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Sweden's Seriously Sharp Investor


A large video display hangs from the ceiling of the cafeteria in the Stockholm headquarters of Com Hem, Sweden's No. 1 cable company. While employees lunch, they monitor the performance of a call center in the northern part of the country. On Apr. 15, the center had a bad day, with only 23% of calls answered within its two-minute goal. The problem? Com Hem's 1.4 million subscribers all received their latest bills at the same time, a mistake CFO Bernt Andersson vowed to try not to repeat.

Com Hem (that's Swedish for "come home") is the property of one of the most successful private equity firms in Europe, Stockholm-based EQT Partners. EQT bought Com Hem for $300 million in 2003 from TeliaSonera (TLSNF), the telecom company. At the time it seemed like a high price for a money-losing cable operator, but Gunnar Asp, an industry veteran brought in first as a bid adviser then chief executive, saw unrealized potential. Asp, 50, is investing heavily in telephony, broadband, and digital television services. He also hired Annika Soderberg, an energetic veteran of the Internet and brewery industries, to juice up marketing, which Asp says "didn't exist" under Telia. Notwithstanding the recent billing snafu, the strategy is working so far. Com Hem has surged from a $14 million operating loss two years ago to a $30 million profit in 2004 on sales of $222 million, up 21.5% from 2003. EQT now estimates that if sold, the company might fetch more than 10 times its predicted 2005 operating cash flow of $100 million, or roughly $1.3 billion. Chief Financial Officer Andersson says his only problem right now is that he has too much cash.

Com Hem is one of about 40 companies, worth a combined $17 billion, acquired by EQT in the last nine years. EQT was set up in 1994 by Managing Partner Conni Jonsson, with backing from Investor, the holding company of Sweden's Wallenberg industrial family, which controls or owns large stakes in such blue chips as Ericsson, ABB, Electrolux, and Scania. EQT benefits from the Wallenbergs' cachet and draws on their vast network for managers and advice. Jonsson was executive vice-president at Investor before starting EQT.

LONG VIEW "MORE FUN"

Unlike its parent, EQT goes after mostly medium-size companies, many of them, like Com Hem, neglected units of big corporations. Beyond Sweden, EQT has made investments in Finland, Denmark, and, of late, Germany. Jonsson says managing companies away from all the requirements of exchange listings has huge advantages. Private equity firms can take a longer view. They don't have to worry about reporting quarterly or spend time on bureaucratic filings. "We can lose money for five years, if that is the plan," he says. "We have more fun."

Jonsson and his 14 partners are activist investors. Each partner takes one or more board seats at EQT's companies and shares power with the CEO and the chairman. At Com Hem, the EQT representative is Investor alumnus Thomas von Koch, 39, who has worked closely with Asp from the beginning and doesn't hesitate to speak up if he sees a problem. It is better, says von Koch, for them "to get knives in the stomach, not in the back."

EQT considers management the easiest part of a company to change, and Jonsson doesn't hesitate to do so. He has replaced four chairmen in the last year. That tough approach seems to work. EQT's target for returns is above 20% per year, but Jonsson says it is doing much better -- with a weighted average return upon selling of 103% to date. The score on recent exits has been lower. Last fall the firm raised its largest fund so far, the $3.25 billion EQT IV. EQT's list of investors includes some big European big-money players, including Swedish and Danish pension funds, the General Motors pension fund, and German insurer Allianz (AZ). Microsoft Corp. (MSFT) founder William H. Gates III is also an investor.

EQT is the most successful recent venture of Investor, which lost big-time pouring money into tech startups in the late 1990s. Investor controls the private equity outfit's management, but EQT's professional staff of 50 or so receives 75% of the firm's profits. EQT says its fee structure is typical of the industry, where 1% to 2% in management charges plus 20% of any gains are fairly standard. Claes Dahlback, who came up with the idea for EQT while serving as Investor's CEO, remains the buyout firm's chairman.

When screening potential investments, EQT first looks closely at the competitive landscape around a takeover target. There is no point, says Jonsson, sinking money into perennially unprofitable and overcompetitive industries such as airlines or forestry. As a rule, EQT wants a global or northern Europe market leader, because companies that aren't at or near the top of their sector don't make money. Unlike some private equity firms, EQT doesn't want laggards. A good company can usually be made better, Jonsson says, "but a bad company is often worse than it looks."

BIGGER GAME

EQT managers are required to take a personal stake in their companies. Asp, for instance, has poured about $700,000 of his own money into Com Hem, according to company documents. Indeed, Com Hem management owns 6% to 7% of the company. EQT likes to use the cash its companies generate to improve their competitive position. In the case of Dometic, a maker of refrigerators and air conditioning systems for recreational vehicles that EQT bought from Electrolux in 2001, the new management tacked on a boating division to spur growth. It then sold Dometic in April to another private equity firm for around $1.3 billion, for a 28.5% annualized return.

Not bad, but Jonsson is now hunting bigger game. In April EQT launched its biggest gambit so far -- a $3.8 billion bid with Goldman Sachs Capital Partners (GS) for ISS, a publicly traded Danish cleaning firm. Jonsson says he likes ISS's leading position in cleaning and other industrial services. But the proposed deal has been controversial with investors in ISS bonds, whose value fell because of the new capital structure.

Debt is hardly a problem at Com Hem, given its cash flow. And Chief Operating Officer Soderberg is winning new customers with cable, TV, and phone packages that cost about $70 a month and give away basic phone service. Com Hem has signed up about 6,000 new phone customers in the 20 weeks since the launch of the offer, mostly from its top rival, TeliaSonera. Company officials think that migration will snowball. "It is cheaper [for TeliaSonera] to lose market share than to cut prices," says Rikard Rosenbacke, telecom analyst at Alfred Berg, the Stockholm brokerage that ran the auction in which EQT bought Com Hem.

Com Hem is rapidly paying down debt but still has a cash pile of about $70 million. EQT partner von Koch says that with banks eager to lend, that gives the company $400 million or so to spend on buying cable rivals. No wonder EQT is not rushing to sell. "We've done a lot, but there is a lot more to do," Asp says. Unless, of course, someone comes along with an offer EQT can't refuse.

By Stanley Reed, with Ariane Sains, in Stockholm


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