Lithuanian takeovers: keeping ownership at home

  • 2005-06-29
  • By Marius Pilibas
During a recent conversation with a moderately successful Lithuanian businessman, the subject of foreign investors came up. The enterpreneur, who recently gained full control of his company after buying out a foreign minority shareholder, bluntly dismissed the idea of attracting another foreigner. His response: "Shouldn't we try to keep our businesses 'Lithuanian' as long as we can?"

To be fair, a partner from abroad with a business understanding formed in a market vastly different from the Baltics today is quite a hassle. Today there is a general belief among Lithuanian company owners that management quality brought to the table by a foreign partner no longer exceeds that of the locals enough to justify the increased length of the decision-making process, lower operating flexibility and in many cases higher risk-aversity of a foreign investor. As a result, a majority of M&A transactions that involve a foreign partner take place in business sectors that require a very specific, locally unavailable resource (e.g., stock trading).

As privatization of large-scale infrastructure assets and privatization in general winds down, foreign strategic investors have seen their natural niche shrink and must today turn to the open market to acquire assets. With cost of debt instruments today as low as they are, local investors' love of risk and, in many cases, "buy-first-ask-later" mentality, acquisitions in Lithuania have become a family affair. All local alcohol producers and half of the country's electricity distribution grid were bought by Lithuanians.

Too small a fish to fry. The sky for Lithuanian investors is not without a cloud or two. Opportunities for acquisitions of meaningful size have become scarce. Having gotten used to higher risks, as well as returns, local investment houses and financial groups have set their sights on nearby markets and, in some cases, more far-out regions, such as Romania and Bulgaria. It is not uncommon to see chartered planes stacked with top Lithuanian investment and business community decision-makers take off from Vilnius for Kiev or Bucharest.

Already among the three top foreign investors in Kaliningrad and Latvia, Lithuanian businesses, such as Hanner, are launching commercial property development in Kiev and Bucharest. It might not be surprising to see the omnipresent VP Market unfurling pharmacy and retail chains throughout Eastern Europe, but the trend today is much broader and includes the acquisition of furniture and textile manufacturers in Russia and Ukraine (Sanitas recently took over Hoechst-Biotika in the Slovak Republic). In 2004 alone investments of Lithuanian companies abroad increased 97 percent to a staggering 188 million euros.

The Lithuanian way. Armed with deal-making expertise from past acquisitions, most active local players have cut out not only foreign investors but also local financial advisors. It is estimated that only around 10 's 15 percent of M&A transactions in Lithuania involve meaningful corporate finance advisory by outside professionals. In-house specialists are in many cases an important success factor for the largest local financial, and business groups and independent advisors have no reason to expect increased business flow from such clients.

For years numerous corporate finance advisors have been predicting that "the next year" will be the year of foreigners' acquisitions, as well as the beginning of the consolidation of fragmented market sectors. But we have yet to see any of the two happening on a meaningful scale. EU funds that poured into the food-processing sector have in many cases allowed companies to massively over-invest in production facilities and still remain viable on the market, even though they utilize less than half of their capacities. Vibrant domestic consumption has helped many companies forget the last time they were in the red and, combined with relatively high stock market valuations, have in many cases led to arguably unjustifiable valuation expectations.

With no public assets available for sale, and private-to-private transactions just gaining pace, it is not surprising that for some investors Lithuania is the country of lucrative opportunities that "once were."

Marius Pilibas is an analyst at Bridge Capital.