Solwers - Growth through acquisitions

[No_Thing]

A bit more consulting business for the listings.

The strategy is acquisitions.

https://www.talouselama.fi/uutiset/kauan-odotettu-solwers-aikoo-listautua-tuloskunto-ei-jata-juuri-toivomisen-varaa-voimme-kasvaa-nopeammin/a0091782-b7ad-47b8-bbca-895ed854a497

Solwers operates in the Finnish and Swedish technical consulting and design markets.
In 2020, the size of the Finnish design and consulting market was estimated at approximately EUR 6.5 billion, employing around 53,000 experts in the field. Over the past six years, the Finnish market has grown by an average of 5.3 percent annually.
The Swedish market was estimated to be approximately SEK 97.2 billion in 2020, employing 74,500 experts.

The Swedish market is estimated to have grown at an annual rate of approximately 8.4 percent between 2014 and 2020. Experts and designers operate in the market across the sectors of industry, construction, community development, and investment.[1],[2]

Solwers companies have framework agreements in Finland and Sweden with many different public entities. Consequently, the growth of public investment increases the number of assignments coming to Solwers companies through these framework agreements. Potential EU recovery support or similar forms of aid are also expected to have a positive impact on the demand for infrastructure services in the coming years.

https://solwers.fi/

[Hurde]

Solwers Oyj suunnittelee listautumisantia ja listautumista First North...

About the IPO

The purpose of the Initial Public Offering (IPO) is to create the conditions for Solwers’ listing on First North and to enable the company’s growth and expansion of operations in accordance with its strategy. The company expects that the First North listing will open a new channel for the company to acquire equity financing from both Finland and abroad, create liquidity for the offered shares, and develop the company’s general awareness and reputation among potential customers, partners, and investors. The purpose of the IPO is also to strengthen the company’s capital structure, expand the company’s ownership base, and enable the company’s shares to be used more effectively as a means of payment in mergers and acquisitions and as a tool for employee retention after the listing.

The planned IPO would consist of a share issue and a share sale. Solwers aims to raise approximately 9.0 million euros in gross proceeds through the share issue. The funds raised from the share issue are mainly intended to be used for financing new acquisitions.

Anchor Investors

Joensuun Kauppa ja Kone Oy, Taaleri Mikro Markka Special Investment Fund, Säästöpankki Pienyhtiöt Investment Fund, and Varma Mutual Pension Insurance Company have each separately committed to subscribing for shares offered in the IPO under certain customary conditions. Joensuun Kauppa ja Kone Oy, Taaleri Mikro Markka Special Investment Fund, and Säästöpankki Pienyhtiöt Investment Fund have each separately committed to subscribing for 133,333 shares offered in the IPO. In addition, Varma Mutual Pension Insurance Company has committed to subscribing for a total of a maximum of 381,922 shares offered in the IPO, provided that its ownership in the company does not exceed 4.5 percent of all the company’s shares after the IPO.

[No_Thing]

In the share issue organized in 2019, the company’s valuation was 20,000,000 euros.

Avoimet rahoituskierrokset - Sijoita yrityksiin Invesdorilla

[kettunen]

Here’s a link to previous comments. After the 2019 offering, new companies have been acquired according to strategy.

Listaamattomat yritykset

The original listing plan was for autumn 2021, but things have progressed faster. Shares were registered with Euroclear at the beginning of the year and also split in the spring to a more commercial unit price.

Behind a paywall:

Listautuva Solwers aikoo ostaa kymmeniä konsulttialan yrityksiä: ”Satsaamme...

A couple of quotes:

“We have a proven, successful and, above all, continuous M&A strategy. Every acquisition expands our customer base and opens new channels for selling the services of other companies,” says Sebbas.

Acquired companies are characterized by strong cash flow, long industry experience, and profitability. The target is companies over ten years old that consistently generate a ten percent operating profit.

“Market trends support Solwers’ growth. Our goal is to balance revenue sources so that about half of the revenue comes from public and infrastructure projects, and the rest from other services,” Sebbas outlines. …
“Maintenance debt and stimulus money maintain a steady project pipeline in the infrastructure and public sectors in Finland. The trend is similar in Sweden.”

From the opening news, also:

“When I founded the company with Stefan Nyström in 2017, the intention was to list it on the stock exchange within five years. Listing allows us to grow faster, and this is not an exit event.”

Solwers states its target as an adjusted EBITDA level of at least 12 percent. Operating profit is intended to be kept around 10 percent.
“A consulting company cannot achieve consistent results every year; they vary. Our business model has so many pillars that, on average, the results will be good in the long run.”
…
“We will be a good long-term investment. Our stock is not a quick-profit lottery ticket; rather, our story continues steadily forward,” Sebbas describes.

Disclaimer: I subscribed to the 2019 offering and added more in the late 2020 offering.

[Jesse7]

Is Solwers trying to be more agile than Sitowise by allowing acquired companies to operate more independently, in their previous style? It feels like management would be more difficult, but if things have worked before, why not?

I think this model could work better. From what I’ve observed, the operations of a company sold to Sitowise, so to speak, “suffocated” under the new owner’s name, and the drive was lost. In this model, you represent the old company under the protection of a larger entity, gaining support and benefits while retaining the small company’s identity and agility.

[kettunen]

Exactly, the acquired companies continue to operate under their own name and with their own customer base.

@Jesse7

In my opinion, this model could work better. From what I’ve observed, when a company sold to Sitowise, its operations effectively suffocated under the new owner’s name, and the drive was lost. In this model, you represent the old company under the umbrella of a larger entity, gaining support and benefits while maintaining the small company’s identity and agility.

However, for example, it’s possible to build better overall solutions together for tenders and receive support from another subsidiary. For the parent company, in turn, this creates a stronger overall structure and a more consistent cash flow across different cycles.

@kettunen

“A consulting company cannot achieve steady profits every year; they fluctuate. Our business model has so many pillars that, on average, the long-term results will be good.”

[Opa]

The companies belonging to Solwers - 17 of them - are presented behind the link below

https://solwers.fi/palvelumme/

[konsta]

Solwers sijoituskohteena

[kettunen]

Company presentation on Tuesday, June 8, 2021, 4:00 PM - 5:00 PM

Tapahtumat

[Mato]

The share issue begins on Monday, June 7, at 10 AM. Market value based on subscription price is 63.7 million euros.

Solwersin anti alkaa maanantaina – Merkintähinta 7,50 euroa

[konsta]

In my opinion, it’s a fair valuation, but of course, it again increases pressure for oversubscription. I participated in the 2019 offering, and the value of that stake has increased by 50% at the offering price.

[kettunen]

Yes, of course, one must consider the non-existent trading opportunity for an unlisted company. The capital is practically tied up in the company with no exit opportunity. At that time, in 2019, the pricing was favorable, which is why I got involved myself, after a couple of previous bad Invesdor experiences – or despite them. And in this case, a listing was already foreseeable in the near future. It happened faster than I expected.

Solwers’ business has also advanced significantly. In a couple of years, several acquisitions have been made that have moved the operations forward. Profitability has nevertheless remained good, and steps are being taken according to the strategy.

And the same continues. You can get good companies at a reasonable price from unlisted companies, thereby creating added value for owners.

Solwers promises more news on acquisitions

The strategy of the Solwers network is to grow strongly in Sweden and Finland. Over the past twelve months, it has acquired four companies in the sector.

This week, Solwers announced it had acquired LVI-Insinööritoimisto Meskanen Oy in Oulu. In March, it acquired Inmeco Oy, specializing in project management, from Jyväskylä.

Leif Sebbas states that acquisitions typically use a multiplier of “six times operating profit.”

Kauppalehti analyst Ari Rajala considers the chosen approach justified.

“Traditionally, a multiplier of 3–5 times EBITDA has been used in acquisitions of unlisted SMEs, so this is quite well in line with that.”

Source behind paywall: Piakkoin listautuva Solwers lupaa hurjia: ”Parinkymmenen prosentin vuosikasvu on realismia seuraavat kymmenen vuotta” | Kauppalehti

This is not about seeking some organic 20% growth; the strategy is very clear. There is considerable experience in acquisitions, and integration costs are minimal when the acquired entities continue under their own names and with their own customers. This also reduces the risks of acquisitions.

[kettunen]

Here’s the press release about the start of the offering, so it can be found here too
https://news.cision.com/fi/solwers-oyj/r/solwers-oyj-aloittaa-first-north--listautumisannin--julkistaa-merkintahinnan-ja-julkisee-finanssiva,c3360419

And the marketing brochure

https://solwers.fi/2021/wp-content/uploads/2021/06/Solwers_markkinointiesite.pdf

Quote from the previous message

@kettunen

There is considerable experience in acquisitions and minimal integration costs, as the targets continue under their own names and with their own customers. This also reduces the risks of acquisitions.

[Ham]

In my opinion, this seems like a more traditional engineering and architect-driven consulting firm. At Sitowise, digital services, digital twin development, and strong geospatial expertise are the most interesting areas for me personally. Although geoinformatics has been around for decades, only now are things like affordable computing power and the amount of data collected (even open data) enabling a real boom. The application areas are incredibly broad, and growth could come from surprising directions if the awareness and adoption of these tools can be expanded (mostly a bonus option at the moment).

On the other hand, I wonder if it’s better to own construction companies that operate with stronger operational leverage, for example, at the beginning of a potential cycle in the construction sector or during government infrastructure stimulus. Of course, they have their own risks, and I certainly don’t claim to know the right answer to this.

It’s a bit disappointing that I don’t have time to research this more thoroughly yet. I’ll probably have to pass on the offering for that reason, even though I’m interested in it due to the industry and growth strategy, among other things. I also noted the supervision tasks, which I think are an interesting service in the field!

[pt99659]

Critical text from Karolta:

Solwers ja Bioretec – kun markkina on kypsässä vaiheessa, myös epäkypsässä...

And a surprise hidden on page 78 of Solwers’ prospectus, which many would probably have missed:

“The Company’s Board of Directors decided on May 10, 2021, on a Pre-IPO Offering in which Joensuun Kauppa ja Kone Oy, Erikoissijoitusrahasto Taaleri Mikro Markka (Special Investment Fund Taaleri Micro Market), and Säästöpankki Pienyhtiöt -sijoitusrahasto (Savings Bank Small Companies investment fund) subscribed for Company shares in accordance with their subscription commitments. The subscription price of the Pre-IPO Offering was 10 percent lower than the subscription price of the IPO Offering.”

Quite a brazen favoritism towards anchor investors. No thanks.

[HolmesJ]

Actually, the anchor investors also participate in the IPO, so the total discount is 5%.

[Omavaraisuushaaste]

I’ve now written an analysis of Solwers as well.

Solwers listautumisanti -analyysi - Omavaraisuushaaste

First, I must point out that the favoritism shown to anchor investors was not, in my opinion, particularly concealed. It was explicitly mentioned in Solwers’ IPO press release. In itself, I think it was done much more elegantly than, for example, Toivo Group’s excessive discount for board members last year, and the transparency was, in my opinion, appropriate (I probably wouldn’t have noticed it myself if it had only been on page 78).

Otherwise, the IPO is quite standard and neutral, and we’ve seen an increasing number of these in the Helsinki Stock Exchange, in my opinion. Sitowise listed at a slightly higher price, and its strategy and industry were very similar.

On the other hand, Aallon Group, for example, uses exactly the same strategy—quite successfully so far, because publicly traded companies are invariably valued higher than unlisted companies. As long as acquisitions are made primarily with Solwers shares, shareholder value is practically created automatically.

Organic growth here will likely remain low, but if one is looking for that basic 7% annual return from the stock market, companies like Solwers are a relatively safe bet for a portfolio. In the medium term, with integration being non-existent, the risks in acquisitions are also small, and there will certainly be acquisition targets in line with the 20% strategy. In the longer term, brands and companies will begin to be integrated, etc., but that will certainly not be relevant for a long time.

Consolidation continues in so many sectors that companies like Solwers will probably be seen more and more in the stock market in the future, which is a completely natural development.

This IPO doesn’t cause any shouts of joy, but in my opinion, there’s no overheating in these listing prices yet, as the key figures are still within reasonable limits.

[InefficientMarkets]

Has anyone already found out if these anchor investors who were able to take advantage of the discount have any lock-up period?

[Omavaraisuushaaste]

Everyone else has a 180-day lock-up, except for the cornerstone investors. So they can sell immediately, although the probability of this is quite low, as they are subscribing for more in the basic IPO — without a discount.

[kettunen]

Behind paywall

Kannattaako yrityskauppoja tehtailevan Solwersin antiin osallistua? – Näin...

A few excerpts

However, Solwers is not just a hollow shell within which companies operate completely independently of each other. With new acquisitions, the group’s service portfolio also grows, which subsidiaries seek to leverage by cross-selling their services.
“Previously, subsidiaries only had their own specialized expertise and services to sell, but now they can also sell the services of other group companies. This makes us much more interesting in the eyes of the customer.”

Comment on the Pre-IPO offering. The same price as in the employee offering, but anchor investors also subscribe to a corresponding pot at the IPO price. As previously stated, the total discount is 5%.

In this so-called Pre-IPO offering, all three subscribed to 148,148 company shares at a unit price of only 6.75 euros. The price was the same as in Solwers’ employee offering arranged for its own employees.

By calculating the average of the two offerings at different prices, the subscription price paid by anchor investors is only 7.11 euros per share.

For those considering participating in the public offering, this gives a slightly worrying signal. Why subscribe to a company for 7.50 euros when even professionals were only willing to pay 7.11 euros?

According to CEO Nyström, attracting qualified anchor investors was seen as important at Solwers, and the purpose of the directed offering was to ensure their participation.

One of those who benefited from the discount is businessman Kyösti Kakkonen, who is active in the management of Joensuun Kauppa ja Kone. He also sees nothing out of the ordinary in the procedure.

“Similar directed offerings have been seen in various forms before. The purpose is probably to commit anchor investors more tightly to the company,” Kakkonen states.