Orkla ASA

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Orkla ASA

Karenslyst alle 6
Oslo, 0278
Norway
Telephone: (47) 22 54 40 00
Fax: (47) 22 54 44 90
Web site: http://www.orkla.com

Public Company
Incorporated: 1991
Employees: 19,575
Sales: NOK 55 billion ($8.11 billion) (2005)
Stock Exchanges: Oslo
Ticker Symbol: ORK
NAIC: 422410 General Line Grocery Wholesalers; 422420 Packaged Frozen Food Wholesalers; 422430 Dairy Product (Except Dried or Canned) Wholesalers; 422440 Poultry and Poultry Product Wholesalers; 422450 Confectionery Wholesalers; 422460 Fish and Seafood Wholesalers; 422990 Other Miscellaneous Nondurable Goods Wholesalers; 421990 Other Miscellaneous Durable Goods Wholesalers

Orkla ASA is a leading manufacturer of branded consumer goods, specialty materials, and financial investments based in Norway. With a history dating back to the 17th century, Orkla provides a wide variety of products and services, ranging from frozen pizza and seafood to metals and specialty chemicals. The company also owns one of the largest equity portfolios in Norway. Its Specialty Materials business segment is comprised of Elkem, one of the world's largest suppliers of metals and materials; Sapa, a leading aluminum producer; and Borregaard, which offers specialty chemicals, fine chemicals, and ingredients. The company's Branded Consumer Goods segment—comprised of Orkla Foods, Orkla Brands, and Orkla Media—accounted for nearly 55 percent of total revenues in 2005. Orkla sold its media group in 2006 in a $1.2 billion deal.

ORKLA INDUSTRIER A/S: 1904–85

The original firm of the present-day Orkla ASA conglomerate traces its roots back to the first pyrite mining operations conducted at Løkken Verk, Norway (south of Trondheim near the Orkla River), which began in 1654. In the succeeding years, a smelting industry grew up around the mines in the area, and after a period of disuse, in 1904 the Løkken Verk mines were reopened by the newly formed Orkla Industrier. For the next 40-plus years, Orkla focused on developing its mining businesses. In the years following World War II, however, Orkla Industrier began building up an ever widening investment portfolio of other companies and in 1958 established an important joint venture with the Unilever Group (makers of "All" detergent, among other products) to manufacture detergents and personal products—a relationship that was still in place in 1997. In 1981, Orkla extended its strategy to diversify beyond its original mining businesses by purchasing its first newspaper publisher.

BORREGAARD A/S: 1918–85

In 1986 Orkla agreed to merge with Borregaard A/S, a major Norwegian chemicals company, to form a new entity, Orkla Borregaard A/S. Borregaard traced its roots back to 1918, when a partnership of Norwegian business interests had acquired the British firm The Kellner Partington Paper Pulp Co., Ltd., itself founded in 1889. A manufacturer of pulp and paper in Norway, Sweden, and Austria, Kellner Partington had fueled its growth through a combination of British capital and Austrian technology. Rechristened Borregaard, the new firm began establishing a reputation as one of the world's foremost producers of pulp and paper, with production facilities in several countries and international sales.

In 1938, Borregaard entered the chemicals business when it began using sugar compounds found in the byproducts of wood pulp production as the raw material for the production of ethanol (used in alcohol and as a solvent). In 1960, it began expanding its chemicals and consumer products, and in 1962 and 1967 it extended its pulp byproduct chemicals manufacturing applications from ethanol to vanillin and lignin, respectively. Although by the mid-1970s Borregaard still owned one of the two largest wood pulp mills in Norway, in the early 1980s it made the radical leap from using pulp as its primary raw material to the production of fine chemicals that used nonpulp-based applications from the specialized fields of advanced chemicals manufacture.

The reason for the shift was plain: demand for Borregaard's traditional wood processing products had begun to fade, and it was forced to begin unloading its international production facilities. In 1979, for example, it sold its Borregaard Osterreich AG subsidiary for NOK 84 million; then in 1983 it sold a 6 percent interest in its stock to food and beverages group Nora Industrier A/S, only to purchase back a 42 percent interest in Nora a year later. In 1985, Borregaard and Nora turned to each other's shares again: in a so-called demerger, Borregaard gained a 45 percent share in Stabburet-Nora—a Norwegian fresh and wholesale grocery company—in exchange for half a million shares of its own stock. Borregaard's overhaul of its historical identity as an old-line paper and pulp producer was about to enter a new phase.

ORKLA BORREGAARD A/S: 1986–91

Borregaard's merger with Orkla in 1986 began the most important stage in its transformation into a high-tech global chemicals maker. As Borregaard's businesses were integrated into Orkla's corporate structure, Orkla's management undertook a major restructuring of the Borregaard fold to bring it in line with the new global markets for advanced chemicals products. Meanwhile, Orkla could add to its traditional brand-name consumer goods, media, and investments businesses Borregaard's wood processing, chemical products, hydroelectric power generation, forestry, and engineering operations.

In 1987, Orkla Borregaard closed its Løkken Gruber mining operations and a year later merged with four Norwegian firms: Johan Norlie A/S, Berskaug A/S, parsley producer Persilfabriken A/S, and real estate firm Orkla Eiendom A/S. To further bolster its new consumer and media orientation, it acquired Ostlandske Fryserier A/S's cold storage plant in Brummunddal, Norway, in 1988 and map publisher Planforlaget in early 1989. During 1989 and 1990 Orkla Borregaard enhanced its position in the chemicals industry with the purchase of increased interests in the chemicals firms Elkem and Dyno Industrier, the acquisition of a Swedish firm's international lignin operations, and the formation of a joint venture with the Eni Group of Italy to produce vanillin, synthetic vanillin, raw materials, and derivative products.

NORA INDUSTRIER A/S: 1969–91

Less than five years after Orkla's monumental merger with Borregaard, the company moved again to expand its product lines and market share through a major acquisition: on January 1, 1991, Orkla Borregaard and Nora Industrier were united through an exchange of stock to form Orkla A/S. Nora Industrier had been formed in 1978 from the consolidation of several Oslo breweries with roots going back to the 1820s. Within a few years, it had become Norway's leading supplier of beer and carbonated soft drinks, fortified by holdings in the Norwegian food market.

COMPANY PERSPECTIVES

Orkla seeks to achieve growth and long-term value creation in its industrial activities by creating competitive advantages based on: a competent organization and a sound corporate culture in which learning and empowerment are key elements; specialized and clearly differentiated products; and strong and leading market positions.

Within five years of its founding Nora had acquired holdings in a brewery, a mineral water producer, and a glassmaker and merged operations with a fourth firm. In 1984 alone it bought another brewery (A/S Lillehammer Bryggeri) and a health drink maker (Vitaminveien 6) established a real estate firm, and began acquiring a 47 percent interest in Helly-Hansen A/S, a major Norwegian manufacturer of men's and women's clothing founded in 1877. Between 1986 and 1988 Nora merged with yeast makers Gjaer A/S and Idu Gjarfabrikken A/S, chemicals producer Oslo Kjemiske Industri A/S, seed supplier Norsk Froforsyning A/S, flour mill Bjolsen Valsemolle A/S, and beverage maker Hamar Bryggeri, among others. In 1987 Nora moved closer to Orkla's product sphere by gaining a substantial ownership stake in six Nordic industrial bakeries and becoming a majority shareholder in the new bakery industry group Bakers A/S. By 1995 the Nora unit within Orkla A/S would be one of the largest suppliers of foods and ingredients to the Norwegian grocery trade, catering, bakery, and food manufacturing industries. In 1988 it merged its breweries and mineral water companies with beverage maker Ringnes Frydenlund, creating a single beverage division and a major new force in the Norwegian beverage market.

Ringnes had been founded as Ringnes Bryggeri (brewery) by Amund and Ellef Ringnes in 1876. Among its landmark products were Vørterol (1903), "recommended by 400 doctors"; the first bottles of a popular new soft drink named Solo (1934); the first Coca-Cola sold in Norway (1938), the first Heineken beer produced in Norway (1975), and the introduction of the market-leading Ringnes brand of beer itself. With Ringnes leading its beverage markets, Nora let Hamar Bryggeri's bottling pact with Pepsi expire in 1987, and in 1989 and 1990 acquired ten companies, from mineral water producer Narvik Minneralvann A/S and food producer Danish Fancy Food A/S to brewer Tou A/S and health food producer Elfas Helsekost A/S.

ORKLA A/S: 1991–94

Until the Nora merger, Orkla Borregaard for all its rapid growth had remained primarily a Norwegian company with scattered businesses in Denmark. Its holdings in Sweden—the largest segment of the Scandinavian market—were almost nonexistent. With Nora anchoring Orkla's industry-leading consumer brands group, however, Orkla A/S entered the 1990s poised to become a broadly positioned Scandinavian firm ready to expand into Europe and beyond. Its specific long-term goal was to reduce its dependence on Norwegian sales to less than half of annual revenues, and toward that end in 1991 Orkla Beverage joined in a Polish joint venture to gain a foothold in the newly opened Iron Curtain market and two years later established Ringnes Beer Ltd. of Poland.

Orkla's late 1980s campaign to restructure Borregaard into a global high-tech chemicals firm continued in the early 1990s with the erection of a new fine chemicals plant in Norway and the acquisition of Daishowa Chemicals of the United States and industrial ethanol producer Kemetyl AB of Sweden in 1991. In 1993, it added the lignin operations of Finland's Metsä-Serla and the Italian and Chinese diphenol (used in the production of vanillin) plants of Italy's EniChem Synthesis in 1994. In addition, the EniChem deal—which was expected to net Orkla NOK 500 million in 1995—gave Orkla's new Borregaard Synthesis unit control of the Norwegian firm Euro Vanillin, the second-largest vanillin producer in the world.

KEY DATES

1654:: The first pyrite mining operations begin at Løkken Verk, Norway.
1904:: The Løkken Verk mines are reopened by the newly formed Orkla Industrier.
1958:: The company establishes a joint venture with the Unilever Group to manufacture detergents and personal products.
1981:: Orkla purchases its first newspaper publisher.
1986:: The company merges with Borregaard A/S.
1987:: Orkla Borregaard closes its Lokken mining operations.
1991:: Orkla Borregaard and Nora Industrier merge to form Orkla A/S.
1995:: Procordia Foods and Abba Seafood AB are purchased.
2005:: Elkem and Sapa are acquired.
2006:: The company sells Orkla Media.

Orkla also focused intently on its media empire. In 1991 Orkla Media bought three Norwegian newspapers, and in November the Norwegian government awarded Netcom GSM A/S, a mobile telecommunications company owned by Orkla Communications, the go-ahead to provide cell phone services to Norway's central region beginning in late 1992. Then in 1993, in a joint venture with Norske Egmont Orkla, the company acquired a 50 percent stake in Hjemmet Mortensen group, the market leader in the Norwegian magazine business. It followed this with the purchase of interests in the Norwegian newspaper Bergens Tidende and six Polish newspapers in 1993. In 1994, Orkla Media acquired the newspapers Drammens Tidende og Buskeruds Blad and Varden and gained a stake in the newspaper Fjordenes Tidende. Finally, in its critical food segment, Orkla scooped up Swedish biscuit maker Goteborg Sex AB, Finnish biscuit maker Quintillion, and grocery wholesaler R.N. Glossiest of Sweden. Concentrating on the consumer food market, it bought out the remainder of Bakers A/S and sold half its interest in clothier Helly-Hansen before repositioning its household products, biscuits/snacks, and chocolate/confectionary units under one roof: Orkla Brands.

PROCORDIA, ABBA, PRIPPS, RINGNES—AND COCA-COLA: 1995–96

Orkla's activities in the food industry in the early 1990s paled in comparison to its third major acquisition in a decade: the purchase in April 1995 of Procordia Foods and Abba Seafood AB from Swedish car maker Volvo for $578 million. The deal, however, would not only make Orkla a $1.6 billion corporate colossus with annual food sales twice the size of current levels. Volvo also agreed to enter into a joint venture with Orkla to create a new beverage industry leader out of the two companies' flagship bottlers, Pripps (Sweden's largest brewery) and Ringnes (Coca-Cola's largest Norwegian bottler), respectively. The new Pripps Ringnes AB would make Orkla the number one beer, carbonated soft drink, and water products company in Norway and Sweden and, through Pripps Ringnes's stake in Oy Hartwall Ab and Baltic Beverage Holdings, the market leader in beer sales in, respectively, Finland and the Baltic/St. Petersburg, Russia.

Orkla's CEO Jens P. Heyerdahl told interviewers that the magnitude of the Volvo acquisition/merger would improve Orkla's ability to stave off foreign competition for its nearby markets. Although Heyerdahl had helped to defeat Norway's proposed membership in the European Union (EU) in 1994, the Procordia/Abba/Pripps Ringnes deal demonstrated that he wanted to position Orkla to enter the European market he had once scorned by way of Sweden, an EU member since 1994. Because the new venture, Pripps Ringnes, would effectively control 82 percent of the Norwegian beer market, 60 percent of the Swedish soft drink market, and 95 percent of Norway's market for bottled water, however, the second phase of the Volvo-Orkla deal had to wait upon the approval of both the EU and Norway and Sweden's antitrust agencies. The anchor of the Volvo-Orkla food deal, Procordia AB, had been formed by the Swedish government in 1969 as Statsforetag, and in its two-decade-plus existence had branched from beverage sales into foods, pharmaceuticals, media services, hotels, tobacco, engineering, and development. By the end of 1990 it had sales of SEK 36.6 billion and 45,000 employees and maintained subsidiaries and affiliated companies in Denmark, Spain, the United Kingdom, Japan, the Netherlands, France, the United States, and Switzerland. By the time Volvo assumed direction of the company, however, Procordia was, as the Wall Street Journal characterized it, "only moderately profitable," and thus Volvo was unable to get prospective international buyers outside of Scandinavia to make compelling bids.

By September 1995, the EU and the Swedish government's antitrust agency had granted Orkla permission to absorb Procordia and Abba in exchange for several concessions: Orkla could no longer prevent the Swedish food company ICA from marketing its own private-label juices and jams, and Orkla itself would refrain from producing private-label juices and jams in Sweden for three years. More importantly, Orkla agreed to sell Hansa Bryggeri, the second-largest brewer in Norway, in 1996 to ease competitors' antitrust anxieties.

Almost as soon as the deal was finalized, however, Orkla faced a major obstacle. As part of its 42-year-old bottling and distribution contract with Pripps, the Coca-Cola Company—whose products accounted for 35 percent of Pripps Ringnes's total sales—was entitled to renegotiate its Pripps contract, and it quickly submitted a new contract in which Pripps would not only be required to focus exclusively on Coke's products but also sell Coke the Pripps line of soft drinks that it marketed along with Coke's products. Pripps's management rejected Coke's demands, calling them "corporate imperialism," and in December 1995 Coke dropped Pripps as its sole supplier for the Swedish market, citing Pripps's new management (i.e., Orkla) and the company's "weak" performance. Pripps countered that its Swedish sales had grown 10 percent annually in each of the past eight years, but the damage was already done. In December, union members of a Pripps bottler in Norway stopped production of Coke products in sympathetic protest even though Pripps's Norwegian operations were unaffected by the terminated Swedish contract.

Unaccustomed to such unrest in its foreign operations, in July 1996 Coca-Cola terminated its Norwegian bottling and sales agreements as well, forcing Orkla's new Pripps Ringnes venture to lay off 1,400 workers. With Coke determined to set up its own bottling and sales operations in Scandinavia, Coke and Orkla agreed on a $166 million severance package that would temporarily extend the historic Coke-Pripps collaboration until the beginning of 1999. Orkla was now free to promote its own soft drink products (such as Mozell and Farris) over Coca-Cola's, and with 60 to 65 percent market share in the Swedish and Norwegian soft drinks market it hoped to be able to compete against Coke's new Scandinavian soft drink machine.

GLOBAL AT LAST: 1996–97

If Orkla's new beverage operations were in tumult, the expansion of its chemicals businesses proceeded at a more orderly pace. By the mid-1990s, an ever more substantial portion of Borregaard's sales were coming from Asia. It was the majority owner of a fine chemicals company for the manufacture of crop pesticide products in China's Jiangsu province, had established a laboratory for technical customer support in Singapore, and maintained sales offices in Singapore, Japan, and mainland China. In May 1996, Borregaard Ligno Tech and China's Kaishantun Chemical Fibre Pulp Mill signed an agreement to jointly produce lignin-based products (primarily for additives to concrete) through a new joint venture in northeast China, and a year earlier Orkla had opened a new lignin plant outside Seattle. As the century drew to a close, Borregaard had successfully made the transition from a basic paper and pulp supplier to a niche producer of vanillin and intermediates to a diversified global producer of a full range of chemicals for the construction, agricultural, and pharmaceuticals industries.

Orkla's campaign to become an even larger presence in the European media market also advanced in the mid-1990s. In mid-1996, for example, Orkla Media signed a letter of intent with the Hersant Group, a French media giant, to take over Hersant's controlling interest in the Polish newspaper publishing company Presspublica, which owned the national daily Rzeczpospolita and the newspaper's printing company Warszawa Print. The deal brought to nine the number of local and regional Polish dailies owned by Orkla Media, not counting its printing facilities in northern and southern Poland. With the Presspublica acquisition, improved advertising revenues in its Norwegian newspaper businesses, and cost reductions in its magazine segment, Orkla Media's profits edged upward in mid-1996.

Between 1995 and 1997, Orkla wrestled with the problems and opportunities presented by the Procordia/Abba/Pripps Ringnes merger of 1995. In early 1996 beer and soft drink sales in Sweden fell in part because of high Swedish alcohol taxes, which drove consumers to buy private beer imports. Under a European Union deadline, Orkla finally sold brewery Hansa Bryggeri to a group of investors in December 1996 to meet the terms of the 1995 Pripps Ringnes merger, and to consolidate its new Abba Seafood business in September 1996 Orkla sold its German seafood operations and mackerel and shrimp factories in Sweden and reduced its interest in Abba's Danish mussel factory. By intentionally focusing on fewer products and markets, a leaner Abba Seafood promised to offer Orkla increased long-term profitability.

Productivity improvements, a new 20-year extension of its detergent/personal products agreement with Unilever, Sweden's reduction of its value-added tax (VAT) on food, price increases for Orkla's Swedish grocery products, the reorganization of its Swedish fruit and berry production operations, and improved versions of its Omo and Blenda detergent brands—all contributed to an increase in Orkla's consumer-branded products segments in 1996. From operating revenues of NOK 15.47 billion in 1990, Orkla's revenues had risen to NOK 21.53 billion by 1995. As the day drew near when identical, truly "Nordic" brands could be marketed in every Scandinavian country, in 1996 Orkla reached its long-sought goal of 50 percent or more non-Norwegian sales.

ORKLA IN THE NEW MILLENNIUM

Orkla made several important moves in the early years of the new millennium to strengthen its operating structure while increasing profits. In an attempt to bolster its consumer goods business segment, the company began a joint venture with Carlsberg A/S in 2000 in which the two companies combined their brewing operations to form Carlsberg Breweries. Orkla retained a 40 percent interest in the newly formed company but arguments over business strategies led Orkla to sell its shares back to Carlsberg in 2004 in a $3.3 billion deal. That same year, the company acquired SladCo, a Russian manufacturer of chocolate, biscuits, and confectionary products. Finnish company Chips was purchased the following year.

Orkla's next big purchase came in 2005 when it added Elkem, a specialty metals group, to its arsenal. Orkla had been battling for control of Elkem ASA with U.S.-based Alcoa—owner of 46 percent of Elkem—since 1998. In the end Alcoa retreated, leaving Orkla free to complete its acquisition. The overall process however, proved costly to the company. Longtime Orkla employee and CEO Finn Jebsen was ousted during the bidding process, criticized for failing to reveal that the company would have to bid on Swedish aluminum group Sapa AB as part of its bid for the remaining shares of Elkem. In the end, Orkla paid approximately $1.16 billion for Elkem and $290 million for Sapa. Dag J. Opedal was named president and CEO in 2005.

When the dust settled on the deal, Elkem, Sapa, and Borregaard became part of Orkla's Specialty Materials group. The company planned to strengthen this group by looking for growth opportunities in the renewable energy sector. Orkla also planned to shore up Elkem profits in primary aluminum by constructing a new anode factory in Mosjoen, by strengthening its partnership with Alcoa, and by securing its electricity supplies until 2020 through a contract with Vattenfall. To improve Sapa's bottom line, the company looked to organic growth as well as geographical expansion.

The company made a major change in its Branded Consumer Goods segment when it decided to sell Orkla Media, which at the time was the fifth largest media group in Scandinavia. Mecom Group plc of the United Kingdom paid $1.2 billion for the media unit in 2006. Orkla planned to use the proceeds to focus on its core industrial businesses.

Orkla's strategy at this time was also included a focus on innovation, operational improvements, and structural development as a means of growth. Company management was aware that the industries it operated in were constantly changing and as such, planned to take advantage of opportunities that would strengthen the company's overall structure and profitability. While Orkla ASA had indeed achieved conglomerate status on a global scale, only time would tell how its acquisitions and the sale of its Orkla Media group would affect its long-term profitability.

Paul S. Bodine