M&A Announcement

Jun 17, 2020

Slides

Good afternoon, and welcome, everybody, to this news conference call regarding Valmet's acquisition of a minority share in the future Neles that we announced today. My name is Pekka Rohenen, and I'm the Head of Investor Relations here at Valmet. And with me in the studio are Pasi Leine, Valmet's President and CEO and Karri Sarinen, the CFO. So today's agenda is so that Pasi will first go through the strategic rationale of the share acquisition and some details regarding the transaction. And after that, we open for questions through the the telephone lines. And Karri is then available for questions here as well. But Pasi, please go ahead. Thank you, Pekka. It's Pasi talking. So the news is that Valmet acquires 14.9% ownership in the future Neles. Valmet has today agreed to acquire 22,674,869 shares in the future Neles Corporation from Solydium OY. The shares to be acquired represent 14.88% of the Neles shares and votes. Neles Corporation, like you very well know, is planned to be creating a partial demerger of Metso. The completion of the partial demerger is expected to take place on June 13 in 2020, pending and it's pending final merger control approvals. The transaction between Valmet and Solydium is expected to take place on 07/01/2020. So what is Neles? As I think many of you have been following Neles lately because Neles is becoming a listed company. And Neles is a leading globally leading valve automation service company with strong exposure to pulp and paper industry. Approximately 70% of Neles net sales is recurring business. Neles is profitable company with good long term growth prospects. Neles net sales in 2019 was €660,000,000 and EBITDA percentage was 14.6 Since 2011, Neles has been growing about 5% annually and profitability has improved. Headquarters of Neles are in Vanta, Finland, close to Helsinki. And it operates in about 40 countries and employs about 2,900 people. And here you see also in the graph different customer segments like pulp and paper is about 26%, oil, gas and industrial gas about 37%, petrochemical and chemicals 21% and others 16%. So diversified customer base customer segments and strong position in Pulp and Paper. Geographically, Americas represent about 40% Europe 36% and Asia, including China, about 24%. So geographically, very well positioned in Americas, growing markets and also in Europe and Middle East and Africa. So nice customer segments in many, many different customer segments, good position there and geographically also very balanced company. Maybe I'll say a couple of words about Neles on top of this because I happen to know company reasonably well. I was myself running big part of Neles since 2003 and the whole Neles as it was part of Metso Automation from was it 2006 to 2011. So I have about eight years history of myself being involved in Nelles business. I know the company, it's a good company. It has very good products. It has very good personnel and very capable organization. And that's all I can say as a of course, not as a totally unbiased person because I'm very proud of having been working with Neles in my career. Now what is the strategic rationale for acquiring the shares? So like I said, Neles is a good quality company with a large share of recurring business. Neles has a strong position in pulp and paper industry and that's of course the connection to rest of Valemet. So we know pulp and paper Neles' roots are from pulp and paper. Neles has demonstrated good growth and potential to grow further, so we wanted to invest in a company. Is there some technical challenge or Wait a moment, sir. Okay. Okay. I don't know. Somebody is there a technical problem or not? There seems to be some technical problems, but I'm not now sure what the situation is. Okay, okay. Maybe a person has a problem, but our technical team is saying that generally coming through. So that has been growing and it has potential to grow further. So we wanted to invest in a good company with a strong position in the industry, which we know and which has been demonstrating growth and has potential to grow further. Now of course, we have the same heritage. So we know people know us. We serve similar global industries, and we benefit from same global trend megatrends. Now what is Walmed's position? Walmed wants to have an active long term role in development of Neles. So of course, when making so big investment in a company, we want to see that company is developing well in long run. And that's our goal, and we want to be actively helping and supporting Neles in its growth. Valmet's target is to increase ownership in Neles when Neles share price supports additional purchases. So now we have about 14.9%. Of course, we want to increase, but only if the share price supports that. And if not, then of course, we have we continue to develop Neles with all the tools what we will have. Then some basic data about transaction price and time line. So we agreed with Soluim the agreed purchase price is €8 per share. And then the total transaction would value to €179,000,000 Transaction will be paid 100% in cash. And the contract has also some extra clauses. So there is an adjustment clause so that there is a variation in the sale price, positive or negative, depending on the share value in the beginning of the trading of NL shares. And that adjustment is capped, and it will not have a material impact on the transaction value. The agreement includes also one year lockup period, during which we cannot dispose Nellis shares without Solydium's approval. Solydium retains the right of first refusal for a period of three years after closing. And we also have an anti embarrassment clause according to which Solydium could be entitled to an additional cash payment in certain circumstances, where Walmart would acquire or dispose shares in LS at a higher price during a three year period after the close. The transaction is expected to take place on 07/01/2020, and we will arrange to pay the acquisition share acquisition with the new loan facility. We were active towards Solydium. So now I can say that since the demerger was announced, we have been planning for this and have been actively talking thinking about it and making different kind of plans. So we are happy that we are now in this stage. The contract terms, which we mentioned here are actually good cooperation with Solydium ourselves. So Solydium wanted to have a good owner long term owner for Neles. And we have the same goal and that's why it was easy to agree on the lockup and the embarrassment and first refusal clauses because we want to make sure that we are long term developers of Neles and Solydium had the same goal. So with these words, I'll open the floor for questions and Karri is here to help me with the questions or with the answers, not with the questions. And your first question is from the line of Claus Berglund of Citi. Please go ahead. Yes. Good afternoon. So I just have a couple of this. I want to come back to the strategic rationale. So I totally get the recurring aspect of Neles, the 70%, but why is it important to integrate like this at this valuation? So do you sense that there would be a risk to the Valmet Neles relationship if Neles would have other owners, I. E, if there would be a bid for the business? And to what extent do you intend to increase your ownership? So obviously, maybe this is tricky to answer, but to put this into context, there are players out there that have quite a lot of firepower to pay much more for Neles than EUR 8 per share. So I'm interested in your thoughts there. So no, we are have agreed to purchase about 50%, and we are saying that our target is to increase ownership when the price that supports and that's our goal. Then I don't know what the other companies are planning and what kind of actions they will have. So it's difficult to comment on that. We have, of course, some synergies we could have some synergies with Neles. But now, of course, we are talking about minority shareholding, and then it's difficult to tell anything or get any benefit of the synergies. But we want to be actively part of developing Neles. We see it as a good company, and we see there are a lot of value increased potential for Neles and then, of course, for Valmet shareholders as well. But so my follow-up, Tadeep, is cost of capital and sort of thinking about alternative investing in terms of opportunity. So obviously, we're starting off with a minority ambition to participate in the growth story and to help support that growth. But on the other hand of the spectrum, we have to what extent Nelis is a critical asset. So obviously, I don't know about your covenants in terms of balance sheet, but what I'm trying to ask is basically, if we go up towards three times net debt EBITDA and, you know, if you look at Medellis from the point of view of a very critical asset, I'm just trying to understand a little bit of the strategic considerations. I know it's difficult to answer perhaps, but, yes, minority variances go all in is, I guess, what I'm after. Now, of course, the only option was to buy minority and not all in because Neles is not listed yet. So the only option was And to buy of course, we wanted to secure our position as soon as possible, and now we have done that. All right. I'll get back in line. Thank you. Your next question is from the line of Antti Kansanen of SEB. Please go ahead. Patrick, I'm Pekka. It's Anti from SEB. Maybe continuing with your previous questions. I mean, you're clearly not a financial investor or a holding company as such. So could you comment a little bit about what kind of operational benefits will you be able to provide Neles as a minority shareholder? Maybe you could open up a little bit about the value chain in the Pulp and Paper in terms of how Neles valves are bundled into the, let's say, projects that you are doing the pulp mill design or developing the paper machines in there. So is there any compared to how it has been historically, is there any avenues to accelerate Neles growth? Or how should we think about the Neles growth in Pulp and Paper when Valmed is an investor in the company? So of course, now, like you were saying, we have purchased a minority and then we haven't had any time to discuss with Neles' management at all what kind of cooperation possibilities there would be. And of course, we are talking about the cooperation between two listed companies. And of course, the cooperation should be such that or have such that we should do for the business and that has to be the base. Thinking on that line, so when we were saying we had quite a lot of, for example, and that could be one find that could able ways how to work together even if we are a two listed company that work would benefit both companies. Actually had a third company working on that digitalization topic early on. Typically, how valves are sold and then of course, I put now in Neles and I'm sure you get a better answer from Neles, but typically the valves can be purchased over the technology supplier, so us or Andrejs for it or then the end customer can buy them buy them directly. So I'm sure that they will keep on having good market position, not depending on who are the minority shareholders. And I guess this could be a bit too detailed question, but could you comment how much have you been using, let's say, other valve suppliers than in your project when you have the option of of choosing the the valve supplier? Yeah. Personally, I've been always proposing customers to use Nelet. But like I said, I'm not a neutral person on that. Yes, of course. And then maybe speculating on, let's say, a scenario of the old entire NLS and it will be consolidated into Valmet. What kind of theoretically, what kind of city outside of basic headquarters and others? What kind of been? Of course, now, don't about the minority shareholding, just as theoretically, one can, of course, assume that this one is sale of but maybe it's a little bit I can't go too much on details of that because now we are talking only about the minority shareholder. Okay. And then maybe last question for me regarding, could you elaborate a bit about the agreement that you have with Medium? So if you see, let's say, a bidder that would bid a substantial amount from or less than what you paid and kind of see as the fair value, how would that be reflected in your numbers if you would then sold the shares at a higher price given that you have the agreement with Solydium lasting for three years? So basically, what would happen from your perspective if within three years there would be a substantially higher bid for Neles? No. Our target is to be long lasting owner of Neles. So if there is a higher bidder then so what we are long lasting or we want to be long lasting owner of Neles. Neles is a good company and we want to strengthen our position there. And Antti, this is Karri here. So may I continue also so that the sense of this whole agreement is such that Valmet is here long term. So we are not kind of thinking even that kind of of course, these kind of situations may come, but our thinking is here to stay long. Okay. But you're not willing to say that if there would be, let's say, 15 bid for Neles and you would, for some reason, need to accept it, would you have to fully compensate the higher price to Solydium if that happens in within three years' time frame? No, but we are long term in Neles. Okay. That's all from me, and have a great mid summer. Thanks. Okay. Thank you, Antti. Thanks for the questions. Thank you. Your next question is from the line of Antti Suttelin of Danske. Please go ahead. Hello. It's another auntie here. So why why didn't you buy this directly from Metso? I mean, in in the same way as you bought the process automation system, you left Neles at that time in Metso. Why didn't you buy buy it also directly from from Valomed sorry, from Metso? How to say? So of course, have been thinking long term in our long term strategy already for five years that it would be very nice to be an own partial owner of Neles. But then we had some other topics to be focused on and we have never actually approached Metso Direct. Because it would have been much easier. You would have 100% owner, now you will have many owners to potentially buy shares from. But Metso has, of course, made their decision based on what kind of goals and strategic goals they have. And we haven't had any influence on that. And now we saw an opportunity, which will never come another time to become a major shareholder in Neles, and we wanted to take the opportunity. And also, Antti, so after the announcement that Neles would be a stand alone company last year, so after that, actually, it would have been technically very, very difficult for Valmet to act here. And I have understood that Valmet is so practically And also that it would be as far as it is almost impossible. For me, in that after that, this was kind of the option now to go. And then I guess this is more of the same, but I understand that Neles is a great company. But why what value does Valmet bring owning Neles? I mean, you you have to keep r and d. You can't cut that, I guess. I don't know whether you can do something on the s and A front, maybe, I don't know. But can you let me understand why is Valmet a better owner for Neles than someone else? Of course, we can't cut anything. So we, of course, are here to develop Neles, and we want to be part of developing Neles. We talk about different listed companies. So Valmet is one and Neles is another one. Our target is not to cut anything. Our target is to develop Neles as well as possible. We know the company. We know the history of it. We know the strength of Neles. And we have same heritage. And in long term, we have the same goal to develop very good technological companies, which have Nordic rules and which have rules in pulp and paper. So I think we have a lot to offer. And from Neles' personal perspective, I think we are quite positive or neutral if there were, let's say, another valves company in the same position, then I wouldn't feel very sure as an employee of Neles. Yes. And then finally, since you know the company so well, I would like to use the opportunity to ask. I've tried to get this number from elsewhere. I observe it's difficult to get a number. Maybe you can give me one. What is the average lifetime of Evolva? I know that the recurring business is 70%, and I'm just trying to understand how come can it be so high 70%. What is the average lifetime of Evolva, please? So that's a difficult one. You asked the same question from Timo in Capital Market Days and Timo couldn't answer maybe. So Timo, who is running the Valus business now in Neles, so Yes, that's why I'm asking The you history is so old that I would say that it goes twenty, thirty years. But you don't get to 70%, so you don't put that in any Excel format, but that's the case. And of course, then if I go more into details, then it depends a lot of on the media, which goes into pipes. So if the media is very oppressive, then it can be that one has to change the inner part of the valves once a year. So it depends a lot of on the media. Yes. Okay. Thanks for the answers. Your next question is from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Hi, Pasir, Karim, Pekka, Johan here. Now just wondering, this sounds like a political situation, isn't it so that the Finnish government, I. E. Soledion, which is a controlling shareholder of Valmet, obviously, in a very cheap way, can now control two companies in one stake. Have you reviewed the impact for other minority shareholders in Valmet that this is a fair deal for all participants? Of course. So that's even a legal obligation. Of course, it's an ethical obligation for the management to think about and Board as well to think about the advantage of all the shareholders. So of course, that's the starting point for all the actions what Valmet is doing. And then from Solidu's perspective, of course, they want to make sure that all the companies they have ownership in are working according this principle. And then because this is a related party transaction, there is also a legal requirement that everything has to happen based on the market values. So there's ethical and principal reason and then there's even legal reason to make sure that everything has happened according to market practices. And then We believe that in long run this is very good investment for Valmet's shareholders. Okay. I mean another perspective is, I mean among investors Vamed is seen as a sustainability company with good long term progress. And I think your motto is sort of converting resources into sustainable results. And now you buy a company with almost a 40% exposure to oil and gas industry. How was your thinking there? Yes. So of course, Nelet is working in oil and gas industry, and then one has to look at what kind of products Neles is offering for that industry. Neles is offering precise control valves, which are reducing the leakages, for example, in gas applications. And then there's oil and gas, 37% includes industrial gas, where big share of that is actually making different kind of industrial gases, oxygen and many others where this industrial gas applications Neles is strong. So Neles is helping these industries to be more environmentally friendly and with energy and shutdown valves also more safe. Okay, good. On the earnings front, pretty solid margins in Neles. How will the balance sheet look like when it's a stand alone company? Have you looked at that? Maybe it's not good for us to comment on Neles. So I hope you can so I can technically on that kind of general things repeat, but also my colleague Olli has been telling Capital Market Days, but maybe we cannot go now to balance sheet details of Neles. Neles has said that they have quite strong balance sheet, 90,000,000 loans and 150,000,000 shares and Okay. That wasn't updated on the how the balance sheet should look like post the merger. So I just wanted to but it's a net debt of €90,000,000 is that what I understand? And you can check that at the CMD material. Yes. Okay. Excellent. Many thanks. Okay. Thank you, Johan. And we also have a question from the line of Sven Weir of UBS. It's just regarding your further share purchase. And I'm sorry if you answered that already, but my line was breaking up. It was just because you said you intend to buy further shares. So first of all, is the ultimate aim of you to reach a majority? Or did you say that you are happy to be a minority shareholder also in the long term? And then also, how would you wanna motivate a Naylor shareholder to sell? Because when I put myself into the shoes of a Naylor shareholder, I would think my downside is protected because there is you potentially in the market. On the other hand, I could have the upside once there is potentially a comeback of oil and gas CapEx. They come through with a margin improvement. So it's a pretty asymmetric profile for me as a Neles shareholder. So I was just wondering how would you motivate me to sell to you. Thank you. We are here for long term. So of course, there are ups and downs in all share prices. You are more of a financial expert, but I don't fully buy the story that we have set the floor for the price. Did you say you would be fine with being a minority shareholder in the long term, so you don't necessarily feel to have the majority in terms we committed long term. And financially, it makes sense not to increase too much our shareholding, then long term, we are minority shareholders. Okay. Thank you. Thank you. Yeah. So since when we said that we would increase, but not at any cost. Understood. Thanks. Once again, it is star and one if you like to ask a question. And we currently have no further questions. Please continue. Alright. If there are no more questions, this then concludes this event. So thank you, Pasir, for presenting and answering Harry as well. And we will meet in about one month when we publish the Q2 results on the July 23. So have a nice midsummer, everybody. Nice summer to everybody who is in nothing amidst you. Okay. Bye bye. Bye. Bye. That concludes the presentation. Thank you for participating.