TIVP074 (Video): Lifco AB (LIFCO-B.ST): The Serial Acquirer Building an Unstoppable Compounding Engine w/ Kyle Grieve & Shawn O'Malley

25:12It remains a home for serious long-term investors committed to compounding their knowledge, relationships and finding great stock ideas and as a member you'll join monthly video calls with me Kyle Grieve and Daniel Maka where we'll dig into what's actually happening in the markets and in individual businesses you'll sit on private conversations with fund managers business operators and authors that we respect the kind of access that does not fit inside of a 90-minute podcast you'll have the chance to join us in roaming Omaha together during Berkshire weekend too. One of my favorite weekends of the year.

25:47If you're looking to expand your circle of investor relationships, get smarter about assessing intrinsic value and are always looking for new stock ideas, then what are you waiting for? Apply for free now at theinvestorspodcast.com slash mastermind. That's theinvestorspodcast.com slash mastermind. And if your application stands out, I'll be reaching out to you personally to schedule a call. Yeah. So before I get to that question, Sean, I just want to comment on something you said there about that process and how it feels like there's a lot of layers. So I think the fact that they have this process and maybe the way that I listed it makes it appear that way.

26:22But in reality, I think the actual, if you think of it as having the board of directors at the company level and then having individual smaller board of directors. So I don't think everything's actually being pushed up top. They have these smaller, basically decentralized groups that are doing it. And that way you skip a lot of that centralization and bureaucracy that basically just hamstrings businesses and unfortunately hamstrings them even more as they scale. So just wanted to put that out there. Now, back to your question here. So in terms of the risk happening in Europe, you know, personally, I have a couple of businesses.

26:52We have a couple of businesses in the intrinsic value portfolio in Europe. And, you know, I think we have to basically stay aware of what's going on with the war going on in Ukraine. You know, I think I'm hopeful that, you know, given what's happened so far, it's going to deter Russia from doing anything like this anytime soon. But, you know, we never know. Now, as for the geographic order, Sweden is definitely going to be number one in terms of where they're exposed to with Germany right on its tail. And then following that, you got UK, Italy, and Norway, which have all been very, very good growers over the last few years.

27:24So I emphasize the importance of getting the right price for, well, I mean, any investment, but it's especially important here in serial acquisition. So what is Lifco's philosophy on this. How do they think about the price that they're paying for the acquisitions that they make? Yeah, it's kind of odd, but Lifco actually doesn't explicitly tell you what kind of multiples that they're looking for on their acquisition prices. So my assumption is probably they're doing this for strategic reasons. They're just trying to avoid inviting others to copy what they're doing because obviously it's worked very, very well in their history.

27:57Now, I'm not sure that's possible given that there's just no shortage of serial acquirers out there, but I think you get my point. So most serial acquirers in this area are looking for something called serial acquire arbitrage. So this basically means that you're getting bought out at a private market multiple, then you immediately re-rate once you become part of a publicly traded mothership. So generally, four to seven times EBITDA sounds about right to me for niche private businesses. So I loaded up the sales that they bought in 2025, then assumed an EBITDA margin right around Lifco's consolidated number of about 22%.

28:28And from there, I divided the EBITDA by the cash that they use in the acquisition of these subsidiaries. And using that data, I'm left with an EBITDA multiple about seven times on average for their acquisitions last year. So I think that's probably a pretty reasonable midpoint of what they're looking for. Now, I like to get back to that serial acquire arbitrage thing I just discussed. So let's take a look at an example here. So let's look at a business called Toppy, which was one of Lifco's acquisitions in 2025. So this is a business that specializes in pallet exchange solutions. Now, the business did about 17 million in euros in sales at acquisition point.

29:06So if we assume about 23 % margins for the system solution segment, then this business would be doing about 4 million or so euros in EBITDA. So if they paid seven times EBITDA, then the assumed price is somewhere around 27 million euros. But okay, now we have to take into account that LIFCO trades obviously at a much higher premium than seven times EBITDA. So LIFCO's current EV to EBITDA, which is pretty similar to the EBITDA number, is around 18 times. So under LIFCO, the business is actually valued at about 70 million euro. Wow, that's really interesting. I mean, yeah, it does make sense why they don't want to be too specific about disclosing acquisition prices from a competitive perspective, but also not giving any real insights into this over time is sort of frustrating as an investor, right?

29:52Because you're speculating on the acquired businesses margins and the multiples paid. And yeah, as an outside investor, it just makes it tricky to grade the quality of specific transactions and figure out how much of this is due to investing skill and then how much of this is due to this public market premium arbitrage that you sort of alluded to where just immediately you're pulling a private company into the public markets and the valuation of the business correspondingly jumps in some way. And it just becomes sort of an exercise in faith where you're trusting management and their track record, but you can't audit the decisions they're making too closely.

30:30And it's the same problem I've always had with Constellation. It's actually worse there because they have many more subsidiaries. And a big part of a serial acquirer's success isn't just what they pay for a business, of course, but also how those businesses perform after they're bought. And you don't want to buy a business at its peak only for it to fall off after you buy it. And so that's a great way to destroy shareholder value. So talk to me a little bit about how Lifco incentivizes the acquired management team to continue to produce at a high level after they get bought out. Yeah, Sean, before I get into that, I will say on your point there about trust, I think that is a huge, huge factor in serial acquires.

31:09You basically have to have enough trust that management is doing a good job, that you can trust the fact that they're going to continue doing a job without necessarily having the disclosure to actually, you know, look at the data to confirm that what they're doing is the right thing. I know I've had a couple of businesses in the past where unfortunately, I think management didn't do as good enough job. And then in that case, it's like, okay, well, can I trust you anymore? And obviously, luckily, I think in Lifco's case going in, I think they have such a good track history that you kind of have to default to trusting them if you want to invest in them, of course.

31:43And then you kind of just have to look at the mothership numbers from there and just make sure that they're going on the right path. Now, back to your question there on earnouts. So the earnout structure is definitely a lot different from what I usually see. So they use something called put call options in their acquisitions to purchase the remaining minority stake in their subsidiary. So here's how it works. So the seller of the business gets a put option. So this means that they can sell or put their shares to Lifco at a predetermined price. Now at the exact same time, Lifco has a call option or the right to buy or call away the remaining shares from the seller.

32:17If either party exercises their option, the other side is basically obligated to buy or sell from the other party. Now, in this case, LIFCO will always acquire the shares from the minority shareholder, which helps LIFCO get to that 100 % ownership over time. Now, the question here is, you know, why do they use the system? So there's a couple of really good reasons. First, it gives the minority shareholders some flexibility. This allows the sellers to have additional upside participation after they sell. And it also helps align interests of the minority shareholder as well as LIFCO and LIFCO's shareholders.

32:48So the option price is tied to future earnings with an attached multiple to it. So if the minority shareholder is able to achieve growth in those earnings, then they can increase the value of their put option. LIFCO deals can vary considerably in terms of their cash outlay and put call options. So in the last two years, put call options have ranged between about 14 to 17 percent of deal value and the remainder is funded through internally generated cash as well as debt. Now, the put call options can last for multiple years. From what I could gather from their financials, most put call options mature in the kind of the two to five year time period after acquisition.

33:23Now, it's really interesting to me to see that they have some of these put call options that actually mature over five years from now, which I think is a really good signal that they're looking for businesses that hopefully are aligning themselves with Lifco over the longterm. Now, another thing worth mentioning is that inside of these put call options, they do have that dirty word, which is options. in their wording, but these are actually not dilutive to shareholders upon exercise. So instead, Lifco is using cash or debt on the put call option, which is really great to see as it just doesn't dilute shareholders at all.

33:54Now, I think that clearly states that Lifco cares very, very deeply about shareholder value. And very interestingly, they've actually never issued options or used dilutive financing in its history. I've got to say, I don't think I've seen in this specific approach before with the put call strategy. And yes, I mean, it's really interesting, honestly. And I think I need to wrap my head around it more. My gut reaction is that I think it's sort of brilliant, but like I said, I feel like I need to reflect on it more. And so on the topic of these put call options, I do think we should dive into Lifco's debt picture a little bit more because if they're not issuing stock to close deals, as you said, they're using cash.

34:37and whether that's from internally generated cash sources or if that's from raising debt. So do you see the put call options here as being like a type of debt or liability on their balance sheet? Is that the right way to think about this? Yeah, let me get to your debt point first and I'll layer on the put call options. So Lifco is definitely not a business that avoids debt since they have many, many potential acquisition targets and only so much cash generated by the business. they are using debt to maximize their ability to create shareholder value. So their net debt to EBITDA target is between two and three times, and they've generally stuck below that low end of that range.

35:16So the intelligent use of debt comes down to a couple of things, such as basically your capital allocation decisions. I think if you have a high return on capital, I personally am fine with a little bit of debt. It has to be manageable. But if you have a little bit of debt and you have a long track record of success and that rare ability to just maintain a reasonably high amount of capital efficiency going forward, well, then you can create a lot of shareholder value. Now, where debt can definitely be dangerous to a serial acquirer is if their acquisition quality falls off and they begin to have issues servicing that debt.

35:48But as I saw from Lifco's numbers, they just basically rarely go above that two times net debt to EBITDA number. And given the steadiness of their niche businesses, I think they're very, very well positioned to continue adding more acquisitions in the near future. Now, if we break down their debt, both at the current and long-term level, it consists of loans with variable interest of about 9.7 billion SEK, lease liabilities of 1.3 billion SEK, and then the put-call options, like you just discussed, of about 2.9 billion SEK. So to answer your question on whether the put-call options are debt, the answer is definitely yes.

36:21But one cool feature of the put-call options is that they actually aren't interest-bearing. so sek there for anyone it's just that referring to swedish kroner um but yeah i mean that is uh you know i think this could lead us this whole conversation could lead us to a rabbit hole of discussing when and how a serial acquirer thinks about carrying debt at the subsidiary level or at the parent company level but overall i mean it does seem like a pretty pragmatic approach especially with this option strategy where you said they're getting leverage without sending cash out the door via interest payments.

36:53And so there's a decent argument for this business having maybe some sort of competitive advantages. Otherwise, they wouldn't have compounded their top line in EBITDA at over 14 % since 2006. And so I do generally think a business needs some sort of moat to accomplish this kind of growth over that long of a period. But I'm really curious to hear more about how you think about that. Does Lifco have a moat? So I think when it comes to serial acquires, the question of a competitive advantage is nearly always kind of mysterious, you know? So when you think of it, if a business is made of a bunch of businesses doing 10 million euro in revenue, how could it possibly have a moat that protects it from competitors?

37:33Now, to me, the answer kind of lies in the business model. And more specifically, it lies in whether or not a business can pick and choose the correct subsidiaries that truly have these long lasting characteristics. So some listeners might consider this to be process power, which is a competitive of advantage that Hamilton Helmer uses in his book, Seven Powers. So I had the opportunity and chance to interview him. And I asked him if he ever found another business that had process power. And he told me no. And he actually even asked some of his other members of his fund. So I'm very hesitant to say that certain serial acquirers do have process power.

38:07But Helmer defines the benefit of a process power as a company with process power is able to improve product attributes and or lower costs as a result of process involvement embedded within the organization. So the question of whether Lifco has process power requires us to just answer one question. Is Lifco improving companies through their operational process, or are they just managing them more carefully? So since Lifco is decentralized, I don't think they're focused too much on firing people inside of an acquired business just to optimize their margins. Where Lifco is really, I think, showing some signs of processing power is in the fact that they have consistently tried to steer the business towards higher and higher margin areas.

38:45For instance, the dental division over time has explicitly shifted its product mix from distribution to more higher margin manufacturing and technology businesses. So an even better, more recent example was one that I mentioned earlier with the system solutions division splitting off environmental technology and the transportation products division, which both have among the highest margins in all of Lifco's divisions. So environmental technology has EBITDA margins of around 28%, while transportation products have an EBITDA margin of around 25%. Now, as Lifco continues to scale and they make these other divisions a larger and larger focus of the business, if they can continue growing while maintaining or increasing profit margins, then that should theoretically allow Lifco to have operating leverage at both the consolidated and divisional level.

39:29When CEO Per Waldemarsson was asked if he actively searches for higher margin businesses, he sort of sidestepped it and noted that they just look for high quality businesses and that the margins tend to vary somewhere between that 22 to 30 percent mark. But circling back to processing power, you know, I think I'll leave it to listeners to determine if they think Lifco has a processing power mode or not. I'm not sure one specific mode to assign to this company is the right framework to use here because it is probably a bit simplifying. And, you know, why are some sports teams, for example, consistently better than others?

40:02And it's sort of a complex question, but there does seem to be a degree of institutional knowledge that can provide an advantage to certain sports franchises that consistently draft better and make better trades and signings in other organizations. And I know you're a big NBA fan, Kyle, and so the NBA's Oklahoma City Thunder, I mean, they've been a great illustration of this in the Sam Presti era for something like two decades now. and just be my own devil's advocate though. The counter argument is that franchise performance across professional sports is pretty mean reverting. So there is a degree of randomness here and I'm a little iffy on that, but I do think there can be also a brand advantage in a sense for serial acquirers.

40:44And if you gain a reputation for treating people well by embedding options into acquisitions and not running companies into the ground after buying them, sellers are going to be more keen to work with you and and that reputation can compound right buffett is again probably the best example of this you know in a crisis people call buffett in berkshire because they know he's good for the money and just to continue the sports analogies right some of the best franchises you know it helps that they have sometimes bigger markets and stuff but also their reputation enables them you know people know that it's a good organization to go and play for and that can be you know consistent advantage right if you're signing with the Yankees, there's a prestige and brand value that definitely affects your thinking.

41:29And I don't know what else you would call that other than, you know, an advantage for the Yankees. And again, you know, not to say that Lifco is, they're the New York Yankees, but, you know, I think the logic applies of how your reputation can be such an important thing into the opportunities that arise. And so I want to ask you though, is there anything else that you think has helped them outperform over the years that maybe we should linger on. Yeah, I think there's a lot, but to just touch on your NBA analogy there, I really like it. And I think the Thunder are a great example. And another great example would be the San Antonio Spurs, who are also an incredible team.

42:05And interestingly, you brought up that point about mean reverting. And even though the Spurs are this organization that have been like incredible for multiple decades, you know, basically a couple years ago, they weren't that good. And so it just kind of goes to show you that even if you have this incredible culture, you mean revert. And I think if you do have an incredible culture, the thing that's really good about that is that you mean revert for a shorter period of time. So in a company like Lifco, right now they're going through some period of a little bit, I guess you could call it mean reversion.

42:34Maybe it's underperformance compared to where they've performed previously. But I think with these really, really high quality teams, just like having a really, really high quality sports franchise, you fix things pretty quickly, especially compared to other teams. So getting back to your question here about what else I think has helped them outperform, I think they have a lot of kind of more non-traditional advantages. So for example, investing in businesses that serve these small niche industries is actually a pretty good competitive advantage in itself. I've seen this numerous times in a lot of the micro cap businesses that I like to look at.

43:06So the question that I get when I'm talking about these kind of micro caps with other investors is if this business is only doing maybe 20 million in sales and they have competitors out there doing billions in sales, why wouldn't they just steal their market share? And I think that's a really, really good question. But the answer is actually quite simple. So these small businesses, some of them at least have kind of these smaller patents that have been built out over many, many years. And while a bigger company could theoretically compete, it might actually take a lot of time and resources just to get to that point.

43:35And let's say there's a business out there doing$2 billion in sales. Are they really going to go other way to try and beat a competitor where the market is like, you know, let's say$40 million and unlikely to really grow much past that. And I think the answer to that is just no, because, you know, even if they did capture all of that market share, it would just end up being a rounding error for them. So I think they just often leave it for a lot of these small fish companies. And, you know, that's a business that that Lifco picks up and it's been pretty successful. So, you know, I think with many of Lifco's niche businesses, they're in that kind of pretty similar situation.

44:07There are competitors out there who are much more likely to pursue industries where the TAM is in the billions, not the millions. And if you have a business that is a leader in its niche, then you are well positioned to continue reaping the profits from that business for many years to come. But again, it definitely depends on how good Lifco's acquisition criteria is. And so far, it's proven to be very, very good. I think they're great points. And this is what I was sort of thinking about earlier with that micro monopoly comment I made. And theoretically, these opportunities should be competed away.

44:37But in reality, that doesn't necessarily mean that they are. You get these sort of gaps in the markets where it doesn't make sense for a certain competitor to allocate the resources necessary to take over a very small TAM. And so moving along here, let's spend some time looking at Lefko's KPIs. You've spoken a lot today about EBITDA, But what other KPIs are important to consider here? Yeah, there's a couple. So I think two that are very important are free cash flow and capital efficiency, which they use called return on capital employed or just ROS, which I'll be referring to from here on out.

45:16So I'll leave ROS alone because I'm going to go over it in a little bit later when we talk about capital efficiency. But let's get back to free cash flow. So free cash flow per share has grown exponentially well since Lifco has IPO in 2014 with about a 23 % kegger. Now, obviously, this has been a great proxy for value creation. When looking at serial acquires, I like to look at the cash that's generated from operations, just because it doesn't remove cash that is invested in new acquisitions. So if you're looking for kind of like a constant cash number, I like that number even more than free cash flow, which excludes cash for acquisitions as well as growth capex.

45:50Now, I briefly touched on EBITDA margins, but they are also a very, very important metric. So it's a metric where I think it has to reach a ceiling definitely at some point. But given the increased margins and some of the other divisions, perhaps they can get EBITDA margins from their current level of around 22.5%, maybe towards 25-ish over the next five to 10 years. Now, given their strong track record of margin improvement, I definitely would not discount their ability to do this. Now, if they chose to continue getting the right mix into higher margin businesses, I think it could definitely raise the bar for the rest of the entire business.

46:24Now, I always find it really, really interesting for a business like Lifco, which I think is already large to really just go out and continue finding businesses that are better and better in terms of their margins. It's just not easy to do, but I think they've shown an incredible ability to do it very, very well. Yeah, it sounds like that. And one other metric I wanted to ask about before we circle back to talking about returns on capital is CapEx. So given that this business does have some exposure to manufacturing, I would assume that their capital expenditures are fairly meaningful. Right. So when I first started learning about Lifco, I actually assumed the exact same thing.

47:02But they share their capex to sales directly on their earnings presentation. And it actually stays basically permanently stabilized in just the 1 % to 2 % range, which I think is very, very low with the business that has some sort of manufacturing as part of its business model. So I wanted to dig in and find out more on how this was possible. So the best answer that I could find is that even though Lifco has, quote, manufacturing, unquote, businesses, they're more like assembly businesses. So for this reason, they don't have to worry about, you know, maintaining expensive machinery or product lines.

47:32And they can more or less just piece equipment together. Basically, they're buying, you know, finished components from a manufacturer, then assembling them themselves. So because Lifco doesn't need to reinvest in that type of equipment, their businesses all tend to not need much capital to just function as is. Now, we've spoken about this a lot, Sean, but I think we both prefer businesses that can reinvest pretty much 100 % of profits back into their business. But, you know, serial acquires are kind of an exception because instead of buying businesses that can reinvest at high rates, the mothership can then just reinvest at high rates without reinvesting back into their own businesses.

48:06But to make things even better, Lifco obviously has some organic growth. So I would assume that there's certain businesses that are reinvesting into some growth opportunities. But my assumption is that this number is probably a lot lower compared to the wide variety of other businesses that they have, as well as the opportunities that they have to invest into other businesses. Let's bring it all full circle by diving back into Lifco's capital efficiency. And judging by reported numbers, they look good to say the least, right? Yeah. So I think the capital efficiency metrics on this business are very nice and more importantly, sustainable.

48:42So as I mentioned, Lifco uses this metric called return on capital employed, ROSE, and they define this as EBITDA before acquisition costs divided by capital employed. Now, EBITDA is pretty straightforward. You can just look at operating income, then add back amortization of intangible assets. Now for the denominator, capital employed equals total assets minus cash and cash equivalents minus interest-bearing pension provisions minus non-interest-bearing liabilities. Then they simply just average this out over the last four quarters. They also show this number excluding goodwill. Now, I personally like capital efficiency metrics, which maybe have some correlation with my expected returns in the future.

49:22So when you remove goodwill and other intangibles, the capital employed numbers are so low that your ROAS number actually goes all the way up into the triple digits, which I don't know about you, it's just not really correlated with future returns of the business. And besides, if you're making an acquisition and you're buying a business, not only for intangible assets, but also for its intangible assets for things like brand, customer relationships, and even expertise, I feel like that's obviously something that does provide value and therefore you paid up for it. So it's still relevant to the purchase price and the capital that you've employed.

49:53Either way you look at it, a ROS over 20%, which Lifco has, is a very good number. Now, another important consideration is just how far the ROS has moved upwards. So it's actually moved down a little peak in 2023 of 22.6%, but it's still up from back in 2016 when it was about 18.6%. So with the current drop in ROS, I think it's more of a product of two things. So first, it's a part of their current investment phase. Some of the newer investments that they made are going to take some time to become fully optimized and integrated. And once they are, we should see those capital efficiency metrics start to normalize or maybe even increase.

50:29And then the second part here that's important to take into account is there's been a bit of market weakness in the demolition and tool division. So revenue has decreased and margins have compressed a little bit. There are quite a few questions over this in the last quarters in their earnings call about this exact segment. Now, it looks like with the construction industry being part of their target market and it not exactly lighting the world on fire, they've kind of faced some headwinds. Now, I assume that this will normalize at some point, but it's impossible to know exactly when that will happen.

50:59One of the things I've always sort of resented is, you know, I see on social media all the time, these like supposed investing gurus that tell beginning investors to almost blindly focus on returns on capital metrics. And, you know, it's just anybody can run a screen for returns on capital. And also, you know, you've often got to make adjustments for the numbers to be meaningful. And there's a lot of adjustments being made here. And so if you don't have that context, you can just really mislead yourself, I think. And so Daniel and I have talked a lot about how buybacks can also have this effect and shrinking the equity base and inflating returns on capital.

51:35And so speaking of buybacks and capital distributions, you mentioned that Lifco has avoided diluting shareholders ever since their IPO. So maybe you can paint some more color around how they think about buybacks and dividends. Yeah. So Lifco does not engage in buybacks. Instead, they basically focus exclusively on distributions via dividends. So I'm not sure how many Swedish businesses that you've looked at, Sean, but it's actually quite normal for businesses in Sweden to issue dividends, even though personally, I'd rather they skip them. So just to get into their dividend strategy, basically, they distribute about 30 to 50 % of after-tax profit as dividends.

52:13For full year 2025, the dividend payout ratio was about 33%. Their dividend growth has essentially tracked their profit growth. So I think it's very, very likely that they're going to continue this policy into the future. Now, there's a few ways of looking at this. I think culturally, Swedish corporations are very attracted to the model of paying dividends to their shareholders. So according to the Organization for Economic Cooperation and Development, or OECD, In 2022, 61 % of publicly held Swedish companies paid a dividend, which they said led all peers. Now, obviously, the data here is supporting my assumptions.

52:47So I've come across a few serial acquires that do pay dividends. And generally, I would prefer that the businesses not have a dividend policy at all, as I think they're kind of leaving potential money on the table. If you have the right capital efficiency, which Lifco has, and a large pipeline of potential acquisitions, which I think Lifco also has. Now, to put it another way, if Lifco kept more of its profits in the business, they could then delever even more and reduce their need for leverage, which would also reduce financing expenses. Now, I understand paying a dividend when you have nowhere else to put your money, but in Lifco's case, they have many more ideas than internal cash flow, which is why they are using debt.

53:23So in my view, the dividend is probably one of the only blemishes on Lifco, which is otherwise a very, very high quality business. Now, paying a dividend would not be a reason that this business is not worth owning. So please don't get me wrong. But I just have to mention that for serial acquirers and the position that I think Lifco is in, I think the best use of capital would be to just reinvest all that back into the business to continue feeding the compounding machine. Absolutely agree with your thoughts there on the dividend and reinvestment. And just to clarify why for listeners, why the dividend policy can be problematic is because you're shifting a tax burden onto investors without their consent.

54:02If you reinvest into a project, there's no taxes on that if you want to call a transaction. Whereas if you take the same amount of money and you send it out to shareholders, and so then you would have to pay income tax on those dividends. And that can be, if you look at over time where you're basically interrupting your compounding by taking your capital and then paying a cutout to the government every time there's a dividend, that can be really, really consequential over long periods of time. And so, yeah, like I said, I really agree with how you paint things there around the dividend. And one other thing you mentioned is that Lifco has many more ideas than they do have cash flow.

54:51So maybe you can expand on that a little more. Yeah. So this is an incredibly important nuance to understand about Lifco. So the business currently has this market cap of 118 billion S.E.K., which comes out to about 12.6 billion USD. And they also have 275 companies. So this isn't a small operation by any means. And yet when you actually look at the size of their potential market, they're just barely making a dent. So according to the European Commission, small and medium-sized businesses or SMBs make up the vast majority of European businesses. And this is the exact type of business that Lifco is looking for.

55:26So that puts the SMB market at about 32 million businesses. So I don't really see them running out of ideas to look for anytime soon. Now, an important caveat to that number I just gave you, Lifco obviously only buys these very, very specific niche business. And my guess that would be that this is probably a very, very small number of those actual businesses that would make up the specific niches that Lifco wants to get into. So, you know, let's assume a small number, I don't know, 5%, you know, that make a decent fit. That's still 1.6 million potential small and medium-sized businesses. And I'm not saying Lifco is ever going to be some sort of consolidator of every single small and niche business in the world or in Europe.

56:06But just to say that I think that they have a large amount of potential targets out there. And then you take into account, there's always new businesses coming online. So that number is probably going to grow at a very, very low rate, maybe the low single digits, but still that's a meaningful rate and it will continue to rise up as more time passes. So in terms of growth, I think really the biggest concern for the business isn't where it can find more potential opportunities, but it will be in ensuring that they have the proper support to manage 500, 750, 1 ,000 companies over the next few decades.

56:38But I'm going to go over that in some more detail here shortly. Yeah. Serial acquirers inevitably run up against this law of large numbers probably, right? And it becomes harder and harder to do deals that move the needle over time. And so I just wanted to go back to something you mentioned earlier, which is that you see Lifco's management being a massive reason for the business's success. And again, that's not surprising to me with, you know, it's really a part of every serial acquirer story, but I think it's worth digging a little more into that. And So we already covered their founder and first CEO.

57:09And so why don't we look at their current CEO, Per Waldemarsson? Yeah, so Per is a very, very good CEO in my books. And the thing that's awesome about that is that he's still quite young at just 49. So if he sticks around, he presumably has at least another decade or two to continue compounding the business. So he has a very long history inside of Lifco. He was a CEO of Brock AB, which I mentioned earlier. Now, what I didn't mention earlier was that Brock is not only a robot company, but also basically a conglomerate in its own right. So from there, Pair moved on to become the head of business of the dental area and then into a role as the deputy CEO of Lifco.

57:44And then once Frederick Carlson left, as I mentioned, he was put in place as Fred's replacement as CEO. Now, since Pair has now led the business since 2019, I think using Buffett's rule of one is an excellent exercise to kind of just see what kind of a job he's done at allocating shareholder capital while being responsible for that duty. So he's been in charge of allocating about 12.7 billion Swedish krona back into the business. Now, over that period, the market has increased by about 75 billion Swedish krona, while dividends total about 6 billion Swedish krona. So he's produced about 6.4 Swedish krona per dollar or per one krona retained, which more than satisfies the rule of one, which is to create at least$1 per dollar retained by that business.

58:29Now, insider ownership on Lifco is very good as well, mainly because their founder and their current CEO, Carl Bennett, owns just so much of that stock and it hasn't been diluted. So he alone owns about 50 % of the shares, but 69 % of the voting rights. So there isn't really any risk here of the business being taken over by anybody else. I will say though, outside of Carl Bennett, the insider ownership definitely leaves quite a bit to be desired. So the second largest insider is Per Waldemarsson. at 0.26%. So the board's ownership of shares isn't really that exciting either with members owning shares all below 0.01%.

59:06So Pair just recently bought 15 ,000 shares of Lifco on the open market, which is obviously a good sign. But other than that, the insider ownership outside of the chairman just isn't that exciting. On the bright side, minimal insider ownership can reflect that the board isn't excessively generous with doling out the stock-based comp. So there maybe is a silver lining there. But what we really need then is the full context of management compensation and incentive structures. And given that Lifco has not diluted shareholders at all here, are all bonuses paid in cash? I presume that must be the case.

59:45Yeah. So let me take the management comp here first. So Lifco doesn't disclose much about specifically the base salaries outside of its CEO. So Herr Waldemarsson in 2025 made a base salary of about 34.7 million S.E.K. But in 2024, it was about 31.5 million S.E.K. And just for anyone U.S. based, that's about 3 million USD, in case you're wondering. So, you know, to me, that doesn't seem egregious at all. Just again, given how much value he's created for shareholders. Now, getting to your point about bonuses and, you know, boards of directors getting these large insider ownerships strictly through getting options.

1:00:21as you can probably guess, given Lifco's very high quality and the fact that they haven't diluted shareholders, they have a pretty shareholder-friendly incentive program. So in terms of Per Waldemarsson, he had a variable remuneration of about 28.8 million SEK. So Per's variable remuneration is judged by targets regarding a few things. You got earnings, volume growth, working capital, and free cash flow. So this number is capped at just 100 % of base salary. Now, given the fact that he has earned nearly 82 % of his base salary, I would say, you know, he's probably doing a pretty good job performance wise.

1:00:57Another nugget that I found interesting was that no variable base compensation will be paid if a pre-tax loss is reported, which obviously makes sure that everything's running smoothly and profitably, which hopefully will make alignment between management and shareholders at a high level. Now, interestingly, executives in the board do not receive cash, but instead get these things called synthetic options. Now, this is very interesting. So since Carl Bennett obviously owns so many shares, like I just mentioned, he basically sold about 428 ,000 options to just 23 individuals inside of the company.

1:01:29Now, they can't be exercised until all the way into the future in 2030. Now, I think this is actually kind of a cool way of doing compensation because the insiders really are just betting on themselves to create value to exercise the option at a later date and collect the difference between the market price and the exercise price while not diluting shareholders at all. Gosh, it's another really interesting option structure here that they've undertaken. And correct me if I'm understanding incorrectly, but I think the incentive alignment logic of it is pretty compelling. And effectively, executives and directors only receive meaningful payouts if the share price rises above the strike price by 2030.

1:02:07So their upside is tied directly to shareholder value creation, but it can avoid issuing new shares by taking this synthetic approach. And so if Bennett is personally backing the synthetic options with his own shares or with cash, then existing shareholders would avoid the dilution that would otherwise occur if the company had to issue new equity options as compensation. So economically, Bennett is sharing some of his personal upside with insiders to motivate them. That's sort of how we would think about it. And And, you know, now I just want to address, though, some of Lifco's potential competitors as we move along in our coverage of the company today.

1:02:48And, you know, because at first glance, it does appear that pretty much anyone with 10 to 20 million dollars and the desire to buy a niche industrial business, anybody who has that capital could theoretically compete with Lifco in some way. Yeah. And I think, you know, this is a pretty important part to understand about Lifco because as businesses aren't, you know, really in just one industry. You know, since they're in such a wide variety of industries, the real competitive pressure comes from other serial acquirers or private equity who want to come in and try to outbid Lifco on a potential acquisition.

1:03:19So the key to understanding serial acquirers is just how they treat acquisitions after they buy them. There are some acquirers, such as those in the private equity space, who fully intend on flipping the business once it's acquired. Now, in that case, once acquired, the business may undergo some very, very significant changes. This could include things such as massive changes in culture, installing new management teams, utilizing consultants, cutting costs, firing employees, and even drastically changing business models. Now, to people who aren't business owners, this might not really sound like a big deal.

1:03:52But to business owners who have owned a business for over a few decades and have very, very close relationships with their employees and where their business is really their baby, this is a really, really big deal. Since a business like Lifco is looking for long-term oriented businesses, management also tends to think long-term. So, you know, these businesses aren't managed by people who want to just sell their business while making out like a bandit while leaving all of their current employees at high risk of, you know, losing their job or being treated as poorly. So for this reason, many businesses will actually prefer selling to a more decentralized type of business such as Lifco.

1:04:25Sean and Daniel have gone over Constellation software spinoffs and they're a great example. So the attraction of decentralization is that businesses have much less need to make these large changes once they're acquired. And that's versus being acquired by a highly centralized business whose sole purpose is to optimize margins of acquired businesses just to prepare them for getting rid of them and selling them to someone else. So we haven't spent a ton of time today discussing the economics of the individual business segments, even though there's some pretty wide variation in margins. And so maybe you can take me through a little bit better, you know, which segments are creating the most growth and which segments are slower growing or tend to be even more volatile.

1:05:06And maybe just discuss the risks associated with each of these different business segments too. Yeah. Great question, Sean. So it's interesting because the dental segment was a primary segment that was involved with LIFCO when it was first formed, but revenue growth in that segment is actually the lowest and by quite a wide margin. So since LIFCO IFPO, dental has compounded revenue at just 6%, whereas demolition and tools has compounded a touch below 16 % and system solutions has compounded at nearly 18%. Now the EBITDA kegger for dental demolition and tools and system solutions have been 9%, 17%, and 29%.

1:05:41But even though the dental segment is the lowest grower, it definitely has its place inside of the business. It tends to be the most stable segment with minimal deviations from its 20 % EBITDA margins. This is due to the ongoing demand, like I think we both mentioned, for dental products. It doesn't matter what's happening in the world. When you need to get work done on your teeth, it's going to take a priority. And it also happens, obviously, that dental work is often covered by insurance. Now, the demolition and tool segment tends to be the most cyclical and volatile. I mentioned earlier that this segment currently is contributing to the slowdown in LIFCO in the last few years.

1:06:17Now, this segment has arguably the highest margins, around 25%, but on a year-to-year basis, they actually fluctuate a lot more compared to some of the other segments around that number. So this segment, it's tied to things like infrastructure, construction, and forestry capex. And unfortunately, these industries are all cyclical. And if they're not spending, then this segment is going to suffer both in terms of growth as well as in margins. Now, as for system solutions, this segment has the highest growth in both its top line and in cash flow. It's clearly doing very, very well, which I think is why they're separating the reporting of some of its divisions.

1:06:50Just to comment on the dental division in particular, I think this is at a high level what many investors find attractive about the healthcare space. And people are always going to be sick or need their teeth cleaned regardless of where we are in the economic cycle. So there's a real stability to the earnings of these businesses that is relatively rare comparatively. But, you know, let's just go over the risks of Lifco again as a whole. You know, how does the company overall perform through a down cycle? Yeah, they actually perform quite well. So during COVID, revenue decreased by half a percent.

1:07:22And at the same time, they actually increased their cash flow margins by about 1.5 percent. And they increased their earnings per share by 11 percent. And I think that's quite impressive during a time where, you know, the world essentially to some degree shut down. So I wanted to share their performance during COVID because I think many businesses just suffered greatly. But Lifco did, I think, a really, really good job at growing, albeit at much lower rates than they had historically. Now I want to touch on some of the more company-wide risks. So Lifco shares a multitude of different risk types.

1:07:51First, you have the broad risks inside of its industry and markets. These tend to be kind of vanilla, you know, macroeconomic factors, customer concentration risks, technological disruption, consolidation among competitors. And then more individually is the risk about insurance being disrupted and which obviously would affect its dental segment. You know, these really aren't super interesting to me or likely because, you know, I think all these are obviously relevant, but they would also affect pretty much any business out there, except again for that dental insurance angle. So macro risks, as I've discussed, tend to hit the demolition and tools section the hardest.

1:08:25Luckily, the dental and system solution segment have been relatively resistant to economic turbulence. Now, the second overarching theme of risks that they discuss are operational risks, which I believe are more of the real risk of the business. So these would include things like having the right people in place to continue scaling the business. So sometimes the person leading a business from, let's say, 100 million to a billion isn't the same person needed to take it from a billion to 10 billion. Now, I'm not saying at all that Pear, their current CEO, isn't capable, but I'm just saying that in some cases, if you don't have the right manager with the correct experience of scaling, this can obviously be really risky once you decide to continue growing up and scaling.

1:09:03Now, another risk is centralization. So in the book, The Compounders, which I've discussed in depth on TIP 772, I actually went over a few businesses that for all intents and purposes are decentralized companies, but they actually experimented with centralization for a variety of reasons I won't go into right now. But basically the outcome of all that in pretty much all examples was that it was a failure. It was a failure centralizing. Because they tended to failure in that centralized business model, they all basically just went back to decentralization, which ended up working very, very well.

1:09:32So, you know, I think in general with these decentralized businesses, if they go through periods of stagnation, sometimes they, you know, they feel that there's these drastic changes that need to be made in order to kind of escape that staleness. But from my research into serial acquires, generally going more centralized is a bad idea. But again, I thought I'd mention that as a risk because that's something that I'd prefer not to see them take. I think you've been pretty thorough here in outlining the case for LIFCO as an addition to our intrinsic value portfolio. But obviously, before we can make any decisions around that, we have to look at the value of the business and the intrinsic value.

1:10:10And, you know, it's a subjective calculation, right? There is no ordained intrinsic value of a company, right? It's not like a law of nature. So anyways, we approach thinking about intrinsic value through this very simplified lens of looking at what the company might be worth in a bear case, a base case, and a bull case, and then pulling those scenarios together into a single valuation with weighted probabilities based on how likely the various outcomes are. And so with that context, Kyle, how about you take us through your base case for Lifco's business over the next couple of years? Yeah, so Lifco is one of these businesses where if you assume that they just stick to what they're doing, there's a very good chance that they'll continue to get returns that they've made historically.

1:10:56Now, I know most investors, myself included, tend to discount future growth. And I think that's normally a very, very good idea because at worst, it just builds in an extra margin of safety. But the fact is that most businesses do tend to fail. So you kind of have to default to that if you want to be a responsible investor. So for my base case, I assume a blended average of about 4 % organic growth, slowly decreasing to about 3 % in the terminal year, which I'm using here as 2030. And I'm going to be using that same year for all other scenarios as well. So I assume about a 10 % to 12 % in top line growth with the rest of that growth coming from mergers and acquisitions.

1:11:30Now, I'm assuming here that Lifco continues to find very high quality acquisitions. And as a result, they're going to continue climbing up in EBITDA margins very moderately from today's number of about 22.5 % up to about 23.5%. Now, given the growth trajectory in the past, I think this seems very achievable in the next five years, especially with the margins on some of their newest acquisitions clearly being very, very high in value accretive. I also assume the environmental technology and transportation products divisions, these new ones, which are naturally high margin, continue to grow and continue raising the bar for the entire company.

1:12:03Now, here I'm applying a 24 times EB to EBITDA multiple. So this has been their median multiple since 2019. And I think given the high capital efficiency and the quality of the business, if they're growing at my assumed rates, this multiple is fair. Yes, it's probably kind of high, but I think it's fair. So I'm also assuming zero share dilution, which obviously has been its strategy in its entirety. So, you know, I don't think it's a hot take to say that they're going to vary away from that. Now, with these assumptions, I get a price of 580 krona, which is offering about a 16 % compounded annual growth rate.

1:12:37But you also have to add in the fact that they have this kind of 1 % dividend yield. So the returns are going to look more like 17%. Yeah. So for context for listeners, that's on a basically a five-year time horizon, right? That's the expected rate of return based on if everything goes according to this base case, which of course it won't. But again, it's sort of a thought experiment. And I think it all sounds pretty reasonable. And maybe the only pushback I would give you is just like a slightly lower exit multiple personally. because we talked about how serial acquirers face this law of large numbers.

1:13:10And generally speaking, whether this will happen over the next five years, I'm not sure. But there is this reality where you have to accept the lower hurdle rates. We saw this with Buffett and Berkshire to continue meaningfully growing the business. And what that means is just accepting deals that they previously might not have seen as being attractive or focusing on a smaller number of larger companies to make deals with. And so that just reduces the opportunity to find these really mispriced assets. And so that's why I would say I might be a bit more conservative with a business where we know, unlike, say, Alphabet or Meta, where something like AI can dramatically reaccelerate growth, even for a multi-trillion dollar company, just isn't going to be the case here with a serial acquirer.

1:13:58And if growth dramatically reaccelerates, so then we might have other problems because they might be making value destructive acquisitions. And so, again, for that reason, it's a little harder to go off, in my perspective, the median valuation multiple from when the company was younger, like seven years ago at this point. But I'm getting a little bit ahead of myself and probably being a little too bear. So why don't you walk us through your bear thesis and how you think about that? Yeah, so I see your point there, Sean. And one of my favorite investing books was Chris Mayer's 100 Beggars. And one of my takeaways from that is that some businesses, and I believe Lifco to be one of them, you kind of have to suspend disbelief in their abilities.

1:14:36So, you know, yes, the majority of businesses will 100 % have a harder time growing as they scale. But for certain businesses, you know, if they can continue scaling in a healthy way, and if your research supports this, then you can get buying opportunities in these businesses that very rarely go on sale. Now, part of the reason a business like Lifco is such a good business is that it doesn't really go backwards. As in, you know, I don't really see a scenario where revenue is going to decline meaningfully and the businesses just no longer generate cash. So for this reason, my bear scenario still factors in growth, albeit at a much lower growth level compared to the base case.

1:15:08Now, I'm assuming that we continue to see some organic growth, but it's much lower at just 2%. I also assume that they continue to make acquisitions, but M &A growth is lower, kind of more in that 8 % to 10 % range. I also assume that there's a continuing weakness in some of the cyclical markets that Lifco is exposed to. Now, as a result, this, along with some FX headwinds, depresses EBITDA margins to a touch below 21%. This assumes that margins in nearly all segment drop by about 1 % with the demolition and tool segment continuing to face additional headwinds. Now, I know I'm not reducing margins much here, but LIFCO's margins have been incredibly, incredibly durable over the years.

1:15:44So since LIFCO has had its IPO, EBITDA margins have actually never decreased year over year. So for that reason, I'm using an exit multiple of about 20 times EB to EBITDA to assume that the market continues giving it, you know, a decent multiple, but obviously not the same premium that they've had in the past. So given the top and bottom lines would continue growing in this scenario, I don't also model a dramatic compression in their multiple in this scenario. So in this scenario, I'm getting a value of about 365 krona, which offers a 6 % return. And again, we have to add that dividend. So that gets us up to about 7 % returns.

1:16:17We're talking a lot of numbers. And for anybody who wants to see the model that Kyle put together and that we're talking about here, you can access it by signing up for our intrinsic value newsletter. And when our newsletter goes out on Lifco, we'll have links to the model in there. But how about you give us the bull case here? if things can go better than expected for this business in the coming years, what would that actually mean? Yeah. So, you know, I think there's a lot to be bullish on in general for Lifco. You know, given the current headwinds in the demolition and tool segment, I think it's fair to expect a tailwind once demand normalizes.

1:16:53Plus you factor in that the business is now focusing on these two new segments, which obviously carry very high margins and are growing faster than the rest of the business. And, you know, there's just some very good growth levers out here for the business to continue to pull on. So in the bull case, I assume its subsidiaries continue to grow organically at around 4%. Now, given that Lifco isn't in that 500 subsidiary range, I think in the best case scenario, they could maintain that range, but it will certainly get harder as they scale. I assume that the M &A engine continues to roar and the top line grows at about 12 to 14%.

1:17:25So as for margins, I see these continuing to expand as they raise the bar on the margins of their acquisitions. So at the terminal date, I'm applying an EBITDA margin of about 25%. So this is assuming that the higher margin segments continue to find high quality and higher margin businesses to add to the portfolio and that the businesses that are already in the portfolio are able to maybe slightly increase their margins as well. So for this case, I apply a 27 times EBITDA multiple for the business, assuming that the market continues to give the business a pretty premium metric given its growth metrics, capital efficiency.

1:17:58So I'm gonna keep the share count, the exact same. While buybacks are an option that I would like for them to take, I just think with how much they're focusing on dividends, I'm not going to assume that they're going to completely change course, even though that's the direction that I would personally prefer that they take. So this gives us a price of about 788 krona, which is a 24 % annual return, including dividends. Now, as for the future return, I'm still applying a 20 % margin of safety for this business. I flirted with 15 % because I think this business is definitely durable, but I decided to keep it at 20 % just to say conservative.

1:18:30For the bear scenario, I weighed that at about 30%, which is lower than my usual number of 40%. But just given the business's history, I think this is fair. So with all that, I get a terminal value of about 446 krona. And this offers about 11 % return with the dividend. Well, you expressed to me before the recording, Kyle, that this is a company you really have conviction in and that you might even replace Dina Polska with Lifco and your personal portfolio. So I mean, it's hard for me to argue with that. And like I said before, if anyone wants to keep up with the holdings and our intrinsic value portfolio and in our models, we do have a free newsletter called the intrinsic value newsletter that you can sign up for at the investors podcast.com.

1:19:09But yeah, I'm not opposed to making Lifco a small position. And, you know, we're low on cash at the moment in the portfolio. So we'd have to sell some Berkshire stock, probably to fund a two to 3 % position. But, you know, I don't have a problem with that. And, We've talked about using Berkshire shares as kind of like a cash proxy that we can tap into when we need more liquidity. And I don't think Daniel would disagree with the approach either. And so I wouldn't say any of us came away from Berkshire weekend feeling hugely bullish about owning the stock going forward, maybe in the same way that we did when Buffett was CEO.

1:19:44And so with Lifco, there's an argument to be made that we'd be taking our position in a very mature acquirer in Berkshire and rolling that into a company with certainly more runway ahead that happens to be trading at a relatively attractive valuation at the moment. So I don't necessarily have the conviction yet. I could get there. I just need to do more homework on the company. But, you know, I'm probably hesitant to make it a full 5 % holding since we target 15 to 20 companies in the portfolio. and right now we have about 16. But yeah, as a tracker position, I would very much be open to a 2 % to 3 % allocation.

1:20:21Yeah, I think that honestly sounds great to me. You know, while the returns on Lifco aren't exactly at that 12 % mark, which is kind of what we try to go for, I think it's fair to give it a little more leeway just given the high quality of the business and the fact that it does have a pretty good growth potential. So on your points there about Berkshire, I tend to agree with you. I think, you know, we had some really, really good discussions about Berkshire. And I think it's very, very fair to say that I completely agree with you on Berkshire. You know, it's obviously still a very, very solid company.

1:20:50But, you know, I would be lying if I said I'm just as impressed with it today as I was when Buffett was a CEO. So I think allocating to, you know, a starter position in that two to three percent range is a really, really good reallocation of capital. OK. All right, folks. So I think it's it's time to say goodbye. We've we've covered a lot of ground today. And I'd like to leave you with a quote from Frederick Carlson. from the former CEO of Lifco. He says, the big plus for a serial acquirer with a high EBITDA growth is they release cashflow. Basically, the best thing would be if only we had EBITDA growth because sales growth eats cash.

1:21:30And actually, he said this when discussing Roco, a business he's been leading ever since he left Lifco. And maybe we'll have to cover that on the podcast soon as well. But given the numbers that Lifco has generated, it remains completely relevant for Lifco. And so that's all for today, folks, and we'll see you again next time. Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional-grade data all in one place.

1:22:16And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P. Thanks for listening. Thanks for listening to T-I-P. Follow the Intrinsic Value Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs.

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