F6. Acquisitions and divestments of group companies and other operations

AP Accounting principles

Acquisition of Group companies and other operations

Essity applies IFRS 3 Business Combinations for acquisitions. In business combinations, acquired assets and assumed liabilities are identified and measured 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 are not recognized in the acquired unit. If the purchase consideration paid 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. 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.

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 expensed when they occur.

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.

Increases in the stake of Group companies after controlling influence is achieved are recognized as an equity transaction, meaning the difference between the purchase consideration paid and the carrying amount of the non-controlling interests is recognized as an increase or decrease in equity attributable to the Parent company’s shareholders. The same accounting procedure applies for divestments that take place without the loss of a controlling influence.

Acquisitions in 2020

On February 27, 2020, it was announced that an agreement had been signed to acquire 75% of the Swedish medical solutions company ABIGO Medical AB. ABIGO Medical AB develops, manufactures and markets products including the Sorbact^® technology, which is a clinically established innovation for advanced wound care. The purchase price for the shares amounts to SEK 674m, and takeover of net debt to SEK 6m. The transaction, which was subject to the customary regulatory approvals, was finalized on April 30, 2020. The purchase price allocation has been established in the last quarter of 2020. Goodwill is justified since ABIGO Medical AB was already an important partner and supplier to Essity prior to the acquisition, with Essity already using Sorbact^® in its wound care products to prevent and treat infections. The company has about 170 employees and net sales in 2019 amounted to SEK 403m.

Since the acquisition, ABIGO Medical AB’s recognized net sales amounted to SEK 163m, adjusted EBITDA to SEK 6m and adjusted EBITA to SEK –3m.

If the acquisition had been consolidated as of January 1, 2020, the anticipated sales would have amounted to SEK 272m, adjusted EBITDA to SEK 15m and adjusted EBITA to SEK 3m.

On April 1, 2020, Essity acquired 100% of the shares in Novioscan B.V., a Dutch company that develops a wearable ultrasound technology that monitors the bladder and enables continence control. The purchase price for the shares was EUR 4m and the takeover of net debt was EUR 3m. The company has ten employees. Net sales for 2019 and for the last three quarters of 2020 were negligible in relation to those of the Essity Group. The purchase price allocation indicated goodwill of SEK 71m. The purchase price allocation has been established in the last quarter of 2020.

Transaction costs for both acquisitions amounted to SEK 7m and are recognized in items affecting comparability in profit or loss.

Acquisitions in 2019

Other than a minor acquisition of the associate China-Euro Healthcare Management of SEK 3m, no new acquisitions were carried out. Payments pertaining to earlier acquisitions mainly concern the final settlement of SEK 129m after the acquisition price was finalized for the compulsory redemption of shares in Essity Hygiene Products SE in Germany, former PWA, most of which was recognized as a liability in 2013. In addition to this, earn-out payments of SEK 11m were paid in accordance with the conditions of the purchase agreement from the acquisition of Sensassure in Canada in 2016.

Acquisitions in 2018

During the first quarter of 2018, the preliminary purchase price allocation from 2017 was established for BSN medical.

Familia, in which Essity has a 50% stake, completed three acquisitions. On February 16, the outstanding 50% of 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 Group company with non-controlling interest. Prior to the acquisition, the company was consolidated as an associated company according to the equity method. Remeasurement was carried out of the previously recognized equity portion at fair value in the amount of SEK 225m, which 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 Continental de Negocias S.A. with operations in the Dominican Republic. The consideration transferred amounted to SEK 85m. On April 3, Industrial Papelera Ecuatoriana S.A. (INPAECSA) was acquired with operations in Ecuador. The consideration transferred amounted to SEK 68m. The acquisition did not have any material impact on Essity’s net sales or earnings in 2018.

Acquisition of Group companies and other 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.

Divestments of Group companies and other operations

In December 2020, Essity divested its 49% stake in Sancella Tunisia to the other owner Sotupa. Sancella Tunisia offers a range of Essity’s products and brands in Tunisia, Algeria, Morocco, and Libya. Essity will retain a presence on these markets through license and distribution agreements. In 2019, Sancella Tunisia reported net sales of SEK 575m. The divestment gave rise to a capital gain of SEK 46m excluding the reclassification of realized translation differences of SEK –17m.

In December 2020, Essity divested part of its Baby Care operation in Russia, giving rise to a capital gain of SEK 24m excluding the reclassification of realized translation differences of SEK –11m. In addition, a previously shutdown operation in Morocco and India was concluded and a minor operation included in the Abigo acquisition was divested with a capital loss of SEK 5m excluding the reclassification of realized positive translation differences of SEK 33m.

The total capital gain for all divestments amounted to SEK 65m excluding reclassification of realized translation differences. Including the reclassification of realized positive translation differences of SEK 4m for divested and liquidated Group companies, the net gain amounts to SEK 69m.

In 2019, Essity divested its holding in the jointly owned company SCA Yildiz in Turkey and a minor operation in Medical Solutions in Brazil.

No divestments were carried out in 2018. Gain/losses and cash flow relate to earn-out payments for previously divested companies primarily in the US.

All earnings were recognized in items affecting comparability in profit or loss.