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M&A: confidence is back

By Howard Jarvis. 28.11.2010

Ivars Gunte (right), Partner, Tark Grunte Sutkiene
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Legal experts specializing in merger and acquisitions are unanimous. A perceptible degree of optimism is returning to the Latvian and Baltic markets.

The Baltic countries are returning to economic growth in 2010, at rates faster than previously forecast. One direct result of this is that a greater number of merger-and-acquisitions transactions will be concluded in the coming months.
The severe and unprecedented double-digit contractions of 2009 viciously threw the three “Baltic Tigers” back in time, eradicating much of the superlative progress seen in the boom years. Strong economic growth in the four years following EU membership in 2004 had seen annual GDP figures regularly exceed 10 percent.
It will take time before M&A activity returns to the quick-fire, highly priced deals common in the heydays of 2006-08. But the M&A lawyers we interviewed for this article all expressed cautious optimism that some of the value and volume of mergers and acquisitions in Latvia and the other Baltic countries are beginning to crawl back.
The number of reported closed M&A deals worth at least €5 million in the Baltic region reached 49 in 2008. In 2009, this slumped to just 19 (see table below). Investor interest in the Baltic countries continued into the crisis, as the number of permits to implement acquisitions or mergers issued by the three states’ competition councils remained consistent in 2009. But in most cases the initial intent was not followed through with closed deals and transactions.
In Lithuania, for example, over 20 deals in 2008 worth approximately €2 billion in total dropped to only six in 2009, worth less than €500 million, according to data from the independent M&A intelligence service Mergermarket.
“Before the crisis, it was very much a seller’s market,” said Laimonas Skibarka, partner at the pan-Baltic law firm Sorainen and head of its M&A team across the region. “This created too much of an imbalance, as many companies and assets were substantially overvalued.”
High leverage and tough competition among bidders resulted in overvalued assets. Valuations then plunged during the crisis, typically by as much as 40-60 percent. Some companies sold in 2007 are now being resold for half the price in 2010.
“The first signs of a crisis were perceptible at the beginning of 2008,” Ivars Grunte, partner at the pan-Baltic law firm Tark Grunte Sutkiene, recalled. “But no one could understand why. Then came an unnerving period of silence in the second half of 2008, and warning bells really began to sound when early restructuring deals started.”
The ensuing economic crisis was not entirely bad for the M&A market. While some lawyers were reassigned to insolvency cases, others were kept reasonably busy as companies under pressure began to sell or restructure businesses. Typically, a crisis situation forces the business community to think harder about options related to mergers and acquisitions as strategic tools to solve challenges. M&A is less of a strategy in a bull market.
“Lawyers had to adapt their skills to the fast-changing situation,” Mr Grunte acknowledged. “We needed to think more laterally, more than strictly law, and this advice was very important for clients.”
Nevertheless, as bad as things became, most companies chose to slash costs and shed personnel rather than cut assets loose – internal devaluations, if you like, similar to those experienced by the wider Baltic economies. The Baltic markets and business communities are small and the media are hungry for scandal, making businesspeople extremely wary of the stigma attached to a speedy selloff – even in a time of severe crisis.
“In the switch to what quickly became a buyer’s market, the buyers began to offer very little in their bids,” said Zane Štalberga-Markvarte, partner at the Latvian law firm Markvarte-Lexchange. “But sellers were not so desperate.”
Yet at the same time credits dried up as the banks operating in Latvia and the Baltic markets – the leading ones are mostly Swedish-owned – abruptly pulled back their reckless lending practices. Companies found themselves starved of funding. Banks organized seminars across the region to emphasize the importance of financial alternatives such as risk capital.
“The criteria from banks were so strict, including requests for personal guarantees, that most businesspeople did not want to accept,” Mrs Štalberga-Markvarte explained.
“The situation was frantic,” Mr Skibarka said. “There were fire sales. But actually we expected more of them. The Scandinavian-owned banks were cautious, passive, and not aggressive in forcing sales. As a consequence, the crisis did not fuel M&A.”

Turnaround
It was clearly a nightmarish and unpredictable period. But now signs of a turnaround in the M&A market are becoming clear. The Baltic economies are growing again, and fears of devaluation have disappeared. The forthcoming accession of Estonia into the EMU is also helping to build more confidence among investors in the Baltic region as a whole.
Another positive sign is the European Commission’s JEREMIE (Joint European Resources for Micro to Medium Enterprises) initiative, which has been designed to provoke activity in the Baltics’ private equity markets. As part of the initiative, BaltCap, among others, has attracted private capital to create risk capital funds of up to €20 million to invest in Latvian and Lithuanian small- and medium-sized enterprises.
Meanwhile, M&A transactions are starting to accumulate. One major transaction so far in 2010, involving two Baltic countries, was Odense Steel Shipyard’s sale of two Lithuanian subsidiaries – Baltija Shipbuilding Yard and Baltic Engineering Centre – to the Estonian company BLRT Grupp in June, for an undisclosed price. Sorainen advised Odense in the disposal of the Baltija assets.
“M&A processes that began in the first half of 2010 are now closing,” Mr Skibarka enthused. “This is positive as it shows investor confidence. There will be many more in 2011, at least 50 percent more than in 2010. I would say that it is realistic to expect the levels of 2007-08 returning in 2012, by number of deals if not by price.”
Among other recent Baltic deals, Sorainen advised the Latvian state in the sale of 25 percent of Latvia’s Parex Bank to the European Bank for Reconstruction and Development; the crude oil refiner PKN Orlen on buying the remaining 10 percent stake in the Mažeikių Nafta refinery, one of the region’s biggest companies; and Bayer HealthCare on its acquisition of Sagmel, a nutritional supplement manufacturer operating in the Baltics and Belarus.
Bloomberg’s M&A Legal Advisory Rankings for the first three quarters of 2010 places Sorainen fifth in Eastern Europe by the number of announced deals – 10 of them during the period, worth a total of €34 million – and first in the Baltic states.
To put that into a global perspective, however, only 2 percent of the world’s €42.35 billion in M&A transactions in the third quarter of 2010 took place in Eastern Europe, compared to 25 percent in Western Europe.
Tark Grunte Sutkiene and Markvarte-Lexchange chose not to divulge the details of deals they have recently advised on, but confirmed that investor interest is picking up.
“The results of the October parliamentary elections in Latvia were positive, but if taxes are raised further, companies may be forced to sell businesses or restructure. That could be a trigger for M&A activity – together with growing investor confidence in the Latvian economy,” Zane Štalberga-Markvarte said.
“Businesspeople have emerged from the crisis with more experience and greater caution. But step by step, classic M&A – not just restructuring – is returning,” Ivars Grunte assured.
“This is the right time to invest and develop a business,” he added. “There is little risk. Latvia has obligations to the IMF. Smaller enterprises are merging in order to survive. They need investments to compete. Investors are negotiating for the real value of a company, which is closer to reality.”

Sectors to watch
Asked about which sectors of the economy seem to be attracting M&A activity faster than others, Mr Grunte mentioned telecoms, IT, energy and heating, food and beverages, and road construction. Mrs Štalberga-Markvarte also said that energy has definite prospects, as have healthcare and wood processing. More than half of Latvia is covered in forests and the price of wood here is comparatively low.
Laimonas Skibarka pointed to energy as a sector that is still state-dominated and which may be the next area the cash-starved Baltic governments turn to for raising money.
“The food industry will consolidate across the Baltics, one example being the Latvian meat producer Rigas miesnieks, which belongs to the Finnish-based concern HKScan, acquiring its rival Jelgavas galas kombinats in June. Utilities, IT, healthcare and retail could be other sectors that are promising for M&A deals in the Baltic region,” he said.
It was also in June that the UK company United Utilities sold its shares in the Estonian water company Tallinna vesi to another British company, Veolia Water.
Buyers looking at the Baltic region today are far more cautious than they used to be, while being much more aggressive in negotiating transactions and their own conditions. The process therefore takes twice as long as it did in 2007. Right now, there are few bidders in this buyer’s market.
“There is a better mood for deal making,” Mr Skibarka summarized. “It’s a good time to invest. Prices are not increasing fast and there is no competition between buyers. In a year’s time, however, it will be different.”


Signs of color
Reported closed deals in the Baltic region worth at least €5 million

Y2008 Jan-Sept 41 (full-year – 49)
Y2009 Jan-Sept 11 (full-year – 19)
Y2010 Jan-Sept 16

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Aly Chiman 04.03.2019 10:26

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