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Addtech, Indutrade: Empire-Building In Sweden

A conglomerate made up of 130 subsidiaries with a core expertise in technology trading, Addtech has thrived since it was spun off from Bergman & Beving AB — owned by the same controlling shareholders Anders Börjesson and Tom Hedelius — in 2001.

The company should be approached as a systems integrator, very much akin to what Accenture does in information technology: for customers, it diagnoses complex technical needs, sources relevant hardware and bundles up cost-efficient solutions; for suppliers, it acts as a natural sales partner in Scandinavia (75% of revenue) to address the industrial and infrastructure sectors.

Like all systems integrators, Addtech grows by acquiring smaller consulting practices in specific niches, to which it applies a freedom-with-responsibility type of oversight. Cooperation among business units creates synergies, especially when deploying customized solutions (50% of revenue) where added value and margins are higher than within the standard products category.

A large consulting business run with a decentralized blueprint requires little tangible capital and sports a flexible cost structure — a valuable feature whenever activity bottoms, for management can quickly lay off staff. As such, the parent company’s functions are to pursue acquisitions, provide salesforce coaching and monitor returns on capital employed.

Addtech never overstretched its resources — a policy of prudence facilitated by the low-risk nature of acquisitions, typically small in size — and self-funded both acquisitions and distributions. Average return on equity of 29% per year over the 2010-2017 period looks impressive in light of the limited leverage employed, and underscores the attractiveness of a cleverly-run consulting business.

Since 2017, however, management took advantage of an ultra low cost of capital to fund a larger-than-usual volume of buyouts. In effect, and that may be the weakness of the model, growth relies entirely on acquisitions: SEK 2.4bn spent on buyouts since 2010 — net of divestitures — have added SEK 4.3bn to the top line, or 100% of revenue growth over the period.

Integrations went untroubled, for sales and profits grew at a regular pace, the latter faster than the former, with a noticeable absence of restructuring costs or write-downs. Based on the average operating margin of 7.5% over the 2001-2017 period, acquisitions have added roughly SEK 420mil in annual profits, for an unlevered return of 13.5% — an outstanding performance in every respect.

A cunning acquirer, the company stuck to a good price discipline over the years, though average multiples paid have inflated recently. As it grows bigger, transformative deals will likely require to take on additional indebtedness, for the pound of low risk targets it used to fish in has shrunk, while bidding competition for larger, well-established players heated up.

On both a market capitalization and enterprise value basis, Addtech trades at roughly x26-x28 its latest net earnings. As about book value, a multiple of x5.6 — as of today — suggests an expected return of about 5% if past performance holds steady.

(No position.)

Controlled by the secretive but resolute Fredrik Lundberg — often dubbed “The Warren Buffett of Swden” — Indutrade is a conglomerate comprised of +200 companies, each sporting its own niche technical expertise. It does the bulk of its business in Scandinavia (54% vs. 34% for the rest of Europe) and sells valves, hydraulics, measurement devices, electronics, filters, pumps, fasteners, construction materials and other hi-tech components.

Like Berkshire Hathaway, Indutrade promotes long-term ownership, entrepreneurship and decentralized management while it oversees capital allocation and provides financing to its subsidiaries. Its buyout checklist includes demonstrated earning power, attractive price and continued involvement of key executives; no exit strategies are ever put in place.

Mr. Lundberg is renowned for his cautious attitude towards leverage, and it shows. Indutrade has always kept the latter well under control, as every peak of indebtedness got promptly repaid — this, despite growing amounts of capital allocated to acquisitions and distributions over the years.

As a result of thoughtful investments, returns on equity — with an average of 27% per year over the 2004-2017 period — rank way above peers’. Performance looks even more impressive once put in perspective with the minimal leverage employed.

Here, too, quality of integrations is underscored by the absence of restructuring costs, write-offs and the other pitfalls typically experienced by serial acquirers. Safeguarded margins evidence strict cost control — Indutrade went through the financial crisis unscathed — and price discipline, with average multiples paid for acquisitions (x0.7 sales) well below the standards usually observed among industrials.

Sales and profits grew at an impressive pace of 15% per year. SEK 7bn spent on acquisitions have added SEK 9.2bn to the top line: based on the average operating margin of 9.5% over the 2004-2017 period, these investments have added roughly SEK 900mil in annual profits, for an unlevered return of 13% — similar with Addtech, and by all means an unusual performance among acquisitive conglomerates.

The market values Indutrade exactly like its direct comparable — that is, expensively. As they both become bigger, however, maintaining such high-flying paces of growth should prove challenging. We shall see fairly soon if the law of decreasing returns also applies under these northern latitudes.

(No position.)

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