Intrum Justitia-Lindorff merger

Hey there, Investor!I should totally be writing on other stuff… not investing or blog related stuff… But this is so much more fun, and that’s why I’ll be taking a look at the announced merger between Intrum Justitia and Lindorff!

What’s going on?
Intrum Justitia and Lindorff announced that they were suggesting a merger. The new company is going to be listed in Stockholm, but the CEO is so far unknown. Intrum Justitia jumped 37% on the announcement but has now fallen back all of that gain. This has gained some attention, because of some special happenings around this deal. First of all, some larger shareholders said that they were not informed of this deal before its announcement. Secondly, this deal is going to cost around 1 bn SEK and significantly weaken IJs balance sheet. The deal will be concluded by Intrum Justitia purchasing all shares of Lindorff, paid with shares of IJ. Both IJ and Lindorff boards are positive to the deal.

Intrum Justitia (GoogleFinance-STO:IJ) was founded in 1923 in Sweden, and listed in Stockholm 2002. IJ is the leading Credit Management Services group. IJ has no major shareholder and is active in 20 countries.

IJ has 13.6 bn SEK in assets, of which 2.9 bn is Goodwill and 8 bn is purchased debt. They have 3.6 bn of shareholder Equity and 6 bn Long term debt. Trailing twelve months IJ had 5.76 bn SEK revenue and ttm EBIT is 1.8 bn SEK.

Lindorff was founded in 1898 in Norway, and is the leading (apparently leading does not mean the leader, or they are very clever with the wording) credit management partner, and Lindorff is active in 13 countries. Both companies are simultaneously active in 11 countries.

Lindorff has 3.4 bn EUR (~33,4 bn SEK) in assets, of which 1.5 bn EUR (14.7 bn SEK) is Goodwill, and 1 bn EUR (9.82 bn SEK) is Loans and Receivables. They have 774 m EUR (7.6 bn SEK) of Shareholder Equity and 2.2 bn EUR (21.6 bn SEK) of long-term debt. Big asterisk here, more on that later. Trailing twelve months Lindorff had 610 m EUR (5.99 bn SEK) of revenue and ttm EBIT is 160 m EUR (1.57 bn SEK).

Important things to note with Lindorff is their very complicated ownership, and 1.9 bn EUR of internal loans.
Lindorff seems to be wholly owned by Nordic Capital Fund VIII, through a series of holding companies. As far as I have understood, this is how the ownership structure looks like: Lindorff, wholly owned by Indif AB, which in turn is owned by (w.i.t.i.o.b) Lock A/S, w.i.t.i.o.b Lock Lower Holding AS, w.i.t.i.o.b Lock Upper Holding AS, w.i.t.i.o.b Lock Topco AS, w.i.t.i.o.b Cidron 1748 S.á.r.l., and Nordic Capital seems to own Cidron 1748 S.á.r.l. I might have misunderstood all of this, but the point is that the ownership is quite complicated.

Now that is out-of-the-way, I noticed in the notes of Lindorff’s third quarter of 2016 report that there are 1.9 bn EUR of bonds emitted, to Lock AS and Lock Lower Holding. the coupon on these bonds range from 3 month EURIBOR + 5.5% to 9.5% and 3 month STIBOR +8.775%. The bonds range from 30 m EUR to 253 m EUR. If my calculations are correct the total bonds issued will cost 131.5 m EUR, which is a Cost of Debt of 6.91%. Lindorff also mentions the fact that they are in “discussions” with tax authorities regarding the deduction of interest costs. I am no master in these kinds of things, but I’m pretty sure this is what “tax optimization” looks like.

Intrum Justitia – Lindorff
What will the new company look like, and who would be the owner?

The new company would be active in something like 23 different countries, and have a portfolio of purchased debt of ~18 bn SEK, and total assets would amount to roughly 47 bn SEK. The new ttm revenue of IJ and Lindorff is ~11.7 bn SEK, and ttm EBIT would be 3.37 bn SEK. I calculated this by adding IJs numbers to Lindorff’s numbers, which totally neglects any costs or synergies incurred due to the merger, those will be discussed later. After the deal, Nordic Capital will indirectly be the largest owner of shares.

The newly formed entity will have approximately 27.6 bn SEK of long-term debt. On top of this there will be a “bridge facility” (read more debt) of 3.4 bn EUR and 850 m EUR more debt, in total 4.35 bn EUR (42.7 bn SEK). Some of this debt will be used to refinance Lindorff and to “provide certainty of long-term financing”. If all of Lindorff’s bonds are refinanced using the bridge (which they have said they won’t) the new company would have a total of 42.33 bn SEK. If my calculations are somewhat correct, the new company will have ~11 bn SEK of equity, giving us a debt to equity ratio of 3.8. IJ shareholders will own approximately 53% (55%, see update at the end of this post) of the post-merger company, and Nordic Capital will own ~47%. If I have my head on straight, given IJs current market cap of 20 bn SEK, the post deal company is valued at 37.7 bn SEK, based on the valuation of IJ. (20 bn / x = 53% -> X=37.7 bn). (Is the difference between 11 bn and 37.7 bn going to be Goodwill, or did I make a mistake?) This valuation indicates a P/B of 0.8 and a P/EBIT of 11. I know that my calculations are very rough, and they might be completely wrong (if so, please let me know!), and that is why YOU SHOULD ALWAYS CONDUCT YOUR OWN ANALYSIS!

Also if I am not mistaken, the Enterprise Value of the post deal company would be something close to 37.7+42.3-0.339-0.273 = 79.388 bn SEK. This gives us an EV/EBIT value of not so cheap 23.5. (79.388/3.37=23.5).

Arguments for the merger
The arguments speaking for this deal are cost and revenue synergies. an estimated 0.8bn SEK of cost synergies in full effect after 3 to 4 years. Furthermore, it is estimated that Intrum Justitia’s EPS will grow by 75% over a 3 to 4 year period.
Other arguments for this deal are; the fact that the new entity will be unmatched in scale and diversification, good strategic fit between the companies, larger geographical market, Cultural fit (Swedes ❤ Norwegians), and good position for future growth through investments.

Arguments against
However, the deal will incur costs of roughly 2 bn SEK split equally between the companies, as well as more debt and issuance of new shares of Intrum Justitia to Lindorff shareholders. The post-deal company will have a weaker balance sheet compared to Intrum, but better than Lindorff. Furthermore, it has been argued that it appears to be Intrum Justitia that has to pay for Lindorff’s refinancing.

My conclusion
I think the outlook for the Post-Merger entity are good. Intrum Justitia and Lindorff have a lot of industry experience, and the increased size might give the new organization opportunity to grow through acquisitions. However, it seems that IJ shareholders have to pay for Lindorff’s “peculiar” debt refinancing. Furthermore, the deal was made in a very short time span, ca 6 weeks of discussions. And on top of that the IJ CEO owns zero shares (purchased 1500 shares at approx 307 sek/share.), and did not seem to be very interested in doing so. This might be a reason for the high price Intrum Justitia shareholders has to pay, standard principal-agent problem To be clear, the new company will probably lack a majority shareholder of meat and bones. Nordic Capital will be the biggest owner, and hopefully that leads to a more invested owner than IJ currently has. However, risk capital firms are not unfamiliar with “management by maximizing-return-on-equity-while-not-giving-f**k”. Ideally I would like to have a new CEO of the new company who has a significant financial investment. The CEO of Lindorff did at least own some shares of Lindorff through a compensation program, but he did not know how many. It’s probably not a significant part of his portfolio, or he just didn’t want to give the number away. The deal is expected to be done in the second quarter of 2017, but it still needs the final approval from the competition authorities.

Here is a bullet point list of the pros and cons in my view:

• Pros
• EPS growth 75% over 3-4 years, according to the company.
• Growth outlook, and leading in Europe
• Cost synergies
• If my calculations are correct (probably not the best way of calculating M&A’s), it is cheap at P/EBIT 11 and P/B 0.8

• Cons
• Not so cheap EV/EBIT of 23.5 (depending on growth, can we expect 75% over 3 years?)
• Lindorff’s debt situation
• Lindorff’s strange ownership – by-product of Nordic Capital?
• Hasty decision to merge with Lindorff, 6 weeks of discussions?
• Faceless owners, no skin in the game. Risk capitalists are not famous for being long-term value creators…
• Lindorff in open cases for tax deductions of interest cost
• Debt to Equity 3.8
• Pricy deal

I think there might be a positive outcome of this deal, but there are some question marks regarding Lindorff. But I would love to hear what do you guys think!

Have a good day, and may the profits be with you!
-Samuraimannen

Other opinions on the deal
Glass Lewis and ISS recommends shareholders to vote for the merger
Erik Selin (1% of IJ) is positive to the deal
Simon Blecher (Carnegie) sells his stake in IJ, however Carnegie renews their buy-recommendation
Danske Bank likes the idea, but the deals terms are too much in favour of Lindorff

Full disclosure
I own shares of Intrum Justitia at the time of writing, and I intend to own the post-merger as well. currently IJ makes up 3% of my portfolio. I plan to increase my holdings in IJ. Remember to always do your own analysis, don’t ever make investing decisions based on what you read here, or anywhere for that matter.

Update
Because some of the funds holding a combined 17% of Intrum Justitia stated that they would not vote to pass the deal, because they thought the deal was too much skewed in Lindorffs favor, the terms of ownership have changed from 53% to 55%. This made them happy and the deal has now been voted through. Now we are waiting for the competition agencies to give the deal a green light.
Furthermore, the CEO of Intrum Justitia purchased 1500 shares of IJ at a price per share of 307 sek. I would guess this is because it does not look good with a chef who does not eat his own cooking. This could also be an indication that he is to be the CEO of the post-merger company.
This update does little to change my view, it is good that IJ gets a lager share of the post-merger company, but an increase of 2 percent units is not that impressive. I also see the IJ-CEO share purchase as purely symbolical, and that carries very little value in my eyes.

Numbers at the time of writing
1 EUR ~9.83 SEK
1 NOK ~0.11 EUR
1 SEK ~0.10 EUR
3m EURIBOR -0.313%
3m STIBOR -0.567%
3m NIBOR 1.15%

Sources:
https://www.intrum.com/en/about-us/https://www.lindorff.com/en/about-lindorff

EURIBOR: http://www.euribor-rates.eu/euribor-rate-3-months.asp
STIBOR: http://www.riksbank.se/en/Interest-and-exchange-rates/search-interest-rates-exchange-rates/?g5-SEDP3MSTIBOR
NIBOR: https://www.oslobors.no/markedsaktivitet/#/list/nibor/quotelist

Lindorff Ownership
lock aslock lower holding aslock upper holding aslock topco as
Google: Cidron 1748 S.á.r.l.