Once the Baltic states became candidates to join the EU, the response from foreign investors changed dramatically. If before 2002 it was mainly Scandinavians who showed an interest, after 2003 there were more nods from the U.K., Netherlands and Russia. Even those European companies that previously thought of the Baltic market as too small 's 7.5 million in three countries 's started considering expansion in the Baltics.
Latvia saw at least a 10-fold increase in acquisition deals in different industries: utility, food processing, soft drinks manufacturing, retailing, textile, financial services. It is expected that domestic consolidation will create new leaders in the future, and it is expected that a number of foreign investors will bow out as ownership redistribution continues.
Latvian M&A. In Latvia the merger and acquisition sphere is significantly different from Lithuania's, which has a different economic structure, and from Estonia's, which has strong historical and cultural ties to Finland. The Latvian population and core economic activity are concentrated in Riga, and the country's favorable location 's in the center of the Baltics 'shas lead to the development of such industries as transit, transportation, trade, business services, banking and finance. Through a number of early privatizations Latvia has managed to retain and develop old brands that were famous not just in Latvia but in all of the former Soviet Union 's the most notable examples such as Laima and Staburadze, cosmetics producer Dzintars and underwear producer Lauma.
FDI in Latvia has been lead by the Norwegians, who came into control of most of the largest retailing properties in Riga. Key assets in the food processing business have been taken over by Scandinavians: Fazer and Vaasan & Vaasan (Finland), Carlsberg Group (Sweden) the owner of Baltic Beverage Holding, Ruokatalo (Finland) and recently Danish Brewery Group (Denmark) and Orkla Food (Norway). The Latvian banking sector has undergone a complicated process of ownership change and currently is dominated by key Scandinavian players and by Germans.
Why acquisition? Many investors that came to Latvia in recent years have preferred acquisitions to greenfield investments. The first reason is market share: Buyers want the opportunity for immediate growth. Another reason is the acquisition of established, well-recognized brand names that can appear much more valuable for a buyer than manufacturing facilities or trade operations. For example, brands Cido (soft drinks and juices), Lauma (underwear), Spilva (ketchups, sauces), Aldaris (beer) have all found new strategic owners through acquisitions.
Strategic investors clearly prefer pan-Baltic acquisitions or buying a company with strong positions in all three Baltic countries. For example, the Cido Food Group, acquired by the Danish Brewery Group last year, is a market leader not just in Latvia but has a strong market position in Estonia and Lithuania. Orkla of Norway recently completed a series of Baltic acquisitions by buying Spilva, a producer of ketchup, mayonnaise and dressings and by doing so established a presence in all three Baltic countries.
Since many strategic investors are ready to pay a premium for pan-Baltic assets, local businessmen have realized the potential of creating a pan-Baltic asset. This pan-Baltic expansion process is likely to be lead by Lithuanians, as many Lithuanian groups have already started looking to invest into Latvia and Estonia and have the financial capacity to do it. Another path to pan-Baltic consolidation is through equity funds or financial groups. Here investors typically regard their purchases as short-term investments or three 's five years.
Latvia as the next step to Russian/CIS markets? Many Western investors regard Latvia and the Baltics as a launching pad to Russia. Russia and CIS represent huge markets for consumer goods, though many investors are still scared of Russia's political situation and mistrust its regulatory environment. In this respect, a company with a strong market position in Russia but located within the European Union could be a less painful way of getting exposure to the vast Russian market.
Future perspectives. Despite the fact that most large assets in Latvia are in foreign hands, there is space for further international consolidation. A number of mergers in expected on the market, and this process will in turn create new leaders.
Jekaterina Kolosova is senior analyst
at Bridge Capital
