By: Patricia Koza

May 16, 2005, The Daily Deal

In the spring of 1991, Agnar Østhus, a sales executive in a Norwegian poultry company, decided to strike out on his own. He bought a family farm outside of Soknedal, a town of 1,700 about 270 miles northeast of Oslo, and started raising chickens for sale to Norwegian supermarket chains.

He and his wife soon bought out his main competitor in the region and from there, Norsk Kylling AS (Norwegian Chicken) developed swiftly. Within a decade it had become Norway's second-largest producer of poultry products.

But Østhus saw the business needed to expand beyond Norwegian borders. The solution? He ended up talking to Finnish private equity firm CapMan Capital Management Oy, which engineered a merger of Norsk Kylling with family-owned Arne Magnussen AS, Norway's second-largest egg distributor. What emerged when the deal closed April 22 was Cardinal Foods AS, two-thirds owned by CapMan, with estimated 2005 sales of 500 million Norwegian kroner ($79 million).

Fanned by thriving Nordic economies as well as demographic pressures, owners of family businesses are looking at expansion opportunities as never before. And often they are turning to buyout shops to avoid having to sell the businesses they have nurtured to an industrial giant.

While owners typically sell a controlling stake, as Østhus did, they can retain a share of the company and often continue to manage it. And it allows them a staged exit.

"We felt we had come to a crossroads," says Østhus, who stayed on as director of business development at Cardinal Foods. "All the money in our personal accounts was being used to grow. We felt we should empty the backpack of some weight and start with a lighter pack."

Østhus hired Oslo-based investment bank First Securities ASA to explore his options, which put him in touch with CapMan.

"We started the process with the poultry company, but we introduced the idea of building a larger company of both poultry and eggs," says Kai Jordahl, senior partner at CapMan. "So we contacted Magnussen and went through more or less the same process with them."

CapMan holds two-thirds of shares in the new Cardinal holding company, which owns 100% of the chicken and egg companies and is valued at about €40 million ($51 million). The Østhus family holds 21%, and three members of the Arne Magnussen family hold 12%.

For the new investors, the hope is that the companies can be put on a better footing to become major businesses.

"Most of these companies are very informal," Jordahl says. "There's very little documentation; agreements are handshake-based. We've been through a process where we've firmed up the companies."

While some deals are driven by the need for capital, simple demographics are also producing dealflow. In Finland, family-owned businesses, or FOBs, account for 80% of all Finnish companies. Owners of an estimated 90,000 businesses are entering retirement age in the next five years, and perhaps one-third of them will not find a relative to take over.

Take Finnish ski clothes and camping equipment maker Halti Oy. Founded in 1976 by Juhani Hyökyvaara, a former sporting goods sales executive, Halti now enjoys a 25% market share in Finland for most of its product groups, having strengthened its brand by sponsoring the Finnish Alpine ski team. It was getting ready to go international.

"I started thinking two or three years ago about who will continue the company," Hyökyvaara says. "This was a little too much for one person."

Through niche investment bank Broadius Partners Oy, he was put into contact with London-based buyout firm 3i Group plc, which has an active Scandinavian operation. After five months of talks, agreement was reached in July 2004 under which the owner retired and 3i acquired 49% of Espoo, Finland-based Halti. The rest is held by the three top managers that had been with the company for years.

"I'm really happy because I have great trust in the management and new owners, and the company has the same staff and continues as before," Hyökyvaara says. "Also in my personal life, I'm in good shape. I have more time to myself."

Berndt Schalin, investment director in Helsinki, Finland, for 3i, adds: "Typically for this situation, there was a fairly sensitive discussion with the owner. Building confidence in the process was very important."

This year, Halti projects earnings to rise 25% over 2004 on revenue of about €24 million. The company expects 19% of sales to come from outside Finland, rising to 23% next year and 28% in 2007, when Halti will host the World Alpine Skiing Championships in Åre, Sweden.

"We found in 3i a very good partner to support our goal to get really international in our business," says chief executive Risto Salo, who holds a 33% stake.

In Sweden, the largest and most developed private equity market in the region, the abolition on Jan. 1 of the inheritance tax, which ranged up to 30%, is expected to encourage even more owners to sell out, take in outside investors or go public.

"Succession is no longer a problem in Sweden," says Claes Dinkelspiel, chairman of E. Öhman J:or Fondkommission AB, a Swedish investment bank. "It's going to change things dramatically."

There are about 140,000 to 180,000 small Swedish companies with elderly owners that must make a shift in ownership in the next decade, according to Gunilla Nysstrom, an economist following the private sector at Skandinaviska Enskilda Banken AB.

"It's too early to see what has come out of it, but just the removal of the tax has started the disposal process for many small corporates," she says.

Both banks and buyout shops say these clients require special handling.

"It's completely different than when you have a public company as a client," says one Nordic banker who asked for anonymity. "They aren't used to advisers. Sometimes they don't know what we do. And you have to really listen to them. If, for example, they are thinking of an exit, price is not always the most important consideration. It may be the characteristics of the buyer that concern them."

Family-owned businesses remain a dominant force in the Nordic region, and their entrepreneurs are a unique breed.

"They are much more open and trusting­ it's part of the regional culture­ and because of that they behave differently," says John Ward, who teaches family-business management on both sides of the Atlantic­ at Northwestern University's Kellogg School of Management in Evanston, Ill., and the IMD international business school in Lausanne, Switzerland. "They are much more likely to have outside directors, to be publicly listed, to have non-family members in senior management and to have smaller numbers of families working in the business."

Because of those traits, Scandinavians tend to be more active in the M&A world than entrepreneurs elsewhere in Europe. The succession issue has served to focus the attention of the region's banks on family-owned businesses as they recognize the possibilities not only to advise on M&A issues but to manage the owners' personal fortunes later.

"We have already seen this [dropping the inheritance tax] is opening up a lot of activity," says Johan Unger, managing director of corporate finance at Hagströmer & Qviberg AB, a regional investment bank that caters to them. "There is a good and healthy climate right now for these types of transactions. Companies with strong balance sheets are ready and able to make acquisitions."

But these businesses aren't as likely to buy arguments about the need to go public.

"It's a big difference in the sense that corporate governance is different," Dinkelspiel says. "In a public company, you have to have a consensus, whereas in a private company, the entrepreneur is not necessarily looking for consensus. He has a vision and [is] looking to achieve his vision."

For Terje Høili, who started his business in 1977 selling toothbrushes out of a suitcase, expertise was an important factor in his search for an investor. He closed a transaction last October with London-based but Nordic-focused Industri Kapital in which IK took an 80% stake in the assets of his wholesale business, Terje Høili AS, and the franchise rights to the discount retail chains Europris and Max 20.

Høili, a former soccer player in Norway's premier division, quickly expanded his wholesale business from toothbrushes to a wide variety of consumer goods by landing several large accounts, including Europris and Max 20, which combine franchises and wholly owned stores. In 2000, he bought 50% of Europris from its other three owners, eventually supplying about two-thirds of its inventory.

His children are not interested in the business so, when he reached 60 last year, he began looking for alternatives. "There were a few parties, but at the end of the day it was the chemistry that was the important thing," he says. "And IK's experience in the retail sector."

IK was actually buying four businesses: the wholesale operation, the franchises and some of the wholly owned stores. The new company, Ekstrem Lavpris AS, will have annual sales of €175 million, with IK holding 80% and Høili and other previous owners about 20%. A new CEO and CFO recruited by IK were due to join the company in May.

"There were a lot of hurdles we had to get over in terms of the structure of the setup," IK partner Trygve Grindheim says. "It was not a traditional process, but again that's also the way to create value."

Grindheim says IK continues to look for similar opportunities. "We have been in contact with several families about helping to move [their] companies forward," he says. "Sometimes it works, and sometimes it doesn't. And sometimes it takes time."

"It's a much longer-term relationship," agrees Nils Erling Ødegaard, managing director of Fondsfinans ASA, an independent, family-owned Norwegian investment bank that has also reported a pickup in business. "It may be that it takes discussions with a company for five, six or seven years before they go public. We typically come in at an early stage. You have to be there when the time is ripe."

Regional banks, not surprisingly, have the inside track on such middle-market deals.

"I think the Nordic market is a bit too small for the big houses," says Mats Bremberg, Nordic head of investment banking at Carnegie Investment Bank AB, which advised more M&A Nordic clients than any other bank last year. "Clients see we have nowhere else to go. We can't say this is a bad year for Nordic, so we'll go to Germany. We have to be long term."

For entrepreneurs such as Østhus, letting go of a company is bittersweet, of course.

"It's a bit special," he says. "It's a baby. But we had to be realistic. To keep this firm going at the same speed we started it, we had to put these feelings away."