Volvo Group’s financial position is starting to look more healthy after a few shaky years, and Swedish fund manager Cevian Capital chose its moment to sell its stake in the company with help from Nomura. Edward Russell-Walling reports.

Nomura team

Sometimes the success of a transaction depends not only on agreeing a price but also on finding a practicable way to pay it. The mechanics of payment proved essential in Cevian Capital’s recent sale of its stake in Volvo Group to Geely, the Chinese vehicle maker, at a premium to the market price. Nomura was sole financial adviser to Cevian.

Founded in Stockholm in 2002 by Lars Förberg and Christer Gardell, Cevian describes itself as the largest and most experienced activist fund manager in Europe, with some $16bn of assets under management.

In stark contrast to US-style activism, the firm is a long-term investor, buying shares in underperforming European public companies and typically holding them for five to seven years, preferably with a seat on the board. Targets have included Ericsson, ThyssenKrupp and ABB.

Cevian held its stake in Volvo Group for even longer than usual: a full 11 years. Volvo Car was divested by the ailing group in 1999, bought by Ford, who offloaded it onto Geely in 2010. One of China’s largest car manufacturers, the highly acquisitive Geely now also owns the London Taxi Company. It is the majority shareholder in Lotus and recently bought just under half of Malaysia’s Proton.

Since taking over the Volvo car business, Geely has successfully turned it around, and an initial public offering is said to be possible, if not imminent.

A favourable response

Stockholm-listed Volvo Group has continued to manufacture the brand’s trucks, buses, construction equipment and marine engines, and is Sweden’s largest company by revenues. It too has enjoyed a turnaround since Cevian boarded the share register, and its share price has doubled since 2016 under a new chief executive, helped by a cyclical recovery in sales of construction equipment.

Cevian’s 8.2% stake in Volvo Group (with 15.6% of the voting rights) was the biggest single shareholding, though Swedish asset manager Industrivarden controlled more votes under the two-tier share structure. Given the hefty increase in Volvo’s share price, Cevian clearly decided that its mission was more or less accomplished. So when Geely quietly suggested taking the stake off its hands in late 2017, it got a sympathetic response.

“Geely wasn’t intending to unite the brands, but it wanted to share some of its technology, such as autonomous driving, with the truck business,” says Mikael Dahl, Nomura’s head of Nordic investment banking.

Mr Dahl, who had known Mr Gardell for more than two decades, was then asked if Nomura would act as sole adviser for Cevian in a potential merger and acquisition (M&A) transaction. “Our objective was to seek a strategic buyer for Cevian’s entire stake in Volvo,” says Mark Milano, at the time a Nomura executive director in industrials M&A and now head of diversified industrials. “Given Geely’s degree of interest, it was possible that others might also be interested. We set out to solicit full value for Cevian’s stake and create an element of competition.”

The team held discussions with various likely parties, concentrating on Asian strategic buyers. Financial buyers were not included, not least because they would expect a discount and a path to control. “Only trade buyers could achieve the value expectations,” says Mr Milano. Mr Dahl adds: “Financial sponsors wouldn’t buy only 16% of a public company, unless there was a clear path to strategic control, which we couldn’t deliver.”

Chinese obstacles

Dialogue with Geely continued in parallel with these discussions, particularly around the likely structure of any transaction. “We needed to find a structure that would cater to Cevian’s requirement for simultaneous signing and completion,” says Mr Milano.

As a China-based company, Geely would need official approval for the deal, and any delays in getting it rubber-stamped could make life awkward for the vendor. China has used numerous measures recently to clamp down on the flood of outbound M&A deals.

The Chinese authorities have been discouraging foreign investment in ‘softer’ foreign assets such as property and hotels, cinemas and football clubs, and large acquisitions outside the buyer’s main line of business. Any Geely/Volvo deal was unlikely to fall foul of those restrictions. As a ‘sensitive’ transaction worth more than $300m, however, it would still require National Development and Reform Commission approval, even if the deal was done via an offshore subsidiary.

“Cevian didn’t want to be exposed to a delay that could last up to six months,” says Mr Dahl. Enter Nomura’s equity solutions team. “We work on client problem solutions,” says Giles Gleave, Nomura’s London-based head of Europe, Middle East and Africa equity solutions. “We help clients build stakes in listed companies, finance them, work through regulatory issues, hedge them and sell them.”

Much of the equity solutions team’s work is for undisclosed investors. In 2017, for example, it acted as the sole derivative counterparty in the leveraged acquisition of a 2% stake in Standard Chartered, valued at about £400m ($555.7m). That same year Nomura was joint arranger of a €321m margin loan on an underlying Greek security to a central and eastern European corporate.

With sister teams in Japan, Hong Kong and the US, Nomura is “very strong” at cross-border dialogue in and out of Asia, according to Mr Gleave.

Over the odds

In order to secure the deal, Geely stepped up the price it was prepared to pay, above that prevailing in the market. “From an M&A perspective, being able to get a premium for a non-controlling stake in a listed company was quite an achievement,” says Mr Milano.

But how to pay for it, ensuring that Cevian could announce a deal to the market without waiting for regulatory approval? One possibility would have been payment via a margin loan secured on the shares themselves. “That would still have required Geely to put forward a substantial equity cheque on day one, for which it would need money offshore or approval to get it offshore,” says Mr Dahl.

Instead, Nomura came up with a solution that eliminated Chinese regulatory risk for Cevian and ensured transaction certainty. It now brought in a syndicate partner, in the shape of Barclays. Nomura and Barclays agreed to acquire Cevian’s Volvo stake and committed, via a contingent forward sale agreement, to sell the shares to Geely once the necessary approvals were forthcoming.

“That gave Geely the certainty that the price was locked in, while giving it time to go to the regulator and get approval,” says Mr Gleave. “It also gave Cevian simultaneous signing and closing. That was important. Because it had a seat on the Volvo board, it would have been embarrassing to announce a deal and then not get approval.”

The beauty of Nomura’s solution, Mr Gleave adds, was that the transaction required no cash on day one. “Geely couldn’t reach out to their banks because this was a sensitive transaction,” he says. “Now it has plenty of time to line up funds to refinance, allowing it flexibility. It’s an elegant bridge.”

The deal was announced in the final few days of December 2017. Given that Volvo is a national treasure in Sweden, it received widespread local attention. “In my 34 years in investment banking I have never seen such media coverage in Sweden,” says Mr Dahl.

As of mid-February, regulatory approval is still pending, and Nomura and Barclays remain two of Volvo’s three largest shareholders. While the premium paid by Geely remains undisclosed, the A and B shares that changed hands had a market value of €2.7bn, making this the largest ever public exit by an activist investor.

There is one other noteworthy aspect of the transaction which gives Mr Dahl particular satisfaction. “There was not one single leak in the market right up to the announcement of the deal on December 27,” he says. 

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