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A Good Time for Consolidation?
Case study from the Latvian dairy
manufacturing industry:
Merger of “Rīgas piena kombināts” and
“Valmieras Piens”
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Consolidation activity in the Baltic M&A arena: recent experience
 M&A transactions with pronounced consolidation features (2012-2013) – around 35-40
deals per year (excluding real estate operations)
 Comprised around 15-20% of the total number of corporate finance transactions in
the Baltic States in 2012-2013
 Most active industries
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Financial services
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Consumer sector: manufacturing/services/trade

Media

IT & telecom services

Business/industrial services
 Activity in the consumer sector (excluding media)

Around 10 deals per year, with 1/4 attributable to F&B industry

Last two years witnessed four Latvian F&B industry leaders having changed
controlling owners
 Sources of deal initiation
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Less than one third involves an acquirer outside the Baltic States
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Consolidation activity in the Baltic M&A arena: in the context of
the global M&A dynamics
According to M&A cyclicality
theory suggested by the prof.
Peter Clarke (UCL), the global
M&A market currently is at the
3rd stage of the notional 4stage cycle – the one poised
for the highest momentum
in deal activity
Sources: Mergermarket, Thomson Financial,
Dealogic.
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Fundamental consolidation motives revisited
Value-maximizing motives
Costs

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
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Economies of scale/scope
Increased monopsony power
Reduction of cost of access to new output markets (geo or product)
Improvement in management efficiencies
Access to capital markets
Reduction of tax obligations
Revenues

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Access to larger and diversified customer base
“One-stop-shop” benefits
Increased monopoly power
Increased market share and resulting reputation effects
Risk
 Diversification of the input/output channels
Non-value-maximizing motives
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Dairy industry in Latvia: topicality of the consolidation theme
 Milk products manufacturing in Latvia – a highly fragmented industry
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More than 40 independent players were operating in the market before the
merger
 Product portfolio
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Relatively low value-added product portfolio on average across the industry
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Relatively homogenous products with high degree of overlap
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Export-oriented players are susceptible to fluctuations in the global commodities
market
 Milk production vs. processing are relatively disintegrated
 Widespread underutilization of capacity (especially among the smaller processing
companies)
 Sub-optimal per-player purchasing volumes of key input (raw milk)
 Undermined ability to offer competitive purchasing prices to raw milk suppliers
 Thin operating margins
Consolidation has been a hot industry topic for quite a while
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Dairy industry in Latvia: actual activity was far from
expectations
 Top-3 industry players remained locally owned – untypical for Latvian F&B sector
 Evolution of the competitive structure:
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Established players’ market shares remained relatively stable
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Several moves aimed at integration of milk production and processing levels
(green-/brown-field initiatives)
 Piena Partneri
 Latvijas Piens
 Piena Ceļš
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Sporadic M&A activity
 Jēkabpils piena kombināts – regional-scale backward integration deal
Actual consolidation activity remained relatively bleak, both among the
industry leaders and the remaining competitive fringe
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Merger of RPK and VP: key facts about merger participants
 Both companies are long-standing industry
leaders (top-3 members)
 Both had product portfolios with a heavy
mass-product orientation and substantial
overlaps
 Both are exporters (with a mostly
commoditized portfolio)
 Both had industry-leading (although
overlapping and underutilized)
manufacturing capacities
 Both experienced sustained decline in
financial performance during several years
before the transaction
Net sales turnover, EUR m
RPK
VP
140
120
100
46.8
46.1
42.6
80
36.2
38.8
43.3
60
40
84.2
85.7
59.2
76.2
71.8
20
55.9
0
2007
2008
2009
2010
2011
EBITDA, EUR m
2012
RPK
VP
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 Both were heavily leveraged
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 Both were locally owned by private
shareholders
5
6
2.9
2.1
4
1.9
3
2
Plethora of similarities between the
merger participants
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4.1
3.6
1
0.3
0.5
0
-1
0.8
3.4
2007
2008
2009
2010
2.1
2011
1.5
2012
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Merger of RPK and VP: timing of the processes
Trade sale of RPK
June 2010
8 months
Closing: Feb 2011
9 months
Closing: Jan 2012
4 months
Closing: May 2012
Acquisition of VP
April 2011
Merger of RPK and VP
Dec 2012
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Merger of RPK and VP: source of initiation
 Foreign individual strategic investor Andrey Beskhmelnitsky
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Seasoned both in the industry and corporate finance deal-making
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Established the 2nd largest dairy products manufacturing company in Russia –
Unimilk, with its subsequent sale to Danone
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Availability of resources
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Ease of executing negotiations
 Deep insight into strategic opportunities presented in the market
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Supply/demand gaps in particular market segments
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Raw materials deficiencies
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Asset quality deficiencies
 Specific interest in targets located in the Baltic region
 Interest in a target with platform capabilities
 Timing coincided with a relevant stage of the acquirer’s investment cycle
Deal has been initiated:
• From outside/towards the industry leaders, rather than
• From within/among the smaller-sized competitive fringe
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Merger of RPK and VP: merger motives in the context of the case
 Reduction in the entry costs & delay: very important
 Access to the raw materials market: very important (specifics of the key raw
materials; quality considerations; stability of supplies; geographic segmentation of
supplies within Latvia; supply/demand gap in the raw milk market)
 Economies of scale: relevant due to mutually synergetic features of the merger
participants (addressing the underutilization issue and lowering per-unit production cost)
 Economies of scope: relevant (repositioning of product manufacturing between both
merger participants; focus on each participant’s core competencies)
 Building size: important for (1) securing minimal supply volumes to the target markets,
(2) achieving sustainable operating efficiency level
 Increasing bargaining power vs. suppliers: less important (the position is already
relatively stronger; regulated to certain extent by the conditions subsequent to the
merger, stipulated by the LAA)
 Increasing bargaining power vs. buyers: less important (the position is already
relatively weaker; regulated to certain extent by the conditions subsequent to the
merger)
 Improvement of management efficiency: relevant (implementing management
experience accumulated during consolidation of the Russian dairy sector; tailoring the
business infrastructure to the needs of the amended business strategy)
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Merger of RPK and VP: conclusions
 Initiators – The material consolidation move in the market is much more likely to be
initiated by a foreign seasoned strategic player
 Attractors – The attraction factor of the potential platform value of an industry leader is
often more relevant than the capacity for efficiency improvement with relatively smaller
players
 Timing – Industry-/company-/investor-specific factors might be of way much higher
importance in timing of the material consolidation activities than the overall macro and
M&A market cycle trend
 Merger spillovers to the industry – Perceived monopoly risks stemming from the
merger might lose acuteness in light of broader consolidation benefits for the whole
industry value chain
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Thank you for attention
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