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 recognized 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 ownership 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 2021

ABIGO Medical AB

On May 14, Essity acquired the remaining 25% of the shares of ABIGO Medical AB, making the company a wholly owned subsidiary. The purchase consideration paid for the remaining 25% amounted to SEK 228m.

Asaleo Care Ltd

On July 1, Essity acquired the remaining 63.8% of the shares in the hygiene company Asaleo Care. Up until June 30, Essity – with its holding of 36.2% of the shares – has been the largest shareholder of Asaleo Care, which prior to the acquisition was listed on the Australian Securities Exchange. Up until the acquisition of the remaining shares, Asaleo Care was recognized as an associate according to the equity method. Essity has paid AUD 1.40 cash per share, a total of AUD 486m. The consideration entails an implicit value for all shares, including the previous holding, of AUD 760m (approximately SEK 4.9bn) and assumed net debt amounts to approximately AUD 196m. Essity’s previous holding in Asaleo Care of 36.2% has, according to IFRS, been remeasured on July 1, resulting in a positive extraordinary remeasurement effect of AUD 110m (SEK 706m) in the third quarter. The remeasurement effect was calculated on the basis of the cash offer, less the assessed control premium contained therein.

Since the acquisition, Asaleo Care reported net sales amounting to SEK 1,539m, adjusted EBITDA to SEK 316m and adjusted EBITA to SEK 226m. If Asaleo Care had been consolidated as of January 1, 2021, Essity’s net sales would have been positively impacted in the amount of SEK 2,641m, adjusted EBITDA by SEK 516m and adjusted EBITA by SEK 342m after adjustment for recognized external sales in Essity to Asaleo Care, the recognized share in profits from associates in Essity, and excluding items affecting comparability in Asaleo Care during the first half of the year.

Productos Familia S.A.

On August 31, 2021, Essity finalized the acquisition of 45.8% of the shares in the Colombian hygiene company Productos Familia S.A. (“Familia”), which was subject to customary regulatory approvals. Essity now owns 95.8% of Familia. The purchase price amounted to SEK 5,961m on a debt-free basis. Already prior to acquisition of the additional shares, Essity had control of Familia and it was fully consolidated in the Group’s accounts. The transaction with shareholders entailed an increase of SEK 5,961m in Essity’s net debt and the corresponding decrease in Essity’s equity.

Athletic tape brands from Johnson & Johnson Consumer Inc.

On November 1, 2021, Essity announced that it had acquired Johnson & Johnson Consumer Inc.’s professional athletic tape brands Coach, Elastikon and Zonas, which are established premium products in the USA market. Essity is a global market leader in taping and strapping and following the acquisition the company will also become leading among USA sports medicine distributors. The purchase price is not material and is not disclosed.

AquaCast LLC

On December 21, Essity acquired 100% of the shares in AquaCast Liner, a specialist orthopedics company that supplies waterproof cast liners in the USA market. The purchase price is not material and is not disclosed. The net assets included in the acquisition were not material. The company has four employees. Net sales for 2020 and 2021 were not material in relation to those of the Group. A preliminary purchase price allocation indicates goodwill of SEK 53m.

Hydrofera LLC

On December 29, Essity acquired 100% of the shares in the USA-based company Hydrofera, which produces and markets Hydrofera Blue Antibacterial Wound Dressings, an advanced line of wound care products designed to shorten healing times, lower treatment costs, and deliver better patient outcomes. The company has about 90 employees.

In 2020, Hydrofera reported sales of approximately USD 23.5m (SEK 216m) with EBITDA of USD 4.6m (SEK 42m) and EBITA of USD 4.3m (SEK 39m). For the first nine months of 2021, Hydrofera reported net sales of USD 20.7m (SEK 176m) with EBITDA of USD 5.9m (SEK 50m) and EBITA of USD 5.6m (SEK 48m). The preliminary purchase price for Hydrofera amounts to USD 129m.

Transaction costs for the acquisitions amounted to SEK 124m and are recognized in items affecting comparability in profit or loss.

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 was established in the final 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.

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 was established in the final 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 of Group companies and other operations

The following table 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.

Adjustment of preliminary acquisition balance sheets 2021

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 preliminary purchase price allocation must be confirmed not later than one year from the date of the acquisition. The preliminary purchase price allocations for Asaleo, Hydrofera and AquaCast Liner are preliminary and may be changed.

Divestments of Group companies and other operations

Essity has chosen to deconsolidate its 50% shareholding in ProNARO as of January 1, 2021 and instead recognize the company according to the equity method. Essity has previously recognized ProNARO as a joint operation according to the proportional method. The reason for this change is that ProNARO’s operation, the purpose of which is to supply Essity and its partner Sappi with raw materials at a lower cost by pooling timber purchases, has become more independent as the company now also sells timber to external customers. ProNARO’s recognized net sales for 2020 amounted to SEK 435m and EBITA to SEK 0m in Essity’s accounts.

In conjunction with the process concerning the acquisition of the remaining 25% of the shares in ABIGO Medical AB, in July 2021 Essity – in accordance with the terms of the agreement – divested ABIGO Medical’s pharma operations to the company’s founder Jan G. Smith for SEK 32m. In July 2021, Essity received SEK 18m in payment for previously unpaid purchase consideration from the divestment in 2020 of its 49% stake in Sancella Tunisia, and SEK 8m in payment for the receivable on the sales proceeds concerning the divestment of a minor operation in Medical Solutions in Brazil in 2019.

In 2021, accumulated negative translation differences of a total of SEK 60m were recirculated to profit or loss in conjunction with the revaluation of Essity’s previously recognized holding of 36.2% upon acquisition of Asaleo Care and the concluded liquidation of Essity’s hygiene operation in the Philippines.

The capital gain excluding reclassification of realized translation differences for all divestments amounts to SEK 39m in 2021. Including reclassification of realized negative translation differences totaling SEK 60m for liquidated Group companies and the previous holding of 36.2% in the associate Asaleo Care, the net loss amounts to SEK 21m.

In 2020, Essity divested its share of 49% in Sancella Tunisia, a share of its Baby Care operation in Russia, a minor operation included in the Abigo acquisition, and discontinued its previously closed operation in Morocco and India.

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