F6. Acquisitions and divestments

AP Accounting principles

Acquisition of subsidiaries

Essity applies IFRS 3 Business Combinations for acquisitions. In business combinations, acquired assets and assumed liabilities are identified and classified at fair value on the date of acquisition (also known as purchase price allocation). The purchase price allocation also includes an assessment of whether there are any assets that are intangible in nature, such as trademarks, patents, customer relations or similar assets that were not recognized in the acquired unit. If the cost is higher than the net value of the acquired assets and assumed liabilities, the difference is recognized as goodwill. Any surplus value on property, plant and equipment is depreciated over the estimated useful life of the asset. Goodwill and strong trademarks with indefinite useful lives are not amortized; instead, they are subjected to annual impairment testing. Some trademarks and customer relations are amortized over their estimated useful lives.

If the transferred consideration is contingent on future events, it is measured at fair value and any changes in value are recognized in profit or loss.

Transaction costs in conjunction with acquisitions are not included in cost, but rather expensed directly.

Companies acquired during the period are included in the consolidated financial statements as of the acquisition date. Divested companies are included in the consolidated financial statements until the divestment date.

Non-controlling interests

Acquisitions of non-controlling interests are measured on an acquisition-by-acquisition basis, either as a proportional share of the fair value of identifiable net assets excluding goodwill (partial goodwill) or at fair value, which means that goodwill is also recognized on non-controlling interests (full goodwill).

In step acquisitions in which a controlling influence is achieved, any net assets acquired earlier in the acquired units are remeasured at fair value and the result of the remeasurement is recognized in profit or loss. If the controlling influence is lost upon the divestment of an operation, the result is recognized in profit or loss and the portion of the divested operation that remains in the Group is measured at fair value on the divestment date, with the remeasurement effect recognized in profit or loss.

Acquisitions after controlling influence is achieved are recognized as an equity transaction, meaning a transfer between equity attributable to owners of the Parent and non-controlling interests. The same applies for divestments that take place without the loss of a controlling influence.

Acquisitions in 2018

During the first quarter of 2018, the earlier purchase price allocation from 2017 for BSN medical was confirmed (refer to the table on the next page) in which a final valuation of intangible assets in the form of customer relations, brands, technology and goodwill was carried out. In the first quarter of 2018, BSN medical had an impact of SEK 1,971m on consolidated net sales, SEK 407m on adjusted EBITDA and SEK 344m on adjusted EBITA.

In 2018, Familia, in which Essity has a 50% stake, completed three acquisitions. On February 16, the outstanding 50% of the company Productos Sancela del Peru, with operations in Peru and Bolivia, was acquired. The consideration transferred amounted to SEK 310m. Following the acquisition, Essity consolidated the acquisition of the company as a subsidiary with a minority interest. Prior to the acquisition, the company was consolidated as an associate according to the equity method. Remeasurement was carried out of the previously recognized equity portion at fair value in the amount of SEK 225m and this is recognized as an item affecting comparability in profit or loss. The acquisition did not have any material impact on Essity’s net sales since the acquired company’s operations are based on the onward sale of products from Familia, which prior to the acquisition recognized sales to Peru and Bolivia as external sales. The impact on Essity’s earnings of the acquisition was not material. In February, a building was acquired that was supplemental to the share acquired at the end of 2017 in the company Continental de Negocias S.A, with operations in the Dominican Republic. See Acquisitions in 2017 below for further information. The consideration transferred amounted to SEK 85m. On April 3, the company Industrial Papelera Ecuatoriana S.A (INPAECSA) was acquired with operations in Ecuador. The consideration transferred was SEK 68m. The acquisition did not have any material impact on Essity’s net sales or earnings in 2018.

Acquisitions in 2017

On December 19, 2016, it was announced that an agreement to acquire BSN medical, a leading medical technology company, had been concluded. BSN medical develops, manufactures, markets and sells products within the areas of wound care, compression therapy and orthopedics. The purchase price for the shares amounts to EUR 1,394m, and takeover of net debt to EUR 1,321m. The acquisition is fully debt-funded. The transaction, which was subject to customary regulatory approvals, was closed on April 3, 2017. Goodwill is justified by the synergies that arise as a result of BSN medical’s leading market positions in attractive medical technology product categories, which create a shared future growth platform in combination with Essity’s incontinence business, including the globally leading brand TENA. Furthermore, synergies are generated by being able to utilize a common customer base and sales channels for both businesses, enabling more rapid growth through cross selling. In 2017, restructuring costs amounted to SEK 96m and integration costs to SEK 48m. Costs for the acquisition amounted to SEK 229m, of which SEK 86m was recognized in 2017 and SEK 143m in 2016.

On December 27, Familia acquired the remaining 50% of its joint venture Continental de Negocias S.A in the Dominican Republic. The consideration transferred amounted to SEK 135m. Prior to the acquisition, the acquired company was recognized as an associate according to the equity method. Remeasurement was carried out of the previous equity portion at fair value in the amount of SEK 72m and this is recognized as an item affecting comparability in profit or loss.

Other minor acquisitions amounted to SEK 3m. During the period, liabilities relating to acquisitions in previous years were settled in the amount of SEK 170m, of which SEK 108m related to non-interest-bearing operating liabilities and SEK 62m to a financial debt; the payments mainly concerned two earlier acquisitions in the US within BSN medical.

Effect on sales and earnings in 2017 of acquisitions for the period

Since the date of acquisition, BSN medical has had an impact of SEK 6,301m on consolidated net sales, SEK 1,331m on adjusted EBITDA and SEK 1,150m on adjusted EBITA.

Had the acquisition been consolidated from January 1, 2017, the expected sales would have amounted to SEK 8,363m, adjusted EBITDA to SEK 1,767m and adjusted EBITA to SEK 1,526m. This is based on an annualization of the acquisition’s impact since the acquisition date.

The acquisition of the remaining 50% in Continental de Negocias on 27 December did not have any impact on the Group’s net sales, adjusted EBITDA or EBITA during the period. Had the acquisition been consolidated from January 1, 2017, the estimated sales would have amounted to SEK 123m, adjusted EBITDA to SEK 19m and adjusted EBITA to SEK 19m.

Acquisitions in 2016

On January 21, 2016, Wausau Paper Corp., one of the largest Professional Hygiene companies in the North American market, was acquired. The consideration transferred amounted to USD 513m (SEK 4,401m). Goodwill is motivated by synergies between Essity and Wausau Paper, including the capacity to offer customers a broad portfolio of products. The acquisition is expected to generate annual synergies of approximately USD 40m, with full effect three years after closing. Synergies are expected in sourcing, production, logistics, reduced imports, increased volumes of premium products and reduced sales, general and administration costs.

A minor acquisition of Sensassure in Canada was carried out. The consideration transferred amounted to SEK 45m, of which SEK 17m relates to earn-out payments that were made in 2017 (SEK 7m) and 2018 (SEK 10m).

Effect on sales and earnings in 2016 of acquisitions for the period

Since the acquisition date, the acquisition of Wausau has had an impact of SEK 2,996m on consolidated net sales, of SEK 272m on adjusted operating profit and of SEK 32m on profit for the period, including items affecting comparability, before tax. If the acquisition had been consolidated from January 1, 2016, the expected net sales would have amounted to SEK 3,164m and profit before tax, including items affecting comparability, to SEK 48m.

Acquired operations

The table below shows the fair value of acquired net assets recognized on the acquisition date, recognized goodwill and the effect on the Group’s cash flow statements. All acquisition balance sheets for 2018 have essentially been confirmed and only minor deviations may arise in the first quarter of 2019.

Adjustment of preliminary acquisition balance sheets for 2018

A purchase price allocation is considered preliminary until it is confirmed. A preliminary purchase price allocation is changed as soon as new information regarding assets/liabilities on the acquisition date is obtained, although the acquisition balance sheet must be confirmed not later than one year from the date of the acquisition. The preliminary purchase price allocation for BSN medical from 2017 was confirmed in 2018 following Essity’s conclusion of its valuation of BSN medical’s balance sheet, in connection with which minor adjustments were made primarily to property, plant and equipment, cash and cash equivalents and financial liabilities against goodwill, in accordance with the above specification. In addition to this adjustment, inventory included in the acquisition of Continental de Negocias S.A in Dominican Republic at the end of 2017 was revalued upward by SEK 10m, which reduced preliminarily recognized goodwill by SEK 7m after adjustment of deferred tax liability.

Divestments

No new divestments were carried out during the year. Gain/losses and cash flow relate to earn-out payments for previously divested companies primarily in the US. All capital gains were recognized in items affecting comparability in profit or loss.