In April, we announced a strategic update entailing an increased focus on our long-term Core Investments, a restructuring of Investor Growth Capital, a wind down of Active Portfolio Management, and as a consequence annual cost reductions of SEK 140 m., with full run-rate effect by the end of 2012.
CEO Börje Ekholm comments the sharpening of focus:
“Since our inception in 1916, Investor has been committed to owning and building best-in-class companies. Our focus is on creating industrial value with a long-term holding horizon. We are willing to support tough decisions to maximize long-term value creation, while not forgetting that the long-term consists of numerous short-terms.
As mentioned in our year-end report in January, we began a review of structural options for Investor AB during the fall of 2010. The review had the aim of clarifying our business model, simplifying our structure and reducing costs. During this review, consideration was given to potential structural alternatives, including a possible separation of selected holdings into a new company. This review was conclusive in determining that the continuation of Investor AB as a single entity provides the greatest long-term value to our shareholders, as single entity creates the strongest flexibility to optimize the levels of investment in targeted holdings, to renew Investor AB’s portfolio, and to fund the payment of dividends to our shareholders. Furthermore, a break-up would, in addition to the loss of flexibility, incur significant transaction costs as well as an increase in annual costs, primarily due to the duplication of corporate structures. A distribution of an investment company would also trigger substantial adverse tax consequences for the shareholders under present tax regulation.
Core Investments will consist of our listed investments in which we have significant influence; Atlas Copco, SEB, ABB, AstraZeneca, Ericsson, Electrolux, Husqvarna, Saab, NASDAQ OMX and Swedish Orphan Biovitrum, and our majority-owned subsidiaries Mölnlycke Health Care, Aleris and Grand Hôtel. In these companies, we are an active owner with a long-term holding horizon. Value creation is generated through dividends from listed investments, cash-flow from subsidiaries once debt has been reduced to target levels, and value appreciation. The return requirement is to exceed our cost of capital.
Financial Investments will consist of unlisted partner-owned companies, including 3 Scandinavia, Gambro and Lindorff, Investor Growth Capital and our investments in the EQT funds. We will continue to work with the partner-owned companies in the same way as we work with Core Investments. Over time, they will either be divested or become Core Investments, i.e. listed or subsidiaries. The objective of Financial Investments is to achieve annual returns of 15 percent and generate an attractive cash flow to Investor.
As of July 1, 2011, Investor Growth Capital will become a standalone entity. All investments and proceeds from divestitures until July 1 will be included in the new structure. To facilitate the transition, Investor will contribute SEK 1.5 bn., after which no more capital will be provided. Approximately 50 percent of annual realized proceeds net of operating and transaction costs, will be distributed to Investor, and the remainder will be available for Investor Growth Capital to reinvest. This model allows Investor Growth Capital to grow if it realizes more than 2x cost on investments which are divested. Furthermore, this model defines our maximum capital commitment and will enable future capital distributions from Investor Growth Capital. We focus on China and the U.S. where the track record and return prospects are the strongest. Consequently, Investor Growth Capital will wind down its office in Stockholm. The existing portfolio of European investments will be managed to maximize value. The Asian operations will be focused on investments in China through the Beijing office.
EQT buys, develops and sells companies with an ownership tenure of 3-8 years. This is different from Investor’s main strategy, but has proven to be financially successful for Investor, as we receive a portion of the profit sharing (carry) and surplus management fees. We plan to invest EUR 450 m. in the new EQT VI fund.
Despite the strong performance generated over time by a dedicated team, we will as part of simplifying our structure, close down our in-house trading unit Active Portfolio Management. A large portion of the portfolio has already been wound down. Going forward, we will maintain a limited internal capacity to execute transactions in public securities.
As a result of the changes, Investor reduces annual cost, SEK 620 m. in 2010, by SEK 140 m. with full run-rate effect by the end of 2012. About one-third of remaining costs are attributable to Investor Growth Capital and will, as it becomes a stand-alone entity by July 1, 2011, be excluded from Investor´s operating cost. A restructuring charge totaling SEK 150 m. has been taken during the first quarter 2011.
The steps which we are taking to define more clearly the roles of Core and Financial Investments will improve our business model. However, we will also continue our work to increase transparency and improve our communication in various ways.
We do not believe that the discount is a day-to-day management tool. Over time, we believe that the new structure will reduce the discount as we increase transparency and reduce costs”.
Information updated 2011-05-05 11:31:32