2013 Baltic M&A Market Outlook

28 January, 2013

The Baltic mergers and acquisitions (“M&A”) market is gradually recovering after the rapid decline of a couple of years ago, and the outlook is encouraging with various drivers creating opportunities for both expansive enterprises as well as exit-planners.

A positive trend that will continue is Baltic entrepreneurs choosing to expand internationally through M&A and consolidating the market. Local capital has been strengthened by an improving financial performance in the last few years and is backed by the Baltic branches of otherwise solid Nordic banks. Vivid examples of such transactions are VP Group’s (Lithuanian retail group) acquisitions in Spain and Poland, the acquisition of a peer in Finland by Nortal (an IT services firm based in Estonia), Alexela’s (Estonian energy group) acquisition of Veolia Environment’s operations in Estonia and Lithuania, the sale of heating assets in Estonia by Dalkia to local entrepreneurs, and a successful acquisition of a facility management business in Poland by City Service (a facility manager listed on Nasdaq OMX Vilnius). Our experience shows that the trend of the growing importance of local capital in the region’s M&A is likely to continue.

Likewise, private equity funds (“PE”-s) will remain a driver of the region’s M&A activity. The creation of the Baltic Innovation Fund (“BIF”), backed by the three Baltic countries and the European Investment Fund, is encouraging local fund managers to pool money for new private equity funds investing in the region. BIF’s €100m of equity capital will be at minimum matched by private investors, resulting in at least €200m of fresh equity capital allocated to the Baltic enterprises over the next years. Looking outside of the Baltics, larger PE-s active in the CEE region are also in the fundraising mode. However, the success rate of raising new funds in today’s environment is yet to be seen.

Several transactions planned in the region for 2013 are driven by financial investors as certain Baltic and CEE funds have reached their exit stage. However, the likelihood of closing the transactions depends if the wide valuation gap between the buyers’ and the sellers’ expectations can be closed. PE-s that are exiting from their mature funds and, in the meantime, fundraising for new funds are in certain cases motivated to delay exits if attractive valuation levels cannot be immediately reached. Alternatively, PE-s are also considering carving out non-core operations of some portfolio companies that have a different risk profile than the respective company’s core business, therefore achieving a partial exit. If such non-core operation (for example, cash flow, real estate or other fixed assets) has a lower risk profile than the core business of the company, then the seller can rightfully expect a higher valuation level for the carve-out.

Also, foreign strategic investors, although somewhat less predictable in terms of size of the potential transactions, will remain on the lookout. Similarly to local buyers and financial investors, sector consolidation is one potential theme to follow, with, for example, dairy, healthcare, and retail sectors providing ample opportunities.

All in all, the state of the market provides reasons for optimism with regards to expected M&A activity in the Baltic region.

Karl-Erik Kodu
Director, Porta Finance
Tel: +372 602 5015