Solwers announces acquisition in Sweden

Translation: Original comment published in Finnish on 1/10/2023 at 7:45 am EET.

Solwers' subsidiary Solwers Sweden AB acquires Sweden-based WiseGate AB, whose subsidiaries specialize in consulting and engineering for the energy and process industries, as well as automation. In our view, the acquisition is in line with the company's strategy and the valuation of the transaction is low. However, this is justified by the low profitability of the acquired businesses. We consider the value creation potential of the arrangement to be good if the profitability of the acquired businesses can be raised to at least a satisfactory level.

Service portfolio expands in Sweden

Solwers announced on Tuesday that its subsidiary Solwers Sweden AB has agreed to acquire the entire share capital of WiseGate AB. Of WiseGate AB's subsidiaries, WiseGate Consulting specializes in consulting and design for the energy and process industries, while DEMAB is active in the automation sector. The WiseGate group employs more than 50 full-time employees and has offices in eight locations in Sweden, serving in particular the energy and industrial sectors.

According to Solwers, the group's combined unaudited revenue in 2023 was estimated at 90 MSEK (~8 MEUR) and its adjusted EBIT at around 4.2 MSEK (~0.4 MEUR). Based on publicly available information, we have gauged the operational development of the acquired entity through separate company figures. According to this data, the acquired businesses have collectively more than doubled their revenue in the last five years from around 3.9 MEUR in 2019. However, overall profitability has been sluggish over the period, with an average EBIT margin of just under 3% for the businesses. According to Solwers, the acquired businesses have synergy potential with the already owned Ele Engineering, and this together with efficiency measures should be reflected in the earnings development of the operations already during the current financial year. We estimate that the profitability of the acquired businesses has been burdened by, among other things, front-loaded costs (i.e. billing rates below potential) and a relatively large number of locations for the size of the business, which generate some fixed costs.

Source: Solwers and Allabolag.se

The transaction will be paid in cash and through a directed share issue

The fixed purchase price for the acquisition is estimated at SEK 15.6 million, of which SEK 1.5 million will be paid in new Solwers shares and the rest in cash. The sellers and the buyer have agreed on a partial withholding of the fixed purchase price, which will be released to the sellers once the adjusted operating profit for 2023 is confirmed. In addition, a conditional earn out has been agreed, which will be paid based on WiseGate companies' financial performance in 2024-2026. In a share issue to the majority shareholders of WiseGate at a subscription price of around EUR 4.28 per share. This is the weighted average price of Solwers shares on the First North Growth Market for the 30-day period prior to the acquisition. The number of shares to be directed to the sellers is 31,267, which will be subject to a 12-month lock-up period.

The acquisition is in line with Solwers' strategy, valuation is moderate and there is room for improvement in profitability

The acquisition will enable Solwers to expand its service portfolio in the energy and electricity sector, which we understand is a strategic choice given the good long-term prospects for the industry. In addition to the sectoral diversification, the acquisitions bring geographical diversification, as according to our calculations the weight of Finland in the businesses owned by the company has historically been slightly higher than in Sweden. Against this backdrop, we consider the acquisition to be in line with Solwers' strategy and a very good addition to the group.

On our 2023 estimates, the purchase price corresponds to an EV/EBIT multiple of around 3.7x, which is quite low. Similarly, with the actualized results of 2022, the multiple rises to 7x and the EV/Sales multiples for 2022-2023 are around 0.2x. Thus, the valuation of the transaction is low. However, it should be noted that with small figures, the earnings-based valuation will change quickly if the earnings level fluctuates. We believe that the acquired businesses have room to improve profitability, which would change the valuation level of the acquisition. At the same time, however, we believe that the earnings improvement will increase the valuation multiples of the arrangement if the conditions for the additional purchase price are met. These are typically linked to growth in revenue and profit. We will update our forecast to take account of the recent acquisitions in the near future.