Welcome to the presentation of the acquisition of Welotec announced yesterday. During the question-and-answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to President and CEO Jenny Sjödahl and Executive Vice President and CFO Joakim Laurén. Please go ahead.
Perfect. Welcome everyone to this call. As mentioned, it is myself, Jenny Sjödahl, President of Ependion, and Joakim Laurén is with me here as well. We are actually today at the Welotec site in Laer in Germany, outside of Münster, where we met with the team yesterday. The purpose of this call is to explain the rationale of this acquisition, and I think we will move straight into it. First, we have the usual disclaimer, but we will skip that and move straight into the company. I am very pleased that we have now announced the acquisition of the German company Welotec. This acquisition has two major aspects to it. One, it strengthens Westermo's position in the energy segment, which is right in the middle of our strategy, as most of you are aware.
Secondly, it adds a new technology area to Westermo, which is edge computing. I will talk a little bit more about what that is in just a minute. Welotec is a company located here in Laer in Germany, around 70 employees and a turnover of EUR 24 million last year. They are focusing on the energy sector primarily. They also do some industrial automation activities, which is also important. Of course, from a Westermo perspective, it is the energy exposure that we are most interested in. Their customer base are large customers in the energy and manufacturing segment, so very well-known customers in these areas. They have been around for as long as Westermo, 50 years, but for the last 10 years, they have really been focusing on the energy sector and the substation automation field for critical energy infrastructure.
I will come back a little bit more to that. They have shown a positive growth development over the last years, as you can see, 12% CAGR from 2020 up to 2024, despite the pandemic and other things. We feel that this is definitely a company that is capable of creating organic growth and with a decent EBIT margin of a little bit more than 13%, also stable over the years. You can see the products there down on the left-hand side. The bigger product there is their key offering to the energy segment. It's called an industrial computer or an industrial server. These are then typically sitting in, for example, a substation. It's a computer that can actually do data processing locally in whatever application you're using it for, but in this case, then in a substation.
Let me talk a little bit about edge computing, because, as I mentioned, we are stepping into a new technology field that we have been looking at for some time. It is adjacent to what we already do today, industrial data networks, but it is really a new field. As you probably are all aware, our key area today, which is data communication, that is really about moving data around from the source of data to wherever the data needs to be in a robust and secure way. When it comes to edge computing, it is really about making sure that you can actually process critical data as close to the source of the data as possible, as opposed to cloud computing, where you actually send all the data to the cloud and then do the data processing there.
The main advantages of actually processing data locally, close to the source, is, first of all, a matter of time and latency, because in a substation, for example, you need to be able to control things in real time. That is extremely important when it comes to the power grid. Making the most critical processing operations close, at the source, so to say, is really, really important. You also have environments where you might not have a very strong connection and big bandwidth to actually send a lot of data up to the cloud. That is another aspect of this, as well as, of course, reliability. If connectivity is lost, you can still perform the most important processing locally.
Also from a cybersecurity perspective, it is a positive aspect to be able to keep the data locally instead of sending it up to other places. It also saves cost for the grid operators, because they can scale this in a very cost-efficient way as they add new functionality and new applications to this. There are a lot of possible applications for industrial PCs. There are industrial PCs, of course, also sitting on board all trains for local data processing and storing. Welotec are not today active in the rail segment, but of course, knowing Westermo's strategy, that is an area that we will be looking into as well, because the technology as such is agnostic, so to say, to the application. Good.
Talking a little bit about the energy sector, because that is, of course, what we are really targeting with this acquisition, and we can see that we definitely strengthen our position in this area with adding Welotec to Westermo. As you are all well aware, there is a green transition going on. The world's energy consumption is expected to continue to grow for some more years, but the mix inside that energy consumption is changing big time, where electricity plays a larger and larger role as energy carrier, so to say, as we move into a more fossil-free environment. Just a few numbers to give an idea of what we are talking about here. If we look at the EU, for example, 40% of the distribution grids are more than 40 years old.
We all know that, just reading the papers here in Sweden, there is a lot of investment needed in order to upgrade and modernize the power grids. This is the case not only in the EU, but in the whole world, actually. If we look at what's going on in the power grids, it's that digitalization of the substations and other critical infrastructure in the grids is really one of the key areas, because as we add fossil-free sources to the grid, so solar power, wind power, and so on, the grid cannot handle that unless it becomes more intelligent. Becoming more intelligent means that you need to have more measurement points. You need to digitalize your substations so that they can cope with this new situation.
Bloomberg estimates that out of the total grid investments in the world, which is an absolutely massive number, around one-fourth of that investment is going into the digitalization part up until 2015. That is a staggering $5 trillion estimate. It's a very big number, and we can see that this is actually happening now, as we are, of course, also in dialogue with our energy customers around this. If we look globally, the transmission and distribution investments are projected to threefold up until 2050. Regardless of which report you read, you can see that there is a lot of change going on. There is a lot of investment happening, and therefore we feel very comfortable and confident about that this acquisition is in a sweet spot, so to say, when it comes to the trends that are happening in the world today.
Just an example from Sweden. Sweden is, of course, a very, very small market, but just to understand and give you a clue of the scale here, I think you are all pretty much aware of how the power grid works on a very high level. You have the power generation, of course. You have the primary substation transforming the power to a higher voltage in order to transport it in the large grids. You have to take down the voltage again as you come closer to the users. That can be, of course, both homes and businesses. In the grid, there are a number of transformers, and we call them also substations. There are primary substations, there are secondary substations. If we just look at Sweden again, a very small market, there are about 50,000-60,000 substations in the Swedish transmission and distribution networks.
Of course, you can pretty much tie the number of substations to the population if you want to, you know, try to figure out how many substations there are total. If we have 50,000 in Sweden, it means that there are hundreds and hundreds of thousands of substations in the world, and most of them are not yet digitalized. There is a lot of things happening there. If we look at the expected grid investments only in Sweden in the coming five years, it's estimated to be around SEK 400 billion, just to give an idea of the scale and the potential of this area and this business. All right, so let's move into then a little bit of facts about the acquisition. So I hand over to, to Joakim.
Thank you very much, Jenny. First, some facts about the acquisition. Yesterday then we entered into an agreement to acquire all the shares in Welotec GmbH. There will be an initial cash consideration of EUR 35.2 million, cash and debt-free basis. In addition to that, the agreement includes that there is a, yeah, performance-based, earn-out opportunity that is capped at EUR 14.8 million. You can obviously understand that the whole transaction is capped on EUR 50 million. That earn-out will be based on result improvements in 2025 and 2026. Then obviously it will be settled in the first half of 2027. The acquisition is expected to add positively to our EPS development.
The fact, some facts around the company, as Jenny pointed out, if we look at it in Swedish numbers, I mean, the turnover is around SEK 269 million, and the EBIT on the SEK 36 million level corresponding to the 13.4% EBIT margin. The completion of the acquisition is expected to occur within the second quarter now in this year. Let's move to the next slide. Some facts related to the financing of the transaction. At closing, there will be a cash payment. We will ask the AGM that is happening on the 13th of May to authorize the board to run a directed rights issue of about SEK 300 million. Danske Bank will support us in the process of running this rights issue.
If there for some reason will be a delay in the rights issue or the rights issue will not take place before the closing, there is a bridge financing facility in place, together with Danske Bank. We have also written and simulated the effect on the net debt, Adjusted EBITDA, KPI. We will move from 1.2 to 1.3, so there will be a relatively low impact on that. Finally, our two biggest shareholders, Stena Adactum and Svolder, have expressed that they will vote in favor of this proposal at the AGM, and they have also expressed that they will take part in the rights issue up to their shareholder, at the present stage. All in all, they together represent about 45% ownership of the shares in Ependion. That concludes the details, and over to you, Jenny.
Yeah, very good. Thank you, Joakim. Finally, before we open up for questions, just a few words on the strategic fit of this acquisition. I am very happy to have concluded this acquisition because, as we mentioned, there are two important aspects. One is, of course, Welotec's strength in the energy segment and the substation digitalization that is going on, where they are right in the middle of that change. The other thing is that we are adding this new edge technology into Westermo, which is also another important step that we can, also in the future, take benefit of in other sectors than the energy sector as well. All in all, you can say that we are ticking the two boxes there, as you can see.
We both, Welotec have some of the current offering that Westermo also has today, and there, there is an opportunity to actually replace third-party products with, with Westermo content. That is a synergy potential, but also adding this new, exciting edge technology leg to our business. I really feel that this acquisition fits right in the middle of Westermo's strategy. With that, I think we will open up for the Q&A part.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Markus Almerud from Carnegie. Please go ahead.
Yeah, hi, Jenny. Hi, Joakim. Exciting times. A couple of questions. First of all, can you hear me?
Yes.
Yes, we can. Hey, Markus.
Hi, Markus.
Yes. Hey. Just firstly, maybe what is, what is Welotec's geographical footprint?
The main sales of Welotec today is within Europe, I would say. They have some customers globally as well, but the majority is within the European Union.
Yeah.
I would assume that is it spread all over, or is Germany quite dominant?
DACH is, of course, a big market for Welotec.
Yeah, but they have customers that are based in Europe, so to say, but that have a very global presence as well, you can say.
Mm-hmm. Mm-hmm. If the next question is in two steps, I guess, if you map kind of where you are and which energy customers you're in and they're in, is there any overlap in terms of customers, or I would assume that their footprint in the energy sector is much broader than yours?
I think it's a very good question. I think there's a very healthy picture there that we are seeing because there is definitely overlap, in that we are talking to the same customers to some respect. Some of the very big players in the energy area, we have in common, but we are, of course, talking to them with respect to different offerings. There we definitely see a very positive opportunity to talk about to them with a broader offering actually, which is very positive. There is also quite a few customers where Welotec has strong customer relationships and Westermo does not, and the other way around as well. Already now there is a lot of ideas about, you know, customers that we can go to together and so on. It is a very good fit actually in terms of the customer base.
I mean, you sound quite optimistic that you will be able to see some cross-selling both of your product into their existing customers and then their product into your existing relationships.
Yes.
E xcellent. And then finally, maybe, if you can talk a little bit about the debt level so that we can get an idea of, of maybe the, the valuation of this. Is there any debt i n Welotec as you take over?
Not really. No.
Okay. Okay. Excellent. That's all from me. Thank you very much.
Thank you, Markus.
Thank you, Markus.
There are no more questions at this time.
Okay.
We will hand the conference back to the speakers for any written questions.
Very good. We have a few written questions here that we will cover, of course. The first one is from Daniel Lindkvist at Danske Bank. What level is the gross margin in Welotec?
Yes. The gross margins in Welotec, I won't give you an exact number, but, if we look at the gross margins, they are somewhat lower than we have as an average within Westermo.
The second question, Eric Larsen, are there examples today where Welotec and Westermo are selling to the same customers? I think that was the same question actually that Markus asked. I think we have answered that one. We have a third question that is from Jonny Jin. Looks like an exciting acquisition regarding the financing structure. Could you elaborate the rationale with raising money? Looks like your balance sheet could handle this alone without a capital raise. Some comments here would be helpful. Thank you.
Maybe I should comment that one. First of all, I think the board has then considered the fact of offering the opportunity for every shareholder. The conclusion is that given this transaction and the company as such, and also for the shareholders, it is more beneficial to actually raise capital via this directed rights issue. Related to the balance sheet, with this transaction, of course, you can look at the initial cash consideration, but you should look at the total when it comes to the balance sheet as such. Also looking forward, we want to make sure that we can continue our active M&A agenda that we have within Ependion. We want to make sure that we have financial muscles moving forward as well.
Very good. We have a question from Michael at Polar Capital Partners. Oops, now it moved on. If you assume the deferred consideration is to be paid in full, what multiple could we expect on the final price?
Yes, obviously, you can do the maths on the existing, what we have published on the initial purchase price and also their performance that we are around the 11, and the multiple going forward will be on looking at multiples of 11-12 going forward.
Yeah. We have a Daniel from Danske Bank. How long have you known the Welotec operation? Was this a structured process or was it a one-on-one transaction? We have known about the company for about a year, and I think that the owner had in his mind to actually sell the company for some time, and there had been some contact with other players. The fact is that when we got in contact for the first time and actually met, I think both we and the owner of Welotec immediately felt that there was a very good fit between our two companies, not least from a cultural standpoint, you know, the way that the company operates, the love of technology, the segment focus, and so on and so forth.
I think we both felt that this was a very positive way forward. Then we entered into an agreement with them last fall basically. Yeah, that's basically the same question. Basically the same question from Yusuf at Krian Specialists. I think we answered that. A more general question we have here. Do you have any defense exposure in Westermo or group? Could you quantify how much of sales roughly? Thank you.
Yes, we do have a little bit of defense exposure in Westermo, not some, nothing actually in Beijer Electronics. It represents less than 5% of our revenues, but there are some interesting customers there that we are working with. It is not the focus segment of Westermo as of today, but obviously with the way the world is looking right now, it is an area that, I mean, we are regularly reviewing our strategy.
Of course this is an area that we are looking at, but that is the situation right now. I think that with that we have answered the written questions as well. Thank you very much for attending. We should also mention that we have, before we stop, a few disclaimer slides here as well just for your information. We will not go through that obviously. With that, we end this call. Thanks for listening. Have a great day.
Thank you. Bye-bye.