Deals show some investors are not so sweet

  • 2001-01-18
  • Ilze Arklina
RIGA - Many Baltic companies have found new investors abroad. Unfortunately, some have come to look for fast money instead of long-term plans. The Icelandic owners of the leading Latvian pastry maker Staburadze have cast a shadow of doubt over their true intentions with their recent acquisitions and huge loans. At an extraordinary shareholders meeting on Jan. 11, changes in the board at Staburadze were approved, while the future of the company looks increasing shakey.

The story started in November 1999, when Icelandic businessman Gisli Reynisson founded and registered a company called Nordic Industries. A month later, Nordic Industries founded Noi Baltija, and then in March 2000 the company Nordic Food was registered jointly by Nordic Industries (76.75 percent) and Icelandic sweets producer Noi Sirius (23.25 percent) to buy a 43 percent stake in the public stock company Staburadze from another foreign investor, Italian businessman Ernesto Preatoni, for 1.36 million lats ($2,21 million).

The project was partly financed by the Latvian bank Baltijas Tranzitu Banka. It had already been planned that the loan would be partly returned by selling the Noi Baltija company to Staburadze for 500,000 lats by June 2000, according to a document recently obtained by The Baltic Times.

So, following the plan, Noi Baltija was purchased by Staburadze in August 2000 for 523,100 lats. The deal was met with outrage by the minority shareholders and followed by various speculations in the Latvian media over the possible financing of the deal. Reynisson, however, has denied that he paid for the Staburadze shares with the same company's money.

"It's ridiculous. Staburadze has received more than it spent," he told the newspaper Dienas Bizness on Sept. 27. Reynisson told The Baltic Times. later that "There was nothing unethical and illegal about this transaction. In fact, it was an extremely good deal for Staburadze."

According to Reynisson, Noi Baltija was established specifically to go into the confectionery business in Latvia. But when it became obvious that it would make more sense to merge the companies, Staburadze bought the Noi Baltija shares for their fixed asset value.

"We didn't charge for investments in setting up the factory," Reynisson said. "We only charged for direct investments. We decided to do this because of how related the transaction was, not to make it suspicious. And that was a relative loss here."

Earlier, Reynisson had announced that the Noi Baltija deal was assessed by financial experts from Nordic Industries, owner of both Noi Baltija and Staburadze. According to the Latvian Law on Concerns, in force since May 1, 2000, in the case of a deal between two related companies an independent evaluation must be presented.

Staburadze's management claims that such a report has now been made by the auditing firm Arthur Andersen. It will be included in the company's annual report. Noi Baltija started the planned production of jelly candies and corn dragees in October 2000, after the change of owners.

On Nov. 21, Staburadze announced another takeover. This time Latvia's biggest chocolate-maker, Laima, was taken over by acquiring the holder of its 73.2 percent stake Ð New Technology and Business Development Corporation (NTBDC-L) Ð for $8 million. To pay for it, Staburadze's assets, including fixed assets, working capital and accounts receivable, as well as the obtained shares of NTBDC-L, were mortgaged in two banks, Latvian Rietumu Banka and Icelandic Islandsbanki FBA, for a $8.4 million loan. Half of the loan has to be repaid by the end of 2001, and the rest in five years.

"By buying Laima we will be able to create a much stronger company in the confectionery industry," Reynisson said. "We will not only have a stronger possibility to develop exports but also have a stronger position in the home market against imports.

"By becoming a bigger unit we foresee chances for the company to be a more efficient producer and therefore be more price-competitive. Staburadze and Laima are very related businesses," he stressed.

Laima's management, which had plan-ned for a management buyout and were at the last moment outbid by Staburadze, was skep-tical about the Staburadze deal. Laima's Board Chairman Ivars Kalviskis, who announced on Jan. 9 that he would soon be leaving the company, said that it is unlikely Laima will get new investments.

"The new merger deal is just an interception, together with ignorance on future plans," Kalviskis said in an interview to the Latvian magazine Klubs.

However, Reynisson said the Laima deal was carefully planned. "We started to look at the company earlier this year, when it was offered for sale by PricewaterhouseCoopers in Latvia. Then we did our own due diligence and evaluation of the company. The price of $8 million was offered to us and we accepted it, which means that our own evaluation was higher," he told The Baltic Times in December.

Trade in the Staburadze shares was halted by the Riga Stock Exchange from Nov. 23 to Dec. 4, as the company failed to submit the necessary information on the deal's value.

The Staburadze extraordinary shareholders' meeting on Jan. 11 affirmed the board's right to exceed the budget while purchasing Laima and Noi Baltija. This was only possible because Staburadze's council member Tryggvi Hallvardsson purchased 14.4 percent of shares from Latvijas Krajbanka, another minority shareholder, on Nov. 27, following another conflict over the Noi Baltija deal.

"He voted for the deal, but Nordic Food as a related party had to abstain from voting, according to the Latvian Law on Stock Companies," Lolita Kronberga, a lawyer for Latvijas Krajbanka, told The Baltic Times. "They did not present an independent auditor's opinion on the deal, so Krajbanka would never support it," she said.

In the meantime, Latvian stock market supervisors launched an investigation to see whether Nordic Food would be obliged to buy out shares from the rest of the company's shareholders.

The Latvian Stock Market Commission will have to find out whether a single shareholder or shareholders group has either directly or indirectly acquired more than 50 percent of the company as a result of that deal. According to the law on securities, this person or entity has to offer to buy outstanding shares from the rest of the shareholders.

The commission's chief Viktors Gustsons declined to comment on the investigation, however, but said it would take a long time to complete.

Hallvardsson represented Nordic Food, the majority shareholder of Staburadze, in the company's council, so together they have 57.4 percent of the shares.

"Tryggvi Hallvardsson is a production director at Noi Sirius, our Icelandic confectionery partner, but he is not working for me and we cannot be called related parties," Reynisson told The Baltic Times. He said that Hallvardsson had 0.5 percent shares in the company before, so he apparently was interested to buy more.

"We cannot foresee that there will be any need for us to make a buyout offer for the company because of that. That doesn't make sense," he said.

However, Hallvardsson was replaced on Staburadze's council Jan. 11, and his proposed candidate for the company's board also was rejected by majority shareholder Nordic Food. Looking rather upset after the vote, Hallvardsson said that obviously he wanted to have more input into the company's management but did not succeed.

The stock market reacted sharply to the change of owners of Staburadze and their plans. In the first half of 2000, the stock price of Staburadze fluctuated around 1 lat to 1.2 lats per share, while in the last six months of 2000 the average price was around 0.8 lat per share. When the Laima deal was announced on Nov. 21, the stock price climbed slightly to about 0.9 lat, but after the announcement of the company's mortgage Dec. 21 the price fell dramatically to about 0.6 lat per share.

Reynisson said that such developments were predictable. "When we bought Staburadze we said that our interest would be to build up a company during the next five years, and we would be interested in making further acquisitions. We also said that while we are restructuring the company we will not pay any dividends. All of it was correct then and is correct now."

But minority shareholders complained.

"This case serves as a bright example to the fact that the rights of small shareholders are not protected in Latvia," said Aldis Sipols, a small shareholder of Staburadze.

He said Staburadze's owners probably plan to benefit from selling the merged enterprise to a larger foreign investor. "The plans on restructuring Staburadze are vague. It's been proven by Naruta the company which has been owned by Staburadze for three years, but still makes losses," he said.

Some stock market experts questioned by The Baltic Times shared this version on Reynisson's plans. "I don't believe that they're going to deliberately bankrupt the companies. Especially, as there are not much current assets left," said a senior stock market expert, who spoke under the condition of anonymity.

Druvis Skulte, a prominent Latvia's Way party member and former Staburadze's council member who was ousted by the new shareholders Jan. 11, said that Staburadze will not be able to repay the $8.4 million loan without selling the company after the merger with Laima. "It can be predicted that the two companies are under preparations to be sold," Skulte told the Baltic News Service Jan. 12.

Reynisson, however, thinks that all 2,000 Staburadze's shareholders and 700 Laima's shareholders can still benefit from their investment.

"We have very high plans for the future," he said.

Staburadze made post-tax profits of 158,000 lats in the first 10 months of 2000. The company's net turnover was 4.2 million lats. Its assets at the end of October stood at 4.44 million lats, but owner equity was 3.66 million lats. Staburadze's share capital is valued at 3.03 million lats on the Riga Stock Exchange.