Sweden

Blocket: A Swedish Franchise

by hurricanecapital

Blocket – Some Background

Blocket was founded in 1996 in Fjälkinge, a small Swedish town, by Henrik Nordström. It started out as a small local market place in the region of Skåne (the southernmost region in Sweden), from where it grew and started offering buy and sell ads for the whole country to become what it is today, Sweden’s biggest marketplace for for selling and buying stuff you need or want to get rid off. 

blocket_logo_org_2013

In 2003 Blocket was acquired for 183 MSEK by the Norwegian media company Schibsted. Already back in 2001 Schibsted had been negotiating with the founders to buy Blocket, but decided not to since the asking price of 90 MSEK was deemed to be too high. Instead Schibsted started their own version of Blocket, but it turned out to be a failure. Having had this experience Schibsted kind of adopted the motto “If you can’t beat them, join them.” In hindsight, the initial 90 MSEK looks superb, but at the same time the 183 MSEK still turned out to be a great deal too. Operating profits during 2008 to 2013 totaled approximately SEK 2 billion. 

At the time of the acquisition Blocket had revenues of 34 MSEK and a profit of 13 MSEK. Using these numbers to get some rough measure of the purchase price paid by Schibsted and by assuming a 28% tax rate, no interest-bearing debt and also no excess cash results in a P/E multiple of 14 and EV/EBIT multiple of 10.

eBay also wanted to grab a share of Blocket’s ever growing profits and most certainly came to the same conclusion as Schibsted. Unfortunately, eBay wasn’t able to “join them,” instead they acquired Tradera, a swedish business not really as good as Blocket—at least from looking at the earnings and profitability. 

Let’s have a look at a few more stats provided by Blocket.se.

  • Blocket has 5 million weekly visitors
  • 99 % of the Swedish population knows about Blocket
  • Almost 8 out of 10 Swedes have bought or sold something at Blocket 
  • 6 out of 10 things that individuals advertise on Blocket is sold within a week
  • The total value of all the ads in 2013 was SEK 414 billion. This corresponds to 11% of Sweden’s GDP. 
  • The business concept of Blocket has been exported to more than 40 different countries. 

Blocket vs. Tradera

To get a quick summary of Tradera and its business, let’s turn to Wikipedia: 

Tradera.com is one of the leading online commerce services in Sweden, with over 2,5 million members and about one million listings (2011). Although Tradera welcomes members from all over the world, most are Swedish. Tradera was founded in 1999 but was acquired by eBay Inc. in 2006. Tradera was originally based completely on private auctions but today visitors can purchase both new and second hand items through auctions as well as fixed price listings.

On 24 April 2006, Tradera.com, along with its sister site Traderamotor.com, was acquired by eBay for 365 million SEK (about 50 million US dollars)

The table below summarizes some financial metrics for Tradera and Blocket. From looking at the change in net sales, earnings and profitability we see that Blocket seems to be the more solid business. At least this has was the case during 2011-2013.

At the same time as Tradera posted an accumulated negative EBIT for this three year period, Blocket managed to earn an accumulated EBIT of SEK 1 128 billion. When looking at ROE in the table below, keep in mind that it may not tell the whole truth about the underlying profitability due to the capital structure and inter-company receivables and liabilities. At least this seems to be the case for Blocket. 

BT1

Blocket’s relative share of total net sales for both businesses has been slowly rising during 2011 to 2013, from 80% to 85%. Looking at EBIT, Blocket has posted great earnings at the same time as Tradera has had a hard time avoiding red numbers. 

BT2

The growth in Blocket’s net sales and profit before tax has been pretty consistent during the last ten years (Source: allabolag.se). Net sales for Tradera grew at a high speed between 2004 up until 2010, showing some decline from 2011 to 2013 and profit before tax has not been that impressive. 

BT3

A Profitable Growth Story

The financial statements speak for themselves and reveals a great growing business with high returns on capital. Net sales grew from 409 MSEK in 2008 to 786 MSEK in 2013, a compounded annual growth rate (CAGR) of 14%. Accumulated operating earnings during 2008 to 2013 approximated roughly SEK 2 billion, growing from 239 MSEK to 398 MSEK, a CAGR of 10.7%.

The question then is: How much investments were required to achieve this growth in sales and earnings? The answer: None. Net investments, that is investments in working capital and capital expenditures (both tangibles and intangibles) totaled a positive of 10 MSEK. Sound pretty good right? Earning SEK 2 billion in accumulated EBIT in a period of six years without having to invest anything in the business to make it happen, instead you get an additional 10 MSEK for doing it.  

Without exaggeration, Blocket seems like a pretty decent little business. A fair question to ask then is: What competitive advantages does Blocket enjoy (at least during the last decade)? If someone else had been able to do it, I’m pretty sure they would have liked to take away some of Blocket’s earnings. 

To keep it short, it seems reasonable to assume that Blocket probably enjoy some combination of local economies of scale coupled with habit and switching costs from the network effect. If you are going to sell something you want to go where the buyers are. The same is true the other way around. As buyer you want to go where there’s a lot of sellers. Sellers and buyers seem to like Blocket, and most likely Schibsted love the business. And who would not, one just have to look at free cash flow margin, averaging almost 53% during 2008-2013. 

B1

Free cash flow grew from 191 MSEK in 2008 to 417 MSEK in 2013, a CAGR of 17%. During 2008 to 2013 Blocket’s average operating margin was 55% and profit before tax margin 56% (the corporate income tax rate in Sweden during these years was reduced from 28% to 22%). In the same period the free cash flow margin was about 53%. 

B2

Profitability has been great with pre-tax return on equity (ROE) and pre-tax return on assets (ROA) averaging 166% and 60% respectively.

B3

If one was to account for the inter-company receivables and liabilities and adjusting for excess cash, it most likely would be the case that business doesn’t really require any invested capital (as measured by net fixes assets plus net working capital). But the point is already pretty clear. Blocket during the last decade has turned out to be a pretty good investment for Schibsted.

Schibsted has also used its ownership of Aftonbladet and its large number of unique visitors (number one of all media sites in week 9 according to http://www.kiaindex.se/), and by placing ads on Aftonbladet’s site driving traffic to Blocket. A great advantage when it comes to achieving the scale of Blocket’s network of sellers and buyers, that when achieved is pretty hard to overcome for any competitor.

Blocket has also expanded at the edges of its business, adding Blocket Jobb (in 2011, with the goal of becoming the biggest site for job ads) and Blocket Bostad (in 2014 with the goal of becoming the biggest housing site in Sweden).

Annual reports

All financial statement data taken from Blocket AB’s annual reports (click link to read PDF): 

Sources

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

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Swedish Banking: Industry Map (part 1)

by hurricanecapital

Industry Map

Industry map below based on figure 3 Illustration of banks’ various sources of funding and the risk of contagion effects, see page 83 here. Click on image to increase size.

BS22Structure of the Swedish Banking Industry

“Number of banks

There are four main categories of banks on the Swedish market: Swedish commercial banks, foreign banks, savings banks and co-operative banks. In December 2012, Sweden had a total of 117 banks. The number of commercial banks and foreign bank branches in Sweden has increased from 42 in 2000 to 66 in 2012. The increase is due to the fact that, among other things, more foreign banks have been established in Sweden. In addition, the number of Swedish commercial banks have increased, including new Internet- and telephone banks as well as securities firms and credit market companies that has become banks.

BS19Swedish commercial banks

Swedish commercial banks are divided in three categories. The largest are the four big banks: Swedbank, Handelsbanken, Nordea and SEB. These banks are important players on most segments of the financial market. The second category is savings banks that have been converted into joint stock companies, often with Swedbank as a shareholder. The third category constitutes other Swedish commercial banks with a diverse business focus and ownership structure. Most of the other commercial banks were formed during the mid-1990s and ahead. At first these banks were mainly focused on the retail banking market and distributed their products and services online, but also through e.g. retail stores. In recent years several new banks have a background in securities trading and financing business. The new established banks have in course of time increased the selection of financial products and many of these banks are today regarded as universal banks.

Foreign banks

The first foreign bank was established in 1986, when foreign banks were first allowed to open subsidiaries. During a few years, in connection with the financial crisis in the beginning of the 1990s, the number of foreign banks declined. Foreign banks were permitted to open branches in 1990 and, since then, they have increased. In December 2012, they amounted to 29. Most foreign banks focus on the corporate banking and securities market. The largest foreign bank is Danske Bank which at the same time is the fifth largest bank in Sweden.

Savings banks

There are numerous independent savings banks in Sweden. Generally, they are small and active in regional or local markets. Most savings banks operate in co-operation with Swedbank as regards technical solutions and the provision of a common range of products and services. The number of savings banks has declined due to small savings banks having merged.

Co-operative banks

A co-operative bank is an economic association that has as its purpose to produce bank services for its members. To be able to use the bank services of a co-operative bank the customer must become a member by paying a member share. There are two small co-operative banks in Sweden.” (Source: Banks in Sweden)

The major banking groups
“Swedish banking groups

From the mid-1990s, Sweden’s leading banks have evolved into financial groups with extensive international activities. This development is partly due to areas such as life insurance, fund management and mortgage lending becoming an increasingly important part of the groups’ business activities alongside traditional banking. It has also involved geographical expansion by the groups, especially within the Nordic and Baltic regions.

BS20Nordea is the largest financial company in the Nordic region with around 33,000 employees. The group includes leading banks in Sweden, Finland, Denmark and Norway. Nordea’s lending consists of 75 per cent of lending from countries outside Sweden. The Bank’s Swedish operations include one of the largest finance companies and major players in fund management and mortgage credits. Nordea also owns the credit transfer payment system Plusgirot.

SEB is the name of the financial group formed around Skandinaviska Enskilda Banken. SEB has developed extensive international activities among others in the Baltic region and Germany. In Sweden, SEB has a strong position in fund management and life insurance, as well as in the mortgage and finance company sectors. SEB is also a strong player on the stock market and in currency trading as well as international payments.

Svenska Handelsbanken (SHB) has more than 460 branch offices in Sweden. From the 1990s the bank has also expanded in the Nordic region, both through acquisitions and by opening branch offices. The wholly owned mortgage institution Stadshypotek belongs to the largest players on the Swedish mortgage credit market. Handelsbanken also has extensive operations in the fund management and finance company sectors.

Swedbank has an extensive network of around 320 bank branch offices in Sweden. In addition, Swedbank is in close co-operation with the independent savings banks and partly owned banks among the savings banks movement. Swedbank also has major activities in the Baltic region. The group includes Swedbank Robur, Sweden’s largest fund management company, and Swedbank Hypotek, which is one of the largest mortgage finance institutions.

BS21Other Nordic financial groups

Other Nordic financial groups with a strong position in Sweden are Danske Bank, Länsförsäkringar and Skandia. Danske Bank is Denmark’s largest bank and has banking operations in all the Nordic countries. Danske Bank is, after Nordea, the largest financial group in the Nordic region. Länsförsäkringar consists of 23 regional insurance companies in co-operation, and together they own Länsförsäkringar Bank. Skandia is the market leader in life insurance but also has a strong position in mutual fund investments. SkandiaBanken is owned by the insurance company Skandia.” (Source: Banks in Sweden)

Operations of the Major Banking Groups in Sweden

OMBIS2013(Source: The Swedish Financial Market)

Bank Assets

To get some grasp of how big the different banks are, see image below.

BS5BS6BS14BS15BS16(Source: The Swedish Financial Market)

Geographical breakdown

BS4BS13(Source: The Swedish Financial Market)

Average Deposit and Lending Rates

BS12(Source: The Swedish Financial Market)

Bank Liabilities

BS18BS7BS17(Source: The Swedish Financial Market)

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

Book on historical property prices and other data (Volume II)

by hurricanecapital

New book on historical property prices and other data

(Source: the Swedisk Riksbank)

Boldings below are my own.

R2“Friday 23 April will see the publication of a new book of statistics concerning the emergence of the Swedish monetary and financial systems, Historical Monetary and Financial Statistics for Sweden, Volume II: House Prices, Stock Returns, National Accounts, and the Riksbank Balance Sheet, 1620–2012.
The book is the second in a series of two books on financial history and focuses on property prices, gross domestic product, equity prices, money supply, national debt and the Riksbank’s accounts.

Sweden is a small country, but provides an interesting historical example of an area on the periphery of Europe with statistical data of a high quality. The Riksbank is considered to be the world’s oldest central bank. Presenting its balance sheets and central monetary and financial variables thus offers a unique account of monetary history. Price and macroeconomic stability are constantly recurring issues. What we can learn from history is that the timing of crises and major changes in the economic system tend to be very difficult to predict.

The book also presents property prices going all the way back to the 1870s, which may bring a new perspective to the discussion of whether or not price increases on Swedish property can be interpreted as a housing-price bubble.

[…]

The book, which is published by the Riksbank together with publishers Ekelids Förlag AB, forms part of a more comprehensive project that has previously resulted in a database of historical monetary statistics which can be found on the Riksbank’s website. The first book was published in 2010 and presents data on exchange rates, prices and wages, with some series going all the way back to the 13th century.”

Links

Historical Monetary and Financial Statistics for Sweden: Exchange Rates, Prices, and Wages, 1277-2008 (Volume I)

by hurricanecapital

Historical Monetary and Financial Statistics for Sweden: Exchange Rates, Prices, and Wages, 1277-2008

(Source: the Swedisk Riksbank)

Boldings below are my own.

R1“Swedish monetary and financial history is fascinating yet perplexing. The authors of this book – economic historians from the universities of Göteborg, Lund, and Stockholm, in co-operation with Sveriges Riksbank – present new data concerning the long-term evolution of monetary units, exchange rates, consumer prices and wages in the second millennium. In this period the Swedish monetary system has changed significantly but there are also similarities that span centuries.

In the Middle Ages, different currencies were used in different parts of the country. Later, in the 17th and 18th centuries, five or six domestic currencies – copper, silver, gold and paper monies – were used side by side with floating exchange rates relative to each other. While the use of several currencies was common in the early modern period, the copper standard added to the complexity in Sweden.

Sweden introduced paper notes in 1661 – the first European country to do so – and this was followed by the formation of Sveriges Riksbank, the world’s oldest central bank, in 1668.

The high transaction costs involved in handling copper money contributed to the attraction of paper notes. In the 18th century it was experience of paper note inflation that produced the first clearly formulated quantity theory for fiat money.

The new data on real wages suggest that unskilled labourers were better off in the late Middle Ages than in the mid-19th century. The newly constructed Consumer Price Index shows that the average annual rate of inflation in Sweden 1290–2008 was 2.5 per cent, remarkably close to Sveriges Riksbank’s present two per cent inflation target. Historically, the Swedish currency has been weak compared with the currencies of its main trading partners. Commitments towards a stable currency have been made time and again, but great events, such as wars and deep economic crises, have often, though by no means always, shattered such assurances.”

Links