It's a scale benefit from, for example, procurement and cost savings on installation. It's not so much about closing plants or stuff like that. We don't expect to close any plants with this acquisition, but we expect to be able to optimize our manufacturing planning, manufacturing footprint between the two sites and the logistic center. There is also an integration cost related to this of approximately EUR 35 million- EUR 40 million. With that, we have finalized the presentation of first the demerger intention of NKT Holding into two listed companies and also well describe the acquisition of ABB high-voltage cables business and we are ready to take questions. Operator, I hand it over to you.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have the first question. Our first question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. A couple of questions from me. First of all, can you sort of quantify the capacity that ABB has compared to your own capacity in Cologne?
Yes. It is always difficult to give a precise picture of capacity, but in Cologne today we have three extrusion lines, one very big one and two smaller ones. In Karlskrona, they have two pretty large extrusion lines. From a volume perspective, it is more or less eye to eye on the capacity side. Then you need to bear in mind that looking at top line for ABB in the past, it has also included a lot of installation work.
Okay. For your own business so far, you have said that the backlog keeps you fully capitalized up until the end of 2017. How is that looking for ABB? Is there any unused capacity?
Today, they are not fully utilized, but with the backlog for 2017, they move closer to capacity limitation. That is more or less also the picture for 2018, although there is still room for new orders. But it is really good visibility for the next years looking at the Karlskrona plant.
Okay. Can you also put a few words on why ABB is selling?
I think that is not up to me to explain why ABB is selling. I think that question you need to address to ABB.
All right. Fair enough. You have given a bit of numbers on the combined earnings and margins. I am just trying to do the math here. Is it correct when I assume that the ABB high-voltage business has an EBITDA margin of around 16% in standard metal prices?
Yeah. If I also do the math and looking at the numbers here on slide 13, then taking out the NKT Cables, which of course is running at lower margins because of a lot of product business, then that number seems to be correct.
Excellent. In terms of management for the merged company, you haven't made any remarks. How will that look?
To be decided on over the next coming quarters. I have to say that ABB brings extremely high competence level when it comes to project execution, cables installation, et cetera. We want to make sure that we are somehow ending with a combined business where we bring in the best of both companies. That's where we are with today's view.
Then just my last question is in terms of an antitrust risk here, do you see any problems getting regulatory approval, and how is the market shares of these two companies when you merge them in the high- voltage space?
Well, as also indicated in this presentation, this is acquiring something that we do not have today. Right? We do not have DC capabilities, and that is by far the biggest part of the ABB business today. We do not expect any issues with the clearance from the European Commission on this. It is not really relevant to talk about market shares because we are acquiring something that we do not have.
Your stance is that the authorities will look at DC and AC as two separate markets?
That is my expectations.
Okay, very clear. That was all for me. Thank you.
I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad now. There will be a further poll, so as questions are being registered. We have a question registered from Jon Hyltner from Handelsbanken. Please go ahead. Your line is open.
Thank you. Can you hear me?
Yes, we can.
Great. My first question is on the partnership you have with ABB following the transaction. Could you go in a bit more in detail what that looks like?
Well, it is not something that I can disclose a lot on today. But it is clear that ABB have been used to supply turnkey solutions to their customers. Now they have decided to exit the cable part because they believe that combining that with us will make a stronger product offering to the market, and I very much agree to that. Having said that, we still see a lot of opportunities in going to the market together, so that we can still provide optimal solutions for common customers. So that is what I can disclose on that today.
Okay, but on the sales side, you will cooperate to be able to deliver a complete solution for the end customer, and then hopefully you will get more business that way.
Yeah, and vice versa for ABB.
Yeah. Then more on the numbers. Could you say anything about the depreciation levels or the actual EBIT margin level of the combined entity?
I can only disclose today what is already included in the presentation. Then I think we need to educate each other on depreciation levels, et cetera, on the side to not to make this call too complicated.
Okay. Then finally, we talked about market shares before, but on DC high- voltage cables, what would you say ABB's market share is that you're acquiring?
Sorry, can you repeat that?
The market shares of ABB's high-voltage business that you're acquiring, what is that roughly? Do you know?
It's as I said before, it is extremely difficult to talk about market shares because there are so many different ways to define market. Is it the cable market? Is the cable market including its installation? Is it onshore, offshore, et cetera? But it's fair to say that ABB today is a strong player within the DC market in Europe, but also globally. It's also fair to say that we are not, because we don't have the technology. On the other hand, we are a well-established player when it comes to traditional onshore high- voltage cable, but also AC offshore cables where ABB is less present. So combining those two is creating this optimal situation.
Okay, and then my last question. You mentioned that ABB has more installation work on their top line. Is that a necessity to get the end business, or is it something they have worked up to improve their offering and their margins? Maybe if you could mention some about the split of what you can say, cable sales and installation sales, perhaps.
Yeah. It is well known that the so-called tier one players, ABB and competitors, are all in a situation where they are able to offer turnkey solutions to customers, which means that next to producing the cable, they also install the cable. That has not been the case for NKT Cables in the past, but now we will get access to that. It's a little bit difficult to give you a revenue split between cables and an installation, because it varies a lot from project to project. But it can go from 30%, 40% in one end to 60%, 70% in the other end, depending on the project.
Okay, and how does it work? Do you sell this at a combined price, the cables plus installation at a fixed price, or is it split to the customer so they can see what they pay for installation and the actual cables?
That is also a little bit depending on the project and also on the customer. Some customers have a strong preference for turnkey solutions, which means producing of the cable and installation of the cable as well. Other customers have a stronger preference for just acquiring the cable from the cable producers and then do the installation themselves. So it depends a little bit about the customer and on the project.
The vessel you will get here in the beginning of 2017, how important is that for the installation work and how is competition on that part? Is it a big competitive advantage to have that in-house?
We see it as a strong competitive advantage to have this vessel. It is, as mentioned here, a state-of-the-art vessel. It has extremely high turntable capacity, more than 9,000 tons of cable. It is able to produce or to install cables under extreme weather conditions, and thereby in the end, we will be able to bring down installation costs with this vessel, compared to using existing capacity in the market. So we do see it as a way to differentiate in the market and to bring down cost.
Would you say that this vessel will be far better than the existing vessels on the market?
That is my statement, yes. It is a cutting-edge cable- laying vessel being 100% specialized to do cable installation work only.
All right. That is very interesting. Thank you. That is all for me.
You are welcome.
Our next question comes from the line of [Fasial Ahmad ] from SEB. Please go ahead. Your line is open.
Yes, Michael, it's [Fasial] from SEB. Congratulations for the deal here. A couple of questions from my side. Firstly, regarding the Cologne factory, you've been contemplating an expansion of that capacity you have there. Is that off the table for the next couple of years for this deal? That's my first question, please.
I think it is probably a little bit off the agenda for now, because we will be able to add more capacity by joining forces and have better capacity utilization between the plants. Having said that, it's still an option we have. It's actually also an option that exists in Karlskrona. At both sites, we will be able to increase capacity at a relatively marginal investment. The next couple of years, I think we have our arms full executing on existing backlog. So that will be our key focus for the coming year.
Okay. Secondly, were you in competition with other players for this asset, or did you have exclusive access?
Well, it's hard for me to comment on what kind of competition we have been in. The last three to four months, there has been a structured process, an auction process running with one of the larger banks. I'm not the one who can somehow comment on the competitive situation.
Okay. That's all from my side for now. And congratulations for the deal.
Thank you.
Our next comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. Just two follow-up questions. First, to what you just mentioned in terms of being able to expand Karlskrona. As I recall it, you've said for Cologne, you can expand high- voltage production by 40%. What magnitude are we talking about for Karlskrona?
It would potentially be something like that, some kind of a similar number, maybe even slightly higher.
Okay. For the same amount of costs, which I recall is DKK 250 million ?
It would be something like that, but I would like to come back with that at a later stage.
Okay. My second question, obviously, with you executing the Race Bank project right now, we have talked a lot about pricing in the sector. I know you are saying that ABB is predominantly a DC technology, but they do also have AC technology. I guess the Hornsea project is a good example where you and ABB got those two orders. Would this position you even better for optimal pricing going forward as you see it?
By joining forces are able to optimize our production flow, and thereby with increasing the combined nameplate capacity, then I also think that in the end, that will benefit the customers.
Okay. Great, thank you. That was all for me.
I would just like to remind you that I still have my Chairman here, Jens Due Olsen, next to me. So we are also happy to take questions on the NKT Holding split.
This question comes from the line of Claus Almer from Carnegie. Please go ahead, your line is open.
Thank you. First of all, congratulations with the deal. Maybe this question could be answered by both Jens and you, Michael. But the balance sheet in the split company, giving these huge orders in the subsea area, how well-financed will the cable division be? That will be the first one.
As we are illustrating here, we expect to be at a leverage of around 3x debt to EBITDA when we are doing the close the deal here. Then we are also communicating that we do foresee a pretty strong deleveraging into 2017 as a result of expected high earnings related to the high backlog. Out of that, in combination with our 10% capital increase and the divestment of the treasury shares that we have, we feel that we will be in a comfortable situation pretty fast.
But will—
It is also the cash generation in Nilfisk.
Definitely, yes.
Yeah, sure. But given, again, this is a huge project, which has been a, t he cable division, you previously said that the cables would not be able to be a standalone company due to these huge projects, but I guess also you will be able to obtain some product financing, if you should win some large deals going forward.
Yeah, I think the main reason for why we have not seen the NKT Cables business to be a standalone business have mainly been due to the size of the business. And now we are increasing the size dramatically. And in particular, we will be a strong player in the upper end of the market, and that is why we have concluded that that is actually sufficient to now create a standalone business.
Okay. And then just m y second question. Given the volatility of, let us say, the quality of projects being one, the backlog you are taking over, is that on average what we have seen ABB be delivering for these 16% EBITDA margin?
I think ABB is well known to be highly disciplined in the market, not taking chances on projects where the risk profile is not optimal. I expect that we, going forward, will be able to realize margins on par with what we have been able to do the last couple of years, or what they have been able to do the last couple of years.
Okay. That sounds great. Thank you so much. And once again, congratulations with the transaction.
Thank you, Claus.
Thank you.
Our next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes. Just one follow-up on the split up. Last year, you had a holding company cost of EUR 3.4 million. How much of that should we expect to disappear as a consequence of the split up?
Kristian, over the last couple of years, since we changed the governance model, we have integrated more and more of the holding cost and holding functions into both Nilfisk and Cables. We have been able to bring down the holding cost the last couple of years significantly. We don't expect to be able to add a lot of extra cost when we will delist the two companies, and the functions that are today purely holding functions will somehow be divided into the different businesses.
As part of taking over the ABB business, ABB has also been in a structure where they have been supported a lot on the legal side, on treasury, et cetera, from ABB headquarters. If you just look at it as a standalone business, we would actually need to add a lot of cost to bring it into a sustainable situation. Part of that we can avoid because we have our existing holding structure.
As you know, it's not a big number in the bigger scheme of things, but we have been running a very lean holding operation for the past two or three years. Creating two standalone listed entities will not reduce cost, it will actually add to the cost because we will have dual listing fees. We will need to have capital market-related functions in both companies, et cetera, et cetera.
Okay. Very clear. Thank you.
There are no further questions at this time. Please go ahead, speakers.
Thank you, operator. Thank you, Jens, for joining in. We are then ready to close down the call. Thank you for listening in .