Weekly Update: Bergman & Beving, Lagercrantz, Zoetis, Cogent, ONEW, Addlife, Essensys

Content Published Last Week

1. IP ANALYSIS: Bergman & Beving, Lagercrantz, Nordic B2B Distribution & M&A

2. Bergman & Beving: The Original Serial Acquirer

3. Zoetis, IDEXX Laboratories and Animal Diagnostics Competition

4. Cogent Communications: Hyperscalers' Dark Fiber Demand

5. OneWater & Marine Boat Retailing through the Cycle

6. AddLife: Vision Ophthalmology Group Acquisition

7. Essensys: Operations and Growth Opportunity

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Bergman & Beving, Lagercrantz, Nordic B2B Distribution & M&A

Last week, we published an interview with the current CEO of Bergman and Beving (B&B), the parent company of some of the top-performing companies in Sweden.

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 Corp, Watsco, Fastenal, etc.

Value-added distribution in the Nordics is particularly attractive:

"You therefore have 26 to 28 million people. You have different languages so for companies coming from outside, if they are going to be able to establish themselves in a region like that, I think it’s very complex. You need to have a critical mass; you need to have the countries if you are going to be successful, because you also need to translate, for example, the manuals and so on. In some cases, you need to answer in the local languages. It is quite complicated to establish that business if you do not already have a Nordic setup or a Nordic organization." - In Practise Analysis

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

On the surface, B&B looks like it barely earns its cost of capital.

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But it's the incremental ROIC that largely drives forward equity returns. And B&B has a new management and revised strategy that is focused on reallocating FCF into niche manufacturing companies just like Lagercrantz, Lifco, and Judges Scientific.

B&B’s CEO, the Former M&A Director at Lagercrantz who completed 50+ acquisitions over 14 years at the company, aims to replicate Lagercrantz’s strategy. 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. We estimate the ROIIC is ~20% relative to ~8-10% historical returns.

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.

In our recent analysis, we explore the parallels between B&B and Lagercrantz’s history, what made Lagercrantz successful, and the opportunity for B&B.

Zoetis, IDEXX Laboratories and Animal Diagnostics Competition

Former Zoetis and IDEXX Director explaining the competitive dynamics in the lab diagnostic market:

They were naive as far as how the diagnostic business works. They first purchased 50-year-old lateral flow Eliza tests from Symbiotics, then did the same with Scandinavian Micro Biodevices which is not important technology. Buying Abaxis gave them access to the hematology, chemistry and urine analysis point of care business. 50% of Idexx's $6 billion revenue is from the point of care in-house analyzer business. Veterinarians with these analyzers in clinic can do urine analysis, blood chemistry, hematology and blood coagulation, which is limited, but you get all consumables to do that and you have a full suite of specialty testing you can do at a reference lab. You need more than in-house analyzers to compete against Idexx's specialty testing bundle, meaning you need to buy reference laboratories, or you will remain in second place.

Cogent, Hyperscalers, & Dark Fiber Networks

A Former Director at one of the hyperscalers on the challenge hyperscalers face getting building out fiber networks to scale data centers:

We're looking at a 2027 and 2028 delivery of gateways and data centers, and the fiber we need to connect and integrate it into our existing backbone infrastructure. This is just in the US. We have projects like this all over the world. Even longer-term planning, I mentioned 2030, we're looking beyond this medium-term horizon, say five years out, beyond 2030, and what these new routes we need because there's nothing existing today. Hyperscalers are similar here. The most significant factors when building our network are latency, resiliency, and redundancy. We have to get faster all the time.

OneWater & Marine Boat Retail Cyclicality

Former MarineMax Dealer on its potential advantages in boat retailing:

MarineMax’s biggest strength is that they are just gargantuan. The number of stores and their network and diversity in owning both manufacturing and distribution and having the infrastructure of all the brokers, no one is ever going to be able to really be able to compete with that. OneWater is the only one really giving them a run but they are not even close, if you look at top line revenue. They’re getting there, they’re trying but I think that MarineMax’s position is a little better because of the product that they have. I’m not just talking about the brands; I’m talking more about the size and how it caters to the American boating wealth here in the US. Think about some of the boats they sell and the size of them. I know OneWater is trying to grow and have put in all these stores but they are still known for a smaller boat. They’ve sold a number of the Cobalts and some of the smaller boats, whereas MarineMax, at one time, was just a huge Sea Ray dealer. Now that they’ve moved into big super yachts and with the marinas they’ve bought around the Bahamas, they’ve just moved into a much bigger arena. I think it’s going to be hard to catch them up. - Former MarineMax Dealer

Addlife M&A

The Former AddVision CEO, a recent acquisition for Addlife as they moved into the Ophthalmology space, provides a primer on B2B distribution fundamentals:

You need people at the top level that have contact to not only existing manufacturers, but emerging manufacturers; people with a great deal of experience that know which way the market is going to go, so you can be proactive when working with new technologies. You only have a lifespan with the best technologies of around three to five years because those technologies are going to be acquired by bigger companies. That's the game and that's the fun, because you make sure that those supply contracts have exit clauses in there where you get compensated. Exit clauses where you're not restricted to sell competing products, and you have a pipeline ready for when that product disappears for the next product to come in and it's probably better than the product you're losing because it's the next emerging technology. That's the game, particularly in our distribution and supply. You've got to know where the market is going, what the market needs are going to be.