M&A Announcement

May 31, 2021

Good morning, everyone. I am Klas Palkov, President and CEO of Axwood. And with me this morning is Anders Leksman, 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. But 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 2 in the presentation. And 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. Then 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. And then as I said, we will open up for questions and answers. So let's start. Please go to next page, Page number 3. Today, we have started a new chapter in the history of And therefore, I think it's appropriate to take a step back and remind ourselves of what has been accomplished over the years. Axwood was established as a group a little bit 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. And we, of course, also have a high level ambition in the areas of Sustainability with a focus on the entire value chain. And 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 dividend per share grew almost 10% on average on an annual basis during this period. So let's now go to next page, Page 4. As you've seen this morning, I am delighted to announce that we have reached an agreement with Beyerdahl's to acquire the wholesale business Beyerdahl Foodarbe, which includes its purchasing and assortment function and a 9.9 percent minority share in Citigroz as a part of a strategic partnership. Beyerdahl have, just like Axwood, a long term value based perspective on its business, and this is a compelling deal with a Clear Industrial Logic. The acquisition of Berndal Food creates economies of scale, synergies and improved competitiveness in our wholesale business that will also benefit wholesale customers and Sweden consumers. And with the minority share in partnership with which includes the call option in the coming years, acquire additional share of up to total shareholding of 30%. I am convinced that we can strengthen Sittigros' market position within the hypermarket segment, which is a segment in which Axford currently is not present. Dagam and Sittigros have also signed a 15 year delivery agreement that includes cooperation around, for example, assortment, IT and Infrastructure. In all, the consideration of closing amounts to SEK 1,800,000,000. We intend to carry out the rights issue of SEK 1,500,000,000 to finance the transaction as well as to maintain a strong financial position and flexibility going forward. Let's now move to Slide 5. And I would like to start by providing some more information regarding Berendal's and Citigos. Berendal's Food is currently owned by Berendal and Sonabe, a family business owned by Elisabeth Berndal Munopoulos and her family. Berndal Food has a strong position in the Swedish wholesale market. Its main warehouse is located in Hesselholm, and there are approximately 800 employees in the organization. Bairnose Food conducts its wholesale business mainly to Citroglios. However, customer base also consists of approximately 170 independent And retailers and online retailers, including, for example, Marteppet and Svenska Matrebellen and the online pure player, Martin. Transports are handled through a well developed fleet of owned 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 the compounded annual rate of approximately 4%. During the 12 month period to March this year, net sales for Berndal Foods amounted to SEK 10,500,000,000 and operating profit was approximately SEK 90,000,000. Please, however, note that Berndal Food does not report in according to the IFRS 16. So have that in mind when you analyze their financials. Please turn now to Slide 6. And then moving into Sittigoss. Sittigoss was established in 1993, including the brand Sittigoss and Hillinga Cash And he is a Swedish food retail store chain with an estimated market share of approximately 4%. We operate in the hypermarket segment of the Swedish food retail market, and Sytogoz 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, Citigroup 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 meal kits are sold with home delivery in several cities across Sweden. And from January to April this year, Citigroup's online sales as share of its total sales amounted to almost 7%. During the 12 month period to March this year, net sales for Citigos amounted to approximately SEK 9,800,000,000 and operating profit Approximately SEK 170,000,000 Again, as with Berndal's Food, please note that CityGloss does not report in according to IFRS 16. We are now on Page 7, and I'm sure most of you already have seen this slide before. But just a quick reminder about who we are at Ax Food 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 brand strategy and a vision to be leading in good and sustainable food. And during the last 12 month period ending March 31, our sales amounted to almost SEK 54,000,000,000, And we have more than 11,000 employees in the group. And together, we engage with approximately 4,500,000 customers every week at more than 300 group owned stores and online. But the point is that our unique business model with strong and distinctive brands and common IT The logistics is a very good match for this transaction with Bariondals and Cytogos. So let's now go to Page 8. Today, Axford has a strong number 2 position in the Swedish food retail market, and we estimate our market share to be approximately But 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 Villis and Eurocash. In the traditional grocery, the largest segment of the market, we are present with Hemship, Tempo and Hanlan. And we also operate in the minimart segment. And lastly, we have Villis, Hemshupp and Mato Tessie in the online segment in the market. But please now turn to Page 9 in the presentation. As we estimate, the hypermarket represents around 26% of the Swedish food retail market. The hypermarket segment It's the 2nd largest segment on the market and 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 compares then to almost 8% for the market as a whole. And although some of the 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 nonfood at competitive prices. The largest brand is IKA Maxi with more than half of the segment, followed by Stora Coop with a quarter and lastly, Citiglas with an estimated 15% segment share. Let's now turn to Page 10. The partnership with City Girls give Axfuhr a presence in the Hypermod segment. And As such, Citigroup serves as a good complement to our existing portfolio of brands. Axford is, as you know, a family of distinctive food concepts Working in close collaboration and compared them to Villiers and Hampshire, City Girls has a very different profile. With its hypermarket positioning, CityGros offers consumers large stores with an extensive assortment, including items that a Villiers or Hemshoop 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 risks. So we are very pleased to add another unique and successful concept to our family. Let's now turn to Page 11 of the presentation. And 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 omnichannel offering with accessible and attractive stores and expansive e commerce channel. This will be very important in the future as it must It's very easy and convenient for our customers to shop for affordable, good and sustainable food no matter time, place or circumstances. With the breadth of brands, we are making sure we are there for all our customers. It's about how you bring everything together that will And we take an omnichannel approach to customers' lifetime value creation by driving loyalty across all channels. But 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. And 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, to a larger 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, and our own service 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 this strong trend for hypermarkets will continue also after the pandemic. Hypermarkets represent a one stop shop for consumers with a wide selection of products, service and large in the large retail areas. The price value trend is strong, as I just mentioned, and this trend fits well into the hypermarkets' 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. So through DAGAB, we have reached an agreement to acquire 100% of the wholesale business by Endals Food. We're also acquiring a minority share corresponding to 9.9% of the shares in Sytogoss as a part of a strategic partnership with a call agreement to gradually acquire additional shares in Citiglas, an additional 10.1% in 2024 and an additional 10% in 2026. Full exercise of the call option would result in AX It's ownership of 30% of the shares. And Citigost will continue to be an independent store chain but will be integrated with Axfel's IT infrastructure and supported by the new coordinated purchasing and logistic operations in DAGA. In connection with the transaction, Axoil has also entered into a 15 year delivery agreement with Citigos. Axel will also be represented on Citigroup's Board of Directors to make sure we're strengthening our partnership. At closing, the initial consideration of these transactions amounts to SEK 1,800,000,000, of which SEK 1,500,000,000 pertains to Berndol's Food. However, the total consideration upon full exercise of the call option amounts to SEK 2,500,000,000. The consideration of 9.9% of the shares in Citigroup set completion of the transaction amounts to SEK 0.3 billion. And upon full exercise of the call option, the consideration for the combined 30% But let's now turn to Page 13. I must say this is a strategically compelling transaction that is attractive to both us and Berndal's as well as other stakeholders groups, including wholesale customers, consumers and our shareholders. A combination of 2 companies with similar cultures and values is a really important part of this. And through DAGAB, we continue to build the logistics structure of the future. And together with Beindol Food, Additional economic of 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 change and for external customer is clearly strengthened. With the CityGros partnership, we take also a position in the attractive hypermarket segment of the Swedish food retail market, thereby increasing our group's presence and reach. The partnership also strengthens Sitka's 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. So please, Anders, welcome up and Your turn. Thank you, Lars. In addition to being strategically compelling, This transaction is also financially compelling. We expect that the acquisition of Beyerdahl's Food, including effects from the signed delivery agreement with CityGloss We'll generate an annual cost synergies of an estimated SEK 200,000,000 and are expected to be realized Successively during the period until 2025 in purchasing, assortment optimization, logistics and organization. To realize the synergies, we expect to invest approximately SEK 100,000,000 in IT and Logistics during the period 2021 to 2023. Furthermore, we expect the integration and transaction costs of approximately SEK 200,000,000 during the period until 2023 and also SEK 100,000,000 in noncash IT write downs. The transaction is expected to generate synergies. And excluding integration and transaction costs, The transaction is expected to be accretive to X Foot'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 March this year, our net debt To adjusted EBITDA amounted to SEK 1.0 minuteus SEK 0.2 billion 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 SEK 1,500,000,000 and SEK 0.3 If you exclude IFRS 16. Including the rights issue, the corresponding net debt to adjusted EBITDA ratio Would have amounted to approximately SEK 1.2 billion. We estimate the equity ratio at closing based on Ax Foods and Baringdas balance sheets As of the 31st March 2021 and the fully debt financed transaction to go from 18% For Exo stand alone, 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, the closing will be different. Going forward, we expect the equity ratio to remain above our financial target of 20% at year end. Moving then 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 Sverut intends to, after closing, resolve on the rights issue of SEK 1,500,000,000 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 Barentals 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, Ekso Jonsson, 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 Berndas Food with Dagab, and consequently Berndas Food will be reported in the Dagab segment. The acquisition of the minority share in Sittagros will be reported in accordance with the equity method in the VILIS 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 This page does not include the effect our share in Citigroup will have on our operating profit and margin. And 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, Claus, presentation. Thank you, Anders. Completion of the acquisition is subject to approval by the Swedish Competition Authority. And at the earliest, We and Berndals have agreed that closing can take place no earlier than September 1 this year. The rights issue is planned to be completed in the Q4, also in this year. So please now turn to Page 18. And with these comments on certain items related to the timing and closing Just some concluding words to sum up this presentation. In summary, I must say, I'm very excited to be able to announce On the next step in our journey. Axford and Beirendalls are 2 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 2 companies with strong values. It is also a strategically and financially Compelling transaction that is attractive to Axwood, Baryndal's wholesale customers and consumers. With this deal, we are here at Axle to 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 4,500,000 consumers in the entire country that every week shop with us. It is important that we together with our customers that we create the largest change in the society and continue to making food production and consumption more sustainable. This has been fundamental for Ax Food 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 Axwood'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. So with that, thank you, and we'll now open up the meeting for questions and answers. Thank Our first question comes from the line of Stavaggios from SEB. Please go ahead. Thanks. Exciting news. Thanks for taking my questions. Firstly, 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 4 players to 3 players with you, you can co op really controlling the wholesales market. Have you do you feel confident with regards to authorities and concessions and all that, that this is Something that will actually be approved or what's your transparency or what's your view here? Now we are confident, hence the reason why we are doing this. We think that the competitiveness in the market will This will give an opportunity as we are compared to who we are meeting in the market, we are meeting a significant larger player, and this will increase Our competitiveness for both Axfuhd and Berndal's positions. So we think this is a good fit. And you don't mention it here, but when you've been thinking about this acquisition, has there also been elements that To you motivated by perhaps making it a little bit more difficult for someone else outside of the market to enter the market, I guess, Bernd also is 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 or I mean, the thinking we have obviously is that With the scale of the wholesale business here, we will be able to integrate that into Daghav's And use the work we are doing with our future logistics, etcetera. We will invest with systems in the Hessle Holmen in Beindols. So obviously, this is a good match for us to strengthening our position, but also strengthening the position, I must say, to both Sittigros and our own chain, but also to the external customers that will now have an even stronger partner. Right. And lastly, you mentioned Hessdalom there. Obviously, you're building quite an ambitious 6 setup in Volstad, but you have some white spots in the southern part of Sweden. Do you think should we envision sort of Hessdalen To be your hub for creating something similar to what you have going on in Board's though, where do you see that? Well, we'll have to come back on that, obviously. I mean, the first step now is to integrate the Hessle Holm into Dagab structure. And then, obviously, This creates opportunities for us to use our various geographical locations. But how this will look in the future, we'll have to come back to. Okay. Thanks. Our next question comes from the line of Daniel Schmidt from Danske Bank. Please go ahead. Yes, good morning, Lars 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, but this is, if I'm not mistaken, the first time that you acquired something in the wholesale Or maybe at least in modern history. And so what do you see there in terms of sort of international Trent, is similar things happening in other parts of the world or what's your reflection on that? My reflection is that we are, as you in a market that is now in a very high speed of change. And as you know and as you follow, there is a lot of trends That is now happening in the market. And for us, it's important to be efficient to be able to provide all these new solutions to the consumers. And scale is and part of that. So it is really a great opportunity, both for Berndals and Axford to create that scale so we can be Competitive in the market trends that we see coming forward that I mentioned on the call. Yes. And if you look at the Actually between Cityros and Beindol Foods and sort of the internal pricing, is that Similar to what you have between Village and Dargav, for instance? Well, the structure is obviously, they are $1,000,000,000 I mean, they have their wholesale part that Sittigros is the largest so called customers to them, but then they also serve other external customers, obviously. So they have a kind of a similar structure, obviously, when they are supporting group owned Sittigros, but also supporting other customers with competitive prices. Yes. But it does look like it's sort of The wholesale business has been under earning compared to industry average. I was just thinking it has something to do with the pricing, maybe it's more the efficiency then. But I mean, as you know, the it is a kind of a scale business as well. And we have as you've seen, we have invested a lot in our And IT and Infrastructure, etcetera, and we are seeing benefit out of that. And I think that's also an opportunity for us, together with the Berndals, to Include them into our investments regarding that. So you're right on that, Analaj. Yes. And then the last one. Regarding the rights issue, it is a lot of money, but still your balance sheet Tremendously strong and so is your business. Is this really needed? As you know, Daniel, we have a history of a strong balance sheet. Dan, we our goal is to keep that balance sheet strong and it's important for us to have the flexibility going forward as well. Okay. I sort of my assumption is that you would have that anyway. And Even a stronger flexibility then going forward if you say it like that. Yeah. Okay. And the next question comes from the line of Magnus Holman 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 Finland centers, do you envision sizable integration physically? Or will you maintain The various fulfillment central of both groups intact. Well, the first step that will happen now is that We will integrate and invest in IT System in the if I hear you right, there was a bit of Disturbance there on the speaker. But if I hear you right, we will start to invest in our IT structure into the Hessle Hall facility. So we then can integrate them into our other systems to make sure that we can Capitalized and used the transport and the efficiency, so we can make that as a smooth way as possible. So Physically, Hesselholm will be there, but they will be integrated IT wise with Dagab as a first step. All right. Then regarding the debt increase in ownership in Chip in Fit Group or plans such, the limit that 30% does that relate to mandatory buyout Rules and regulations and your sort of how you deem what would be 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 Berriendal in terms of ownership. It is and we are sending a very strong signal here that it is clearly a strategic partnership where we are working together and Our building our business together in a common way. So it has nothing else to do with. Yes, go ahead. All right. So and just finally on the online share, you mentioned an online Cheryl, 7%. Could you just repeat what time period that was for? And also 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 Mad Casse, But 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. So it is they are so and to your question, it was the last It's a period 12 month period. Right. Okay. And then just finally on March 10, I guess that the share of these external 30% of volume should be quite sizable. Do you see any material risk that it We'll seek a new sourcing route here or sourcing sources for their procurement. No, but I think the opportunities here is very clear. With the combined volume and with the combined efficiencies, we will be even more for external partners. That's the way we view it. And we hope Matt and view the same. All right. Thank you very much. And as there are no further questions, I'll hand it back for any closing remarks. Well, with that then, really, again, thank you for joining us on a short notice. As I said, it is a very strategically And a compelling offer that we are presenting today. And we look forward now to of course, the business is as usual as it is right But then after the authorities have made their statement, then we're looking forward to take the next step together with Berndal. So with that, thank you for listening. Thank you.