Baltic Trendspotter: telecommunications, financial services, energy and food sectors to dominate 2016

Agne Mazeike and Katharine Dennys from Mergermarket summarise the key trends for the year ahead in the Baltic deal market.

  • Private equity-backed exit candidates include Kelprojektas, Sidrabe, Groglass, FCR Media
  • Food sector companies to watch include Food Union, Tere, PRFoods
  • Estonian state privatizations could stir up M&A market

The Baltics will see the largest deals coming from telecommunications, financial services, energy and utilities sectors, with the food sector also on the map in 2016, dealmakers said. So far in 2015, Mergermarket data shows there were 13 fewer deals compared to 1H15, equating to a value of EUR 209m, a 40.1% decrease by value compared to the 25 deals totaling EUR 350m in 1H15.

Since the beginning of 2015, there have been 37 Baltic-targeted transactions worth EUR 559m, down 46.8% by value compared to the 59 transactions during 2014 estimated at EUR 1.04bn.

Bite to improve numbers

Sponsor Mid Europa Partners is set to soon sell Lithuanian and Latvian mobile operator, Bite, several dealmakers said. The deal is expected to exceed EUR 300m and has entered an advanced stage, as reported.

The largest deal this year was the acquisition of a 43.25% stake in the Latvian oil products storage and transportation company Ventspils nafta [RSE: VNF1R] by the Cyprus-registered Euromin from the Latvian Latvijas NaftasTransits for an estimated value of EUR 199m, according to Mergermarket data.

Private equity driven M&A has not picked up at the speed anticipated, but the trend is still valid, said AareTammemae, a senior partner at Redgate Capital. Funds such as BaltCap, Livonia, BPM Capital and others, driven by the Baltic Innovation Fund, a European fund-of-funds initiative, have around EUR 300m capital to invest in theBaltics, said Simonas Gustainis, managing partner at BaltCap. Together with leverage available, total estimated deployable capital stands at around EUR 400m to EUR 500m, and this will be invested in the Baltics over the coming years, he added.

Potential targets for 2016 include the Lithuanian transport infrastructure engineering company, Kelprojektas, the Latvian high-tech companies, Sidrabe and Groglass, the Estonian information media company, FCR Media, according to earlier reports by this news service.

Businesses are in investment mode and have confidence in future growth, so there is no reason for further M&A decline, according to Irmantas Norkus, managing partner of Cobalt. M&A activity should be higher closer to the end of 2015 and in early 2016, according to Sven Papp, partner at Raidla Ellex.

Eyes on food sector

With a plethora of financing sources available, local businesses are considering non-organic growth opportunities, according to Darius Klimasauskas, associate director at KPMG. Businesses are looking to increase efficiency and consolidate market positions, as it is getting more difficult to grow organically in the domestic markets, he said, naming the food sector as an example.

The Latvian dairy Food Union, which has been growing through acquisitions over the past few years, is building scale to become an attractive target to Scandinavian peers, one dealmaker suggested. In Estonia, some food sector takeover candidates include the private equity-controlled fish products maker, PRFoods [TAL:PRF1T], and a privately held dairy, Tere, a second dealmaker added.

Meanwhile, the telecommunications sector is set to see local players trying to create four-play operators with TV, mobile, fixed line and internet services, said Mikus Janvars, partner at Porta Finance. Latvian state-backed operatorsLattelecom and Latvijas Mobilais Telefons (LMT) are to be watched in 2016, as their possible merger, although politically difficult, may be positive for business and stir up ownership issues, said Maris Vainovskis, senior partner atEversheds Bitans.

The Latvian government is in contact with the Swedish TeliaSonera [STO:TLSN], a co-owner in both Lattelecom andLMT, over future ownership scenarios, as reported.

The sector may also see further consolidation of cable TV operators, dealmakers said. The next major change on the Lithuanian cable TV market is likely to be related to Balticum, which can either become a target or acquire peers, as previously reported. Separately, the Latvian sector player Baltcom is interested in domestic acquisitions, also as reported.

Financial services on radar

There are a handful of small-to-mid-sized banks in Lithuania and Latvia, and the coming changes to IFRS9 and tightening regulatory requirements of Basel II will have the biggest impact on these banks’ costs and capital requirements, prompting them to look at various strategic alternatives, including mergers, said Klimasauskas.

The Latvian bank Citadele, which failed with its planned EUR 115m IPO this autumn, may raise capital from a financial investor next year and try the IPO avenue again, said Girts Rungainis, partner at Prudentia. Citadele may also turn to acquisitions in Lithuania and Estonia next year to increase its market share in the Baltics, said EvaBerlaus, managing partner at Sorainen in Latvia.

In Estonia, an IPO from a local bank LHV is expected in 2016, according to several dealmakers. Apart from LHV, the listing pipeline is not significant in the Baltics and it is not a lively market, said Rolan Jankelevitsh, partner at TarkGrunte Sutkiene.

In Lithuania, a potential takeover candidate is Medicinos bankas, as reported.

Meanwhile, insurance sector, the sale of Lietuvos draudimas, Balta and PZU Lietuva, is likely to spur further consolidation, said Paulius Gruodis, partner at Glimstedt.

Among potential targets in the region is the Latvian non-life insurer BTA, which is already at an advanced stage of a sale process, as reported in November.

Western buyers keen on infrastructure

Western European strategic investors are interested in the Baltic infrastructure companies, as they can acquire large assets at better prices than in Western Europe with similar risks, said Mikhail Kuklin, managing director for the Balticsat BIC Securities. The Baltics have mostly adopted EU-wide programs making it easier for potential investors to forecast regulation, he added.

Dealmakers expect to see the sale of Latvian and Estonian gas companies Latvijas Gaze [RSE:GZE1R] and EestiGaas by year-end or in 2016. Latvijas Gaze is expected to be sold to the European fund, Marguerite, as reported.

Alternative energy targets, such as wind parks, are also monitored by potential bidders, such as the Lithuanian state-held energy group Lietuvos energija, several dealmakers said.

State-owned organizations and local governments remain active catalysts in the Baltic M&A market, according toJulijus Grigaliunas, managing partner at Porta Finance.

For example, the Estonian government is considering selling a majority stake in postal services company, Eesti Post, to a strategic investor, with a decision expected in 1H16. The government is also preparing to sell Eesti Teed, a road maintenance company, and complete the sale of Andmevara, an IT company, by April 2016, according to earlier reports by this news service.

by Agne Mazeike with analytics by Katharine Dennys

Trends in each of the Nordic markets will be examined at Mergermarket's Nordic M&A and Private Equity Forum on 10 March 2016 in Stockholm.

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