M&A Announcement

May 31, 2021

Good morning, everyone. I am Klas Balkow, President and CEO of Axfood, and with me this morning is Anders Lexmon, our CFO. As always, a warm welcome and thank you all to listening and watching our webcast for joining us today at a very short notice. Following the presentation, there will be an opportunity for those of you listening in to ask questions. Before I start the presentation, just a reminder for all of you to read the disclaimer on page 22. Let's now start and go to page number two in the presentation. Here you can see the agenda for today. I will start by giving you a summary of the transaction and then to give you some background, provide an overview of the food retail market. I will talk about the transaction in more detail before I hand over to Anders for comments on the financial impact and implications of the transaction. As I said, we will open up for questions and answers. Let's start. Please go to the next page number three. Today, we have started a new chapter in the history of Axfood, and therefore, I think it's appropriate to take a step back and remind ourselves of what has been accomplished over the years. Axfood was established as a group a little more than 20 years ago, and we have always had a deep commitment to be a positive force for change in the society. This entails offering good and sustainable food for everyone and being an inclusive business that is conducted in a responsible way. A lot has happened during these years, and we have worked hard to make our organization better and more efficient to create conditions for profitable growth. A dynamic market puts high demands on the ability to change, and we've had a strong focus on developing our business for the future in areas such as logistics with automation and transport, IT, stores and new concepts, a higher degree of digitalization, as well as more data-driven way of working. We, of course, also have a high level of ambition in the areas of sustainability with a focus on the entire value chain. Throughout the years, we have also made acquisitions and added more members to our family of distinctive concept to expand our offering into new markets, categories, and segments. In all, we have seen a strong growth, and from 2010 to 2020, our group annual net sales growth averaged 5%. Annual earnings per share growth was even higher and amounted to 8% on average. We have returned a lot of cash to our shareholders and our ordinary dividends per share grew almost 10% on average on an annual basis during this period. Let's now go to next page number four. As you've seen this morning, I am delighted to announce that we have reached an agreement with Bergendahls to acquire the wholesale business Bergendahl Food AB, which includes its purchasing and assortment function and a 9.9 minority share in City Gross as a part of a strategic partnership. Bergendahls have, just like Axfood, a long-term value-based perspective on its business, and this is a compelling deal with a clear industrial logic. The acquisition of Bergendahl Food creates economies of scale, synergies, and improved competitiveness in our wholesale business that will also benefit wholesale customers and Sweden's consumers. With the minority share and partnership with City Gross, which includes the call option in the coming years, acquire additional share of up to a total shareholding of 30%, I am convinced that we can strengthen City Gross' market position within the hypermarket segment, which is a segment in which Axfood currently is not present. Dagab and City Gross have also signed a 15-year delivery agreement that includes cooperation around, for example, assortment, IT, and infrastructure. In all, the consideration at closing amounts to SEK 1.8 billion. We intend to carry out the rights issue of SEK 1.5 billion to finance the transaction, as well as to maintain a strong financial position and flexibility going forward. Let's now move to slide number five, and I would like to start by providing some more information regarding Bergendahls and City Gross. Bergendahl Food is currently owned by Bergendahl & Son AB, a family business owned by Elisabeth Bergendahl Mylonopoulos and her family. Bergendahl Food has a strong position in the Swedish wholesale market. Its main warehouse is located in Hässleholm, and there are approximately 800 employees in the organization. Bergendahl Food conduct its wholesale business mainly to City Gross. However, customer base also consists of approximately 170 independent retailers and online retailers, including, for example, Matöppet, Den Svenska Matrebellen, and the online pure player Mathem. Transports are handled through a well-developed fleet of own delivery vehicles as well as through external hauliers. During the period from the financial year ending August 2018 to the 12-month period ending March this year, net sales grew at a compounded annual rate of approximately 4%. During the 12-month period to March this year, net sales for Bergendahl Food amounted to approximately SEK 10.5 billion and operating profit was approximately SEK 90 million. Please, however, note that Bergendahl Food does not report according to the IFRS 16, have that in mind when you analyze their financials. Please turn now to slide number six. Moving into City Gross. City Gross was established in 1993, including the brand City Gross and Hyllinge, and is a Swedish food retail store chain with an estimated market share of approximately 4%. They operate in the hypermarket segment of the Swedish food retail market, City Gross today has approximately 2,800 employees and a store network of 42 stores in total. The stores are mostly found in the southern parts of Sweden and external locations outside city centers. In addition to operating stores, City Gross also have a competitive e-commerce offering with the sales of both grocery items and meal kits. The grocery items are sold via pickup in stores, or click and collect as we say, and the meal kits are sold with home delivery in several cities across Sweden. From January to April this year, City Gross online sales as share of its total sales amounted to almost 7%. During the 12-month period to March this year, net sales for City Gross amounted to approximately SEK 9.8 billion and operating profit was approximately SEK 170 million. Again, as with Bergendahl Food, please note that City Gross does not report in according to IFRS 16. We are now on page number seven. I'm sure most of you already have seen this slide before, but just a quick reminder about who we are at Axfood for those of you who don't follow us on a daily basis. We are a leading food retailer in Sweden with a clear house of brands strategy and a vision to be leading in good and sustainable food. During the last 12-month period ending March 31, our sales amounted to almost SEK 54 billion, and we have more than 11,000 employees in the group. Together we engage with approximately 4.5 million customers every week at more than 300 group-owned stores and online. The point is that our unique business model with strong and distinctive brands and common IT and logistics is a very good match for this transaction with Bergendahls and City Gross. Let's now go to page number eight. Today, Axfood has a strong number 2 position in the Swedish food retail market, and we estimate our market share to be approximately 20%. The market can be divided into different segments, and you can see here how the segment is divided. We operate in the soft discount segment with Willys and Eurocash. In the traditional grocery, the largest segment of the market, we are present with Hemköp, Tempo and Handlar'n. We also operate in the mini mart smart segment. Lastly, we have Willys, Hemköp, and Mat.se in the online segment in the market. Please now turn to page nine in the presentation. As we estimate the hypermarket represent around 26% of the Swedish food retail market. The hypermarket segment is the second largest segment on the market, as I mentioned before, a segment in which Axfood is currently not present. This segment is, however, very attractive and has seen very strong growth over the past year. In fact, in 2020, growth exceeded 10% compared to 2019, which compare then to almost 8% for the market as a whole. Although some of their growth is most likely related to the pandemic and the consumers is then opting for large stores to avoid crowding, we believe there will be a good growth in this segment also going forward, even when the pandemic-related restrictions ease. Hypermarkets are typically located in external locations and carry a large assortment of both groceries and non-food at competitive prices. The largest brand is ICA Maxi with more than half of the segment, followed by Stora Coop with a quarter, and lastly City Gross with an estimated 15% segment share. Let's now turn to page 10. The partnership with City Gross gives Axfood a presence in the hypermarket segment, and as such City Gross serves as a good complement to our existing portfolio of brands. Axfood is, as you know, a family of distinctive food concepts working in close collaboration and compare them to Willys and Hemköp, City Gross has a very different profile. With its hypermarket positioning, City Gross offers consumers large stores with extensive assortment, including items that a Willys or Hemköp store does not carry, including, for example, a large selection of non-food items. Having distinct food concept is a way of meeting customers' varying needs and diversing our risk, so we are very pleased to add another unique and successful concept to our family. Let's now turn to page number 11 of the presentation. Before we go back to today's transaction, I just want to mention a few words about the market trends that we have identified as important going forward. We have a strong omni-channel offering with accessible and attractive stores and expansive e-commerce channel. This will be very important in the future as it must be very easy and convenient for our customers to shop for affordable, good, and sustainable food, no matter time, place, or circumstances. With a breadth of brands, we are making sure we are there for all our customers. It's about how you bring everything together that will matter, and we take an omni-channel approach to customers' lifetime value creation by driving loyalty across all channels. Second, during the pandemic, we've seen large variations between store performance, depending on the physical location. Stores in residential areas have benefited and stores in more central urban areas have experienced a challenging situation. Going forward, also after the pandemic, we believe stores in residential areas will continue to benefit as we enter into a new normal where people will, to a larger extent, work remotely and spend more time in their homes. Now third, with digitalization comes greater price transparency, and it's clear that the discount trend continues to be strong, especially in times of economic uncertainty and higher unemployment. Consumers in Sweden are generally very price conscious. Our own survey shows that customers regard value for money as its most important after quality. However, it's not only price that determines what customers perceive as value for money. Service is, of course, important and many other aspects in how we are meeting our customers. Lastly, we believe the strong trend for hypermarkets will continue also after the pandemic. Hypermarkets represent the one-stop shop for consumers with a wide selection of products, service in the large retail areas. The price value trend is strong, as I just mentioned, and this trend fits well into the hypermarket's overall value proposition. Let's now move to slide 12 and back to the transaction. On this slide, you'll find the key items that we are presenting. Through Dagab, we have reached an agreement to acquire 100% of the wholesale business, Bergendahls Food. We're also acquiring a minority share corresponding to 9.9% of the shares in City Gross as a part of a strategic partnership with a call option agreement to gradually acquire additional shares in City Gross, an additional 10.1% in 2024 and an additional 10% in 2026. Full exercise of the call option would result in Axfood's ownership of 30% of the shares, and City Gross will continue to be an independent store chain but will be integrated with Axfood's IT infrastructure and supported by the new coordinated purchasing and logistic operations in Dagab. In connection with the transaction, Axfood has also entered into a 15-year delivery agreement with City Gross. Axfood will also be represented on City Gross' board of directors to make sure we're strengthening our partnership. At closing, the initial consideration of these transactions amounts to SEK 1.8 billion, of which SEK 1.5 billion pertains to Bergendahl Food. The total consideration upon full exercise of the call option amounts to SEK 2.5 billion. The consideration of 9.9% of the shares in City Gross at completion of the transaction amounts to SEK 0.3 billion. Upon full exercise of the call option, the consideration for the combined 30% share in City Gross amounts to SEK 1.0 billion in total. All these amounts are on a cash and debt-free basis. Let's now turn to page 13. I must say this is a strategically compelling transaction that is attractive to both us and Bergendahls, as well as other stakeholder groups, including wholesale customers, consumers, and our shareholders. A combination of two companies with similar cultures and values is a really important part of this. Through Dagab, we continue to build the logistic structure of the future. Together with Bergendahl Food, additional economic scale and cost synergies are expected to be generated over time. With our combined volume in the wholesale business, the competitiveness for both our own store chains and for external customer is clearly strengthened. With the City Gross partnership, we take also a position in attractive hypermarket segment of the Swedish food retail market, thereby increasing our group's presence and reach. The partnership also strengthens City Gross' competitiveness and create conditions for development of the concept and an increased market share. We're now on slide 14, and with that, I would like to hand over to Anders, who will provide some more details on the financial ratio on this transaction. Please, Anders, welcome up and your turn. Thank you, Klas. In addition to being strategically compelling, this transaction is also financially compelling. We expect that the acquisition of Bergendahl Food, including effects from the signed delivery agreement with City Gross, will generate an annual cost synergies of an estimated SEK 200 million and are expected to be realized successfully during the period until 2025 in purchasing, assortment optimization, logistics, and organization. To realize the synergies, we expect to invest approximately SEK 100 million in IT and logistics during the period 2021-2023. Furthermore, we expect the integration and transaction costs of approximately SEK 200 million during the period until 2023 and also SEK 100 million in non-cash IT write-downs. The transaction is expected to generate synergies and excluding integration and transaction costs, the transaction is expected to be accretive to Axfood's earnings per share from 2022. In 2023, the transaction will be accretive to earnings per share as integration costs will have been incurred, part of the synergies have been realized and accounting for effects from the rights issue. As of the 31st of March this year, our net debt to adjusted EBITDA amounted to 1.0 and -0.2, excluding effects from IFRS 16. Our net debt to adjusted EBITDA ratio at closing of the transaction, that is before the effects from the rights issue, will amount to 1.5 and 0.3 if you exclude IFRS 16. Including the rights issue, the corresponding net debt to adjusted EBITDA ratio would have amounted to approximately 1.2. We estimate the equity ratio at closing based on Axfood's and Bergendahls balance sheets as of the 31st of March 2021, and the fully debt-financed transaction to go from 18% for Axfood standalone to 15%. Following the completion of the rights issue, we expect the equity ratio to amount to 22% at the same time. These figures will obviously be somewhat different at closing, given that the closing accounts, including debt and cash position at closing, will be different. Going forward, we expect the equity ratio to remain above our financial target of 20% at year-end. Moving on to slide 15 and the financing of the transaction. In the short term, and in connection with closing, the acquisition will be financed through a combination of existing cash and our unutilized revolving credit facility with Swedbank and SEB. The strong financial position has enabled us to make significant investment historically to develop the business. The board of directors of Axfood intends to, after closing, resolve on a rights issue of SEK 1.5 billion with preferential rights for existing shareholders, subject to approval by an extraordinary general meeting. The rights issue contributes to securing long-term financing of the acquisition and enables investments as a result of the integration of Bergendahls Food. A separate notice to the extraordinary general meeting is planned to be announced in connection with the decision of the board. Our largest shareholder, Axel Johnson, with 50.1% of the shares, has undertaken to vote in favor of the board's proposal of the rights issue and to subscribe for their pro rata share in the rights issue. We are now on slide 16. We intend to integrate Bergendahls Food with Dagab, and consequently, Bergendahls Food will be reported in the Dagab segment. The acquisition of the minority share in City Gross will be reported in accordance with the equity method in the Willys segment. Overall, the transaction will have a dilutive effect on the group operating margin, but we are committing to our financial target for profitability and reiterate the group operating margin will also, going forward, be at least 4% over time. Please note that the table on the right side of this page does not include the effect our share in City Gross will have on our operating profit and margin. On this slide, you can also see the synergies that I mentioned in detail earlier. Turning to slide 17, and now I hand over to you, Klas. Thank you, Anders. Completion of the acquisition is subject to approval by the Swedish Competition Authority. At the earliest, we and Bergendahls have agreed that closing can take place no earlier than September 1st this year. The rights issue is planned to be completed in the fourth quarter, also in this year. Please now turn to page number 18. With these comments on certain items related to the timing and closing of the transaction, just some concluding words to sum up this presentation. In summary, I must say I'm very excited to be able to announce the next step in our journey. Axfood and Bergendahls are two well-managed and family-founded companies. We are governed by values and have a long-term perspective in both our business and how we see our role in the society. We want to make a difference for the consumers and be a positive force for change. This transaction is therefore somewhat of a perfect match between two companies with strong values. It is also a strategically and financially compelling transaction that is attractive to Axfood, Bergendahls, wholesale customers, and consumers. With this deal, we are here at Axfood become more efficient with increased scale and realize significant synergies in the coming years. Our competitiveness will improve, and we will also expand our presence and reach. It will enable us to continue to drive profitable growth and further strengthen our ability to deliver sustainable superior shareholder return for the long term. Until the examination by the Swedish Competition Authority is complete, it is business as usual. We continue to work to deliver affordable, good, and sustainable food to the 4.5 million consumers in the entire country that every weeks shop with us. It is important that we, together with our customers, that we create the largest change in the society and continue to contribute to making food production and consumption more sustainable. This has been fundamental for Axfood for the last 20 years, and will continue to be so also going forward. As a final remark, on slide 19, I encourage you to save the date for Axfood's Capital Market Day 2021, which will be held on December 16 this year. At this event, we will of course revisit today's proposed transaction as well as cover many other areas that are important for our group to continue to drive profitable growth. More details around the event will follow in due time. With that, thank you, and we will now open up the meeting for questions and answers. Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Gustav Hagéus from SEB. Please go ahead. Thanks. Exciting news. Thanks for taking my questions. Just thinking about the wholesale business, which is really, I guess, the main part of this story. I assume that now the market will then go from really four players to three players with you, ICA and Coop really controlling the wholesale market. Do you feel confident with regards to authorities and concessions and all that this is something that will actually be approved? What's your view here? No, we are confident, hence the reason why we are doing this. We think that the competitiveness in the market will strengthen. This will give an opportunity as we are compared to who we are meeting in the market. We are meeting a significant larger player. This will increase our competitiveness for both Axfood and Bergendahls' position. We think this is a good fit. You don't mention it here, but when you've been thinking about this acquisition, has there also been elements that you're motivated by perhaps making it a little bit more difficult for someone else outside of the market to enter the market? I guess Bergendahls was really the last target to acquire for someone who's not present in the market at the moment. Could you elaborate a bit on if that is a strategic part of this? The thinking we have obviously is that with the scale of the wholesale business here, we will be able to integrate that into Dagab and use the work we are doing with our future logistics, et cetera. We will invest in systems in Hässleholm and in Bergendahls. Obviously this is a good match for us to strengthening our position, but also strengthening the position, I must say to both City Gross and our own chain, but also to the external customers that will now have an even stronger partner. Right. Lastly, you mentioned Hässleholm there. Obviously, you're building quite an ambitious logistics setup in Bålsta, but you have some white spots in the southern part of Sweden. Do you think should we ambition sort of Hässleholm to be your hub for creating something similar to what you have going on in Bålsta, or where do you see that? Well, we'll have to come back on that, obviously. The first step now is to integrate Hässleholm into Dagab structure. Then obviously this creates opportunities for us to use our various geographical locations. How this will look in the future, we'll have to come back to. Okay, thanks. Just as a final reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question comes from the line of Daniel Schmidt from DNB. Please go ahead. Yes, good morning, Klas and Anders. Hope you can hear me. Just a couple of questions. It does look like a big bet on wholesale and of course also hypermarkets as you highlight. This is, if I'm not mistaken, the first time that you acquire something in the wholesale or maybe at least in modern history. What do you see there in terms of international trends? Is similar things happening in other parts of the world, or what's your reflection on that? No, my reflection is that we are, as you know, in a market that is now in a very high speed of change. As you know and as you follow, there is a lot of trends that is now happening in the market. For us it's important to be efficient to be able to provide all these new solutions to the consumers and scale is an important part of that. It is really a great opportunity both for Bergendahls and Axfood to create that scale so we can be competitive in the market trends that we see coming forward that I mentioned on the call. Yeah. If you look at the structure between City Gross and Bergendahl Food and the internal pricing, is that similar to what you have between Willys and Dagab, for instance? Well, the structure is obviously Bergendahls They have their wholesale part that City Gross is the largest so-called customers to them, but then they also serve other external customers, obviously. They have a kind of a similar structure, obviously, when they are supporting group-owned City Gross but also supporting other customers with competitive prices. Yeah. It does look like the wholesale business has been underearning compared to industry average. I was just thinking it has something to do with the pricing. Maybe it's more the efficiency then. As you know, it is a kind of a scale business as well, and we have, as you see, invested a lot in our logistics and IT and infrastructure, et cetera, and we are seeing benefit out of that. I think that's also an opportunity for us, together with Bergendahls, to include them into our investments regarding that. You're right on that analysis. Yeah. The last one. Regarding the rights issue, it is a lot of money, but still your balance sheet is tremendously strong and so is your business. Is this really needed? As you know, Daniel, we have a history of a strong balance sheet, and our goal is to keep that balance sheet strong, and it's important for us to have the flexibility going forward as well. Okay. My assumption is that you would have that anyway. Even a stronger flexibility then going forward, if you say it like that. Yeah. Okay. Thank you. Thanks. That's all for me. The next question comes from the line of Magnus Råman from Kepler Cheuvreux. Please go ahead. Thank you very much, and thank you for a good presentation, firstly. My first question relates to the physical integration of these fulfillment centers. Do you envision a sizable integration physically, or will you maintain the various fulfillment centers of both groups intact? If I hear you right, there was a bit of a disturbance there on the speaker. If I hear you right, we will start to invest in our IT structure into the Hässleholm facility. We then can integrate them into our other systems to make sure that we can capitalize and use the transport and the efficiency so we can make that as a smooth way as possible. Physically, Hässleholm will be there, but they will be integrated IT-wise with Dagab as a first step. All right. Regarding the stepped increase in ownership in this group or plans as such, the limit at 30%, does that relate to mandatory buyout rules and regulations and how you deem what you would be able to have approved by competition authorities or not, or is it any other reasons? No, it has been a discussion with Bergendahls in terms of ownership. It is, and we are sending a very strong signal here that it is a clearly strategic partnership where we are working together and are building our business together in a common way. It has nothing else to do with it. Right. Yeah. Go ahead. All right. Just finally on the online share, you mentioned an online share of 7%. Could you just repeat what time period that was for? It was based only on if they only do click and collect or if it's also home delivery in that number. They have some home delivery of Matkasse. The large part is also the click and collect. They are very well structured for a click and collect business model with the large store formats. To your question, it was the last period, 12-month period. Right. Okay. Then just finally on MatHem. I guess that their share of these external 30% of volume should be quite sizable. Do you see any material risk that it will seek a new sourcing route here or sourcing- I think- sources for their procurement? No, I think the opportunities here is very clear. With the combined volume and with the combined efficiencies, we will be even more attractive for external partners. That's the way we view it, and we hope Mathem view the same. All right. Thank you very much. As there are no further questions, I'll hand it back for any closing remarks. With that, then really again, thank you for joining us on a short notice. As I said, it is a very strategically and compelling offer that we are presenting today, and we look forward now to, of course, the business is as usual as it is right now. After the authorities have made their statement, then we're looking forward to take the next step together with Bergendahls. With that, thank you for listening. Thank you.