Founded in 1906, Bergman and Beving (B&B) has a long history of creating enterprise value. We studied B&B’s legacy 18 months ago:

During the 1890’s, Avid Bergman and Fritz Beving were working in Germany and England in the midst of the industrial revolution. This experience led them to foresee further rapid industrialisation in Sweden. But there was one problem: industrial suppliers didn’t have the local knowledge to sell into the Nordics. In 1906, the two founders created Bergman and Beving (B&B) as the first importer and agent for foreign manufacturers to sell industrial products to Sweden. Over 100 years later, this heritage has created four listed companies that manage hundreds of operating subsidiaries with over $10bn in enterprise value. - In Practise Analysis

B&B started by simply sourcing and reselling industrial goods to Nordic manufacturing companies. Over time, the company added customisation, support, and other ‘value-added’ services to improve profitability. This was the birth of the first value-added distributor, a business model we’ve studied via POOL , WSO, FAST, etc.

We’ve previously covered Addtech and Addlife, two of the three successful B&B spins. This piece is focused on B&B, the $3bn SEK mothership. It presents one of the most interesting ‘serial acquirer’ opportunities we’ve seen in a while.

Part of the reason B&B is relatively attractive today is that it has been messy.

In 2001, B&B spun out Addtech and Lagercrantz separately. Addtech later spun out Addlife, its medical sciences division. After the 2001 spins, B&B renamed itself B&B Tools to focus on tools and supplies for the manufacturing and construction sectors. More importantly, B&B Tools began drifting from its successful roots: it focused on centralisation, not decentralization.

Source: Lagercrantz 2004 AR
Source: Lagercrantz 2004 AR

In the early 2000’s, B&B Tools looked to solidify positions in each part of the value chain: designing or owning proprietary brands, owning wholesalers, and rolling out retail stores to sell its products. It began vertically integrating. B&B opened TOOLS retail stores and acquired Momentum group, a traditional reseller of industrial components. The company lost touch with its decentralized roots and aimed to consolidate the highly fragmented northern EU B2B distribution market.

It's fascinating how alluring such ideas may be. The same board that approved the successful spins of Addtech and Lagercrantz, approved B&B Tools’ consolidation strategy. Even with a 100-year history of successfully owning niche, decentralized distribution and product companies, B&B was lured into consolidating a market to build an empire.

In short, this didn’t work. In 2015, the group proposed to split the company into two: Bergman and Beving (niche industrial product companies) and Momentum Group (retail and wholesale distribution companies). The spinco was named Alligo and included the TOOLS retail chain and Momentum Group, which was separately spun out last year.

Source: Momentum Group Prospectus
Source: Momentum Group Prospectus

Today, Bergman and Beving is a listed holdco with 20 operating companies. Although the portfolio is organised into three segments (Tools & Consumables, Safety, and Building Materials), we believe it’s better to split them into two:

  1. B2B distributors: mainly Luna and SKYDDA = 40-50% of revenue
  2. Niche product companies: 10+ companies each with 1-2m EUR EBITA at 15% margins

At a high level, B&B’s looks unattractive relative to other Swedish acquirers and the numbers suggest it has barely earned its cost of capital:

Source: Historical Annual Filings
Source: Historical Annual Filings
Source: Historical Annual Filings
Source: Historical Annual Filings

B&B’s capital intensity is also higher given it owns Luna, a more commoditised B2B distributor that requires more inventory and receivables to offer all-day availability and favourable payment terms to industrial customers. This leads to significantly lower EBITA / WC, a common metric to analyse the profitability of niche distribution and manufacturing companies:

Source: Historical Annual Filings
Source: Historical Annual Filings

What makes B&B so interesting today?

Put simply, the new CEO is looking to replicate the success of Lagercrantz. In the mid-2000’s, Lagercrantz switched from acquiring B2B distributors to niche product companies with EBITA / WC > 45%, 15% EBIT margins, and high market share. Since 2005, Lagercrantz has returned ~30% per year including dividends.

B&B’s current CEO, the Former M&A Director at Lagercrantz who completed 50+ acquisitions over 14 years at the company, aims to replicate Lagercrantz’s strategy at B&B. Thus, all incremental capital is invested into niche manufacturing companies at 6x EBIT targeting ~1.5x net leverage. This ~20% ROIIC is much higher than its historical rates of return above.

The board is also stacked with experience at creating value and includes the original two controlling families, Borjesson and Hedelius, arguably the modern architects of B&B’s value creation, the Lagercrantz CEO and Addtech’s CEO.

More interestingly, this comment from our recent interview with the CEO of B&B particularly stood out to us:

When I started, the opportunity to get 10 plus profit margin with [Lagercrantz’s] company portfolio would have been challenging, if not impossible. Lagercrantz was very dependent on acquisitions, whereas the companies Bergman & Beving own today can easily reach 10% profit margins. The quality of businesses we own today is higher than Lagercrantz in 2007. The opportunities are greater but there are no quick fixes and it requires diligent persistent work across the group. Today, B&B has greater potential than Lagercrantz did. - Current CEO of Bergman and Beving

It’s an interesting setup: a CEO who has completed 60+ acquisitions of niche product companies, the most experienced serial acquisition board in Europe, and a starting portfolio that trumps Lagercrantz 20 years ago.

This led us to dig through Lagercrantz’s old filings to analyse the history of a serial acquisition machine, similar to our recent work on Halma. Lagercantz’s history has interesting parallels with both Halma and B&B today.

Lagercrantz was the original electronics and IT solutions division of B&B.

Source: Lagercrantz Prospectus, 2001
Source: Lagercrantz Prospectus, 2001

In 2001, 65% of revenue was generated from distributing electronic products to large companies like Nokia and Ericsson:

Source: Lagercrantz Prospectus, 2001
Source: Lagercrantz Prospectus, 2001

The first decade of Lagercrantz’s performance looks very different to the last 10-years:

Source: Lagercrantz Reports
Source: Lagercrantz Reports

From 1999 to 2005, Lagercrantz’s revenue declined 20% and it took 10 years to reach the EBIT high of the 90’s. Distributing electronics was a commoditized business; the sector boomed during the tech bubble, then as the market shook out, large suppliers and customers squeezed distributors. We’ve previously discussed how Electrocomponents is facing the same problem trying to ‘add value’ to electronic products today.

Lagercrantz’s problem was that over 40% of its electronics distribution revenue was commoditised. It couldn’t add value on top of reselling the products and component production began moving to cheaper geographic locations. In 2003, management highlighted:

The most important of these is the move of certain types of electronic production from the Nordic Region, in the first instance to Eastern Europe and the Far East. The effect is that the prerequisites for profitability have deteriorated for distribution of standard-type electronic components. Even in an improved economic climate it may be difficult to attain satisfactory margins. - Lagercrantz CEO, 2003

This led Lagercrantz to change strategy and focus on acquiring companies with proprietary products led by B&B’s current CEO:

For Lagercrantz to deliver double digit profit margins, their new growth strategy was based on acquisition of product instead of distribution companies. We started to allocate most of our capital into acquiring niche B2B product companies with margins well above 10% and with addressing an underlying growing niche…Lagercrantz still own companies doing distribution with electronic and telecom distribution business, but they still have operating margins below 10%. - Current CEO of B&B

Even by 2008, as Lagercrantz hit the prior EBIT high, the electronics division still only earned ~3% EBIT margin. Electronics is just a poor category to distribute. This led Lagercrantz to lose 5 years of EBIT growth in the 2000’s.

Halma also lost 3-4 years of growth in the 2000’s from acquiring commoditised telco equipment components. When such a business does face a bump, like Halma and Lagercrantz in the early 2000’s and Judges in 2013/14, it proves to be a great entry point.

It was only until mid-late 2000’s that Lagercrantz sold off underperforming electronics opcos and allocated the capital into higher margin electromechanical components and systems.

Source: Lagercrantz Filings
Source: Lagercrantz Filings

Since 2009, with a focus on acquiring proprietary products, Lagercrantz has compounded at closer to 40% per year.

Why is this relevant?

B&B is arguably in a similar position to Lagercrantz in the early 2000’s: ~40% of revenue is from Luna (tools) and SKYDDA (safety equipment), two B2B distribution businesses. B&B purchased Luna over 40 years ago and is now the largest tools distributor in the Nordics. But not all of the volume is profitable. We estimate Luna’s operating at ~2% EBIT margin at best, similar to Lagercrantz’s electronics segment margin in 2002.

Similarities aside, the differences are more important: 68% of B&B’s revenue is from proprietary products whereas Lagercrantz earned ~10% from proprietary products in the mid-2000’s. B&B has a higher-quality, more proprietary portfolio of IP relative to Lagercrantz in 2005 before it set out on its acquisition journey.

Lagercrantz’s old electronics business was structurally impaired. Luna has low supplier and customer concentration and isn’t at risk of the technological disruption facing electronics in the 2000’s. B&B management believe Luna’s margin can improve by phasing out low-margin distribution agreements:

The group is now going through the process of phasing out low margin, high volume business, to ensure we have profit growth over time…mainly within the wholesale business where our top line won't grow.

Owning Luna also creates a greater operational challenge given it requires effective inventory management, logistical capabilities, and overall operational efficiency relative to owning niche manufacturing companies. Although B&B uses Luna and SKYDDA to distribute the products it owns, it effectively runs two separate business models. This leads to a higher gross margin but lower EBIT margins than Addtech or Lagercrantz:

gross margins are high because those wholesaling companies sell our product company's products. We get healthy margins in both businesses but we need to bear the cost of two business models, so the cost is higher to generate that margin. The cost of sales percent is much higher since we need to carry two business models to generate that gross profit in some product areas. - Current B&B CEO

There are already signs of Luna improving: last quarter, excluding the cyber attack operating losses, the Tools and Consumables segment hit a 5-year EBITA margin high.

Although management may improve Luna’s profitability, B&B is not as ‘pure’ a serial acquirer as Judges Scientific or Lifco, who enjoy superior EBITA / WC and ROIIC:

Source: Historical Filings
Source: Historical Filings

Luna’s higher capital intensity limits the reinvestment rate and potential revenue growth relative to JDG or Lifco. Not only does B&B aim to pay out ~40% of net income in dividends, but Luna’s working capital drag leaves only ~40% of FCF available to reinvest in higher-margin acquisitions. Thus, B&B targets ~2.5x net leverage to increase the capital available for M&A. However, it’s fair to note that Handelsbanken supplies the debt and is also a major shareholder.

B&B currently earns ~10% ROE but its ROIIC is ~20%. Over longer periods of time, it's hard for the equity to outrun the long-run ROE. If B&B is to compound anywhere close to Lagercrantz, it has to significantly improve Luna’s performance and consistently acquire niche manufacturing companies. Arguably, the former is harder to achieve than the latter.

Lower ROIC and greater operational complexity means B&B is currently less of an acquisition machine than JGD or CSU, for example. These companies have near-100% of FCF available to reallocate at the same economics as B&B.

But what if B&B spun out Luna?

The remainco would have ~90% proprietary products, 10%+ EBITA margins and more capital to allocate to acquisitions. The same board that pivoted from Lagercrantz’s low-margin electronics businesses are also the same people on the B&B board today. One would have to believe that rationality would prevail if Luna couldn’t be improved. This would release the underlying acquisition machine within B&B at full force.