October 27, 2022
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Gustaf: Hi Magnus, you are today Group CEO of Bergman & Beving [the legendary serial acquirer spawner of Lagercrantz Group, Addtech, Addlife, Momentum Group, & Alligo]. What strategic journey did you make as Executive Vice President at Lagercrantz Group from 2007 to 2021?
Magnus Söderlind: When I joined Lagercrantz Group as EVP in 2007, Lagercrantz was mainly a group of companies focusing on electronic and telecom components distribution. It was obvious that even if you were world-class in those industries, reaching a double-digit profit margin would be very challenging.
As EVP, one of my responsibilities was M&A. We outlined a new acquisition strategy focusing on niche product companies with a proven track record of double-digit profit margins.
It was not easy initially to get everyone in the management team comfortable with the new acquisition focus. Most of them had careers as MDs of electronic and telecom components distribution companies and had no experience with industrial products companies selling to multiple customer groups.
Luckily, the product companies we initially acquired were successful, and over time, the internal acceptance of acquiring product companies increased, accelerated by changes made in the management team.
If you look into the growth of Lagercrantz over the last 15 years, it's very much acquisition-driven. When I joined, the profit margin was 4%. Today it's close to 17%, a level never heard of in the electronic and telecom components distribution industry.
With the profit expansion, the valuation accelerated. Back in 2007, when I started, the market cap was SEK 800 million. Today it's SEK 17 billion, an increase of 21x or approximately 2000 per cent, representing a share price CAGR of 22%. That is the journey I foresee for Bergman & Beving (B&B).
Gustaf: What is Bergman & Beving today?
Magnus: When I joined B&B 1.5 years ago, the profit margin was roughly 2 percentage points higher than Lagercrantz’s when I started there. But even more important, the potential in B&B’s current companies (21 today) is much greater than the potential in Lagercrantz's portfolio in 2007.
I argue that we can reach a double-digit profit margin in our existing companies. We have started that journey focusing on the companies/product lines having healthy margins and running improvement projects tailored to each company.
There are no quick fixes, but we should see an improved profit and margin over time. The target is to double the group profit by the fiscal year 2025/26 at the latest, having 2020/21 as the starting point.
Part of the plan is to, over time, step up our acquisition activities. In the last years, the main focus has been on add-on acquisitions to our companies having the highest profit growth potential, which is something we will continue doing.
Furthermore, we will go forward and establish ourselves in new niches by acquiring leading niche companies as an entry ticket, concentrating on asset-light companies with a profit margin well north of 10%.
In line with this, we have made two platform acquisitions during 2022. All in all, if you should put a label on B&B, I guess ‘industrial compounder' or 'serial acquirer' are appropriate labels.
Gustaf: What lessons and changes do you bring to Bergman & Beving?
Magnus: My ambition from day one has been combining the best of the two worlds. As B&B and Lagercrantz have much more in common than differences, it was pretty easy to get into B&B and be productive.
But the fact I started at B&B hasn’t meant a revolution; it's more like an evolution. We have increased the level of decentralisation and now, for example, have fewer people at the head office (ten employees at the head office) than when I started.
After the spinoff of the retail part (now Alligo and Momentum Group), the B&B product company lost business volumes. And up until 2020, the focus of B&B was to get new customers to compensate for lost volumes.
We also had to strengthen the product companies' management team during this period and revitalised the offerings. Since 2020 this revitalisation has been in place, and we now have had 11 consecutive quarters with increased profit and improved profit margins.
To further fuel the ‘right type’ of growth, we have taken a company-by-company approach. We have a strategic agenda for each company, including where the company should be in 4-5 years, signed off by each company's management team to ensure aligned expectations. And we expect each company to move towards their long-term target year-by-year.
We have also increased the focus on ROCE, not only focusing on profit growth, to ensure we do the right investment and activities in our current companies but also on generating cash flows to be able to increase acquisitions.
For this, we use a B&B ROCE definition (EBITA/WC%) used for decades within Bergman & Beving. I have also brought my experience and network within M&A to vitalise our acquisition activities, and we now have a comprehensive acquisition pipeline of exciting prospects.
Gustaf: Why is your profitability goal EBITA/WC>45%? And how do you work with the “Focus Model”?
Magnus: The compounder model we are running is that neither organic growth nor our acquisitions should dilute our current shareholders. We have never diluted our shareholders in our 115 years of operations.
Instead, have we created great shareholder value by spinning off companies over time. Our growth should be self-financed, i.e. both organic growth and acquisitions.
If you calculate backwards, the EBITA/WC of 45% is required to be self-financed, given that we have to pay tax and interests, make investments in our portfolio companies, pay out dividends in the range of 30-50% of our profit after tax and finance acquisitions.
Therefore, an EBITA/WC of at least 45% will generate the cash necessary to breed organic profit growth together with acquisitions.
The EBITA/WC is also gearing us to where we want to grow, as the higher EBITA/WC, the more working capital efficient the company is. Those companies require less working capital investments when growing.
Our internal strategic priority tool - the Focus model - is a tool that decides strategic priority for each of our companies based on their EBITA/WC ratio together with their profit growth potential.
For example, suppose the company is >45% and facing a market and competitive landscape that gives the company good growth opportunities. In that case, we like the company to focus on growth. As a company with >45% has healthy margins, it's about organic or acquisition-driven growth, maintaining the EBITA/WC level.
If you are on the other end of the EBITA/WC spectra, i.e. <25%, the company’s sole focus should be on improving EBITA/WC, likely by reducing working capital and improving margins, and not considering add-on acquisitions.
Gustaf: How are acquisition targets sourced? In what valuation range do you usually acquire them?
Magnus: We source acquisition opportunities through structured processes and outreach activities. In add-on acquisitions to our current companies it's mostly outreach activities. The two last platform acquisitions we made were one by a structured process and one by our outreach activities.
We only buy well-managed, profitable niche companies where we have identified opportunities to grow the business and profit, but making a valuation arbitrage is also part of our model. Our acquisitions valuation range is well below the Bergman & Beving stock valuation.
Gustaf: How can investors and business owners get in contact with Bergman & Beving?
Magnus: If you like to know more about Bergman & Beving, you can visit our website: https://www.bergmanbeving.com/en. You can also contact our IR contact: Peter Schön, at Peter.Schon@bb.se or +46 703 398 999