manager-magazin.de, 24 November 2021, “Ottobock - on crutches to the stock exchange”, By Dietmar Palan and Thomas Werres
Link to the original article in German
For the IPO, Hans Georg Näder presents the Prosthesis manufacturer as a tech high-flyer. The majority shareholder and the financial investor EQT strive for a spectacular rating. But the substance is mediocre. And there is one personnel risk.
For a long time, the two men knew each other almost exclusively by hearsay, even though their passion for sailing links them. Hans Georg Näder (60), the owner of the Ottobock group of companies, is the proud owner of the largest single-mast carbon yacht in the world, the “Pink Gin VI”, designed and built at the Finnish shipyard Baltic Yachts, also in his possession. Marcus Brennecke (also 60), is a partner of the German arm of the Swedish financial investor EQT and one of the wealthiest private equity managers in Germany, won last year’s Sailing world championship with his boat “Hatari” in the so-called ClubSwan-50-class.
This was the closest the two men ever came to meet. Too different are their characters. Most of the time, wearing a long silk scarf, Näder is eccentric and not at all afraid to openly display his wealth. Brennecke, on the other hand, is a keen company optimizer; he prefers to stay below the radar of the general public.
The two were brought together by a mutual acquaintance, Peter Harf (75), primarily known as the corporate architect of the Reimann clan. Then, in the fall of 2016, finally, an opportunity emerged where the business and personal interests of Brennecke and Näder met. Näder needed liquidity replenishment for his numerous extravagant and expensive hobbies and activities. Brennecke, as always, was looking for the next investment. And of all things with Näder’s company Ottobock the prospects seemed promising.
The private equity man is particularly keen on companies which - following the zeitgeist - serve a good cause. Hardly any other goal could be more suitable than a Medical technology company and prosthesis specialist whose “Purpose” has always been about getting the disabled back on their feet. During a trip on one of the Näders yachts in waters off the coast of Sardinia, the bon vivant and the financiers finally agreed with a handshake that EQT would buy in Näder’s company.
A good five years later, the duo is planning to split up. Not as War of the Roses, rather than a capital market firework. Probably in spring, both want to cash out by having Otto Bock shares sail onto the Frankfurt Stock Exchange at a high price. It’s supposed to be a spectacle with an international reception. Ottobock is to be presented as a European Hidden Champion, a company that releases wheelchair users from their handicap with the help of artificial intelligence - experts speak of Bionic prostheses. And in the case of athletes at the Paralympics lets them reach peak performances.
Pitch with the Deutsche Bank Boss
Big international banks fought in advance for the chance to lead Ottobock to the IPO. Deutsche Bank, which was awarded the contract alongside Goldman Sachs and BNP Paribas, even sent its CEO Christian Sewing (51) to the Beauty Contest. In the meantime, the professional promoters are running hot: “This is such a great thing for Germany. If that works, then the world will say again: My God, this is the German middle class! Unbelievable, what they can do.”, says one of the promoters.
In fact, there is also plenty of glitz in the game. Behind the marketing noise is an often loss-making company with moderate substance and weak organic growth. The biggest risk for investors is the headstrong entrepreneur Näder, who continues to be the majority shareholder which gives him final say. The capital market expects a dynamic management that acts independently, providing shareholders with the same level of transparency as well as the right to have a say in running the company.
But it will be difficult for Näder to take on this new role. Already during the sales talks with EQT, he had made unmistakably clear who he sees as the pilot (himself) and whom as co-pilots (Brennecke and Co.). The ambitious CEO Philipp Schulte-Noelle (45), son of Allianz veteran Henning Schulte-Noelle (79), who would like to crown his young and steep career with the IPO, could remain in the role of a mere executor.
Worst case scenario, the Ottobock IPO could to become a lesson in how an exuberant patriarch with an urge for validity and cash requirements taps the capital market and investors to fix a desperate situation that he himself contributed to. Quite a number of managers have already tried to tame Näder. Most of them gave up after a while. For Example, Oliver Scheel (53), who succeeded Näder in early 2018 to lead Ottobock, stayed for just ten months. Since 2016, five men and one woman had the role of CFO. Näder does not lead, he rules. He likes to make decisions based on his gut feeling. During the Football World Cup 2014 in Brazil, the hotel where he stayed impressed him so much that he bought it right away. Then he wanted to tear down the “Maria Santa Teresa Guest House” and replace it with a new building. He did change his mind though and now uses it as a private guest house.
Sometimes the entrepreneur is even right, pushing for groundbreaking orthopaedic innovations. For that, he likes to be celebrated extensively. Privately, he parties at the Hotel “Damouchari”, located on the Greek peninsula Pelion. The same hotel hat once served as the backdrop for the film version of the Abba musical “Mama Mia”. Publicly, his 60th birthday is worth a 48-page insert at the “Göttinger Tageblatt” devoted to him.
However, his downsides are never far either. “Näder is very baroque, not easy to deal with and particularly resistant to advise,” says a consultant who worked closely with him. “You can’t manage someone like him”.
Even the die-hard minority shareholder EQT (20 percent) had that experience. Regularly the private equity folks got together with Näder at the “Kitchen table” to resolve their disagreements about the state and future of the company. Brennecke and EQT representative on the Ottobock Board of Directors, Johannes Reichel (40) would have gladly remodelled the company apparently more radically, for example, detaching the often not-profitable wheelchair business from the main corporation. But Näder blocked it.
Restrained Investor
On other adventures, however, Näder simply did not allow himself to be stopped. The purchase of the US company Freedom Innovations, for which he spent almost USD 72 million in September 2017, turned into an absolute fiasco, wasting millions of dollars. The acquisition was so poorly prepared that the Federal Trade Commission (FTC) in Washington forced Ottobock to sell the company without setting a minimum price limit.
The cut wasn’t made until mid-December last year. The proceeds for the remains of the split-up company were negligibly low. In the meantime, Näder had annual losses and litigation costs in double digits millions. The original purchase price is now fully written off. Reichel and Schulte-Noelle were forced to watch. Even bigger projects like the acquisition of the US company Hanger, of approximately the same size and specialized in the sale and fitting of prostheses, Näder and the EQT people didn’t even approach afterwards. Antitrust laws are being mentioned as reasoning. Thus, the Hanger acquisition was an integral part of the calculation used by the private equity firms Carlyle and CVC, who tried to join Ottobock in 2016 alongside EQT.
Within four years, Brennecke and Reichel succeeded essentially only in modernizing purchasing and IT departments at Ottobock. In the case of smaller acquisitions, they were allowed to assist with their expertise. The comparatively high-cost base was hardly touched. More was not possible. “We are still at the beginning of the efficiency improvement,” says one manager. Today, on a range from one (bad) to ten (excellent), the company would only receive a grade between three and four. Reichel, who succeeded Brennecke this year in Ottobock’s supervisory board, occasionally was treated by Näder like a younger sibling who needed a few more lessons in visionary business administration before he could walk by himself.
This apparently also applies to Schulte-Noelle, but to a lesser extent. He and Näder come together for a Jour fixe once a month. In the eyes of Näder, the man is probably only there to organize the ongoing operation and keep the hardships of everyday life at bay. For the big things, Näder seems to consider himself best qualified. Though, he has a tendency for absurd ideas. Years ago, he integrated his shipyard Baltic Yachts, which specializes in high-performance sailing yachts into the holding company and praised their experience in processing carbon materials as an innovation engine for the prosthesis manufacturer.
When he was still involved in the operational command post, he regularly dismissed the decisions of his managers. After long periods of illness or extended sailing trips, the order was usually: “Lets Start Over”. After Näder retreated to the top of the board of directors, it does not seem that much has changed. Repeatedly he interfered with his CEO. Once, the patron tried to reanimate research and development projects which the top management had already dropped. Another time, it was about locations that had long been decided to close. At the end of last year, he reinstated the CIO, who had just been let go by the CFO at the time. Only with the IPO in sight, Näder agreed to Schulte-Noelle’s proposal to relocate parts of the production line to cheaper Bulgaria.
Näder even shamelessly duped CEO Schulte-Noelle in terms of corporate reporting. For example, shortly after the close of 2018 the balance sheet cheered about an Ebitda record value of EUR174 million for the twelve months that had just passed. When the annual report from Näders group holding was published one and a half years later in the “Bundesanzeiger” (Federal Gazette), it was revealed that the holding company, whose profit and loss account is dominated by the “Ottobock division”, suffered an after-tax loss of EUR 107 million. Nevertheless, Näder received a dividend of EUR 41 million. The balance sheet presentation was not spared from the ingenuity of the patriarch. Published was so far only what fits the narrative. Income and profit figures have to be searched for - from the group balance sheet of the family holding company and the individual financial statements of the operational Ottobock SE & Co. KG. A considerable part of the revenue from medical technology sales of the Ottobock Group is accounted for by subsidiaries that have no disclosure requirements and therefore don’t even publish any numbers.
Auditor for Over Two Decades
Large amounts of R&D spending were opportunely booked under fixed assets instead of the profit and loss account. This completely legal but a very aggressive strategy leads to a disproportionate increase of profits in the balance sheet during the year of publication. The result is regular depreciation in the following years, with the actual financial position will shrinking noticeably.
That’s why in his press releases, Näder summarizes the business development predominantly in Ebitda figures where the depreciation expressly is taken out (as well as taxes and interest payments). Which, in the end, is also the explanation for that gap between the rosy profit announcements and balance sheets being in the red.
As far as the examination of his books is concerned, Näder was for a long time able to rely on the services of Andreas Spielmann. The longtime Head of the Dortmund branch of the auditing and consulting company EY certified the according to the regulations of the German Commercial Code prepared balance sheets of Ottobock Holding and Ottobock Healthcare for a good two decades. EY defends its long-term mandate by stating that the Ottobock Group is neither publicly-listed nor is considered a company of public interest.
During this time, Spielmann was a welcomed guest on Näders festivities. The published Annual Reports in the “Bundesanzeiger” and the numbers between appendix and balance sheet didn’t add up, but no one seems to have cared. It wasn’t until 2021 that Spielmann gave up his mandate when he left EY due to retirement. Instead, Näder hired him on 1 November as managing director of Näder Holding.
The financial jolts of the past four years were not good for the company. The numbers of the last four years show a fairly bleak picture. Instead of a growth company, it presents itself as a rather stagnant business.
The medical technology company increased its volume mainly through smaller acquisitions, among others, medical supply stores. Revenue fluctuated around the EUR 1 billion mark. In the after-tax profit category of the holding company’s last two published reports, one can find losses in the two and three-digit millions.
The equity ratio has been melting away for years, especially because the debt in the SE rose dramatically. Between 2016 and 2019, the most recently published annual financial statements of Ottobock Healthcare show it had nearly tripled to around one billion euros. The company borrowed 661 million euros from Banks alone. EQT provided 23 million euros as bridge financing which likely will be due at the beginning of next year.
Only a small part of the rise in debt is explained by investments in the company’s future. Much of the burden comes from regular high distributions to the principal shareholders. In 2017, the largest chunk of around EUR 225 million was for Näder for himself, the year of the EQT entry. The hole in the balance sheet he later filled in with borrowed capital. Even during the Corona year the company paid a total of EUR15 million to the Näder family and EQT.
A Big Bag of Tricks
The pandemic hit Ottobock with a revenue decline in the double-digits. The support teams in the field and in the treatment centers are usually very close with patients helping them adjust the prosthesis and get used to them could only work within certain limits due to contact restrictions.
Even for the premium models with equipped chips and microprocessors that are individually tailored to the customer, Ottobock had to offer discounts during the lockdown months.
The annual status report of the EQT VII Fund, which holds a 20 percent stake in Ottobock, indicates for the year 2020 in the Ebitda and Net Debt section that they are “below planned”. In the “Update for the first quarter of 2021”, the Sales category is also “below plan”. Both “strictly confidential” reports were made available to Manager magazine. EQT insists that the deviation from the plan relates to the 2017 acquisition date.
According to the Status reports, Brennecke and Reichelt set the value of their package at EUR 670 million. With total investments of 437 million, that means an increase in value of precisely 233 million or just under 55 percent within five years.
The EQT figures result in a company valuation of about EUR 3.4 billion. However, before entering the stock exchange floor, Näder and EQT are still expecting exchange completely different orders of magnitude. They want the company’s valuation to be at least an ambitious six billion Euro by the day of the IPO.
Part of the valuation gap is expected to be closed due to Ottobock’s calculation for the listing brochures will be changed from the rules of the German Commercial Code to international standards (IFRS). The accountants are currently hard at work. They have to retrospectively recalculate three years to prepare the listing prospectus on time.
The figures previously published in the “Bundesanzeiger” will have barely anything in common with the recalculated IPO prospectus metrics. Regular depreciation on capitalized R&D costs or evaluations of acquisitions are not considered by IFRS.
Also, the International Restored Equity Ratio will present Ottobock in a much better light than before. The Commercial Code is significantly more restrictive about leased buildings, car fleets and manufacturing facilities, when it comes to the addition of equity and debt positions. “In the end, a publicly listed company will always show higher profits than a single-family entrepreneur who is focused on paying as little taxes as possible”, says one investment banker. What is still missing for the planned IPO rating is a stock market story that meets the highest expectations of the imagination of the investors. “Within the next five years sales shall double to two billion euros”, “Disruptive high-tech provider with enormous growth potential” - in this tonality the investment bankers are likely to phrase the headlines for their IPO studies.
As usual, the company valuation will be based on the multiplier of Ebitda. The factor 30, which is the current one for the Ebitda of the Danish-Icelandic prosthesis specialist Össur should, at best, represent the lower limit. Ottobock would like to be in higher categories. Somewhere were the Swiss dental implant manufacturer Straumann (76 times Ebitda) or the Danish world market leader in minimally invasive surgery equipment. Based on the most recently available Ebitda numbers, Ottobock would then be valued at a level of more than ten billion euros.
Almighty Patriarch
Despite the high issuing price, Ottobock and fellow campaigners are confident that the project will fly. Apparently, Scandinavian investors close to the Wallenberg clan are ready. But also American and Asian funds should show interest in the Ottobock story.
Financial investor EQT will therefore be happy to let go of the bulk of its shares. Näder and his daughters Georgia (24) and Julia (31), on the other hand, only want to sell around 10 percent to keep the majority in the company going forward. Also, the company must receive money from the issue of new shares. Otherwise, investors would not swallow the growth narrative they have been fed. The most important figurehead for the stock exchange traders is the ambitious and smart CEO Schulte-Noelle. Already at his previous station as CFO of Fresenius Kabi AG, he liked to present himself to colleagues as a strategist and entrepreneur, much better than his predecessor. Now he can show what he can do.
Could the prominently staffed supervisory board become an effective opposition to the all-powerful Näder? At its head is ex-Bosch-Grande Bernd Bohr (65). Former Zeiss boss Michael Kaschke (64) acts as his deputy.
But an even more important body of the company is the Board of Directors which sets the strategic direction of Ottobock, and like a board based on the Anglo-Saxon model, it is staffed with executive and non-executive members. There, the chairman Hans Georg Näder still has a unique position that was not present in any other stock exchange-listed German company before.
While he only has one vote, like Schulte-Noelle and the former Beiersdorf boss Stefan Heidenreich (58) and all other board members, Näder alone decides the composition of the body.
So, in actuality, he alone controls it, just like the company. And investors’ money on top.