Glenboden M & A Originations

Latvian private equity group grows its central European confectionery platform after Estonian buy

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Origination Status subsidiaries divestment agreements signed
Asset five companies that cover all of the confectionery, dairy and bakery activities of AS Kalev
Buyer Alta Capital Partners SCA (Latvia), Baltics and CEE private equity firm
Seller AS Kalev (Estonia), leading domestic diversified group
Buyer Rationale part of strategy to build pan –CEE foods group
Seller Rationale exit from underperforming businesses with costs pressures
NBs Kalev in market leader in confectionery in Estonia, with 37% market share
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Estonia’s a small country, but that doesn’t mean it can’t produce M&A transactions with international significance. On the seller’s side, this represents a radical corporate transformation; Kalev is exiting food manufacture, in order to focus on media and real estate. On the buyer’s side, it shows private equity building a CEE regional food platform; Alta Capital’s portfolio also includes a Polish confectionery maker (and a Lithuanian dairy). Expect Alta to roll-up more confectionery assets in the region.

Kalev wants to focus all of its efforts on real estate and media, and that’s fully understandable. In real estate, the group is particular keen to expand its public sector development business; this makes sense, in view of the wall of money hitting Estonia from the EU, and each contract that they win will require significant up-front funding.

In media, Kalev has made a number of acquisitions recently, spanning publishing, printing and marketing. The group has added the big one, TV, with the acquisition of a production and broadcasting company in June. This activity will require a lot of investment and management talent; the ‘game is worth the candle’, however, since the rights to just one blockbuster reality show could make Kalev’s days in food manufacture an unpleasant memory.

Alta Capital is a low-key private equity firm, whose team and (presumably) funding originate solely from the Baltic States. Their ambitions are greater than that, however.

Earlier this year, Alta acquired Mieszko in Poland, in a secondary buy-out. Like Kalev, Mieszko has a strong domestic market position in branded confectionery, both in chocolate (pralines) and more recently in sugar (‘Zozole’ fizzy sweets).

If Alta acquires a third confectionery business, in an adjacent country, and just starts to generate some synergies or scale economies between the three companies, then it could rightly claim to have created that rare animal, a regional –CEE food business. Such a business would attract a multinational buyer, and command a significant valuation premium to what Alta paid for the three companies separately. Likely buyers would be Cadbury and maybe even Hershey.

Kalev’s rationale for exiting food manufacturing includes another key factor – increased materials and labour costs. Obviously high prices for cocoa and milk powder are making life tough for independent producers, right now.

However, these costs are likely to be cyclical and alternative suppliers can always be sought. Far more serious and ‘structural’ are the labour cost increases, which are hitting all producers in the CEE countries that recently joined the EU.

It’s not highly skilled IT or marketing specialists that are commanding higher salaries. Semi-skilled and unskilled workers also have passports, and the right to find work in the UK or Sweden.

In this situation, and as the Kalev case illustrates so clearly, manufacturing is harder hit than services. That’s because services are labour –intensive even in ‘best practice’ markets. On the other hand manufacturing, especially food products, has remained relatively very fragmented in CEE, because companies were able to stay independent by paying hordes of workers the national minimum wage.

This is no longer the case, with minimum wages either increasing sharply, like in Estonia, or becoming a laughable relic of the bad old days before the EU, like in Poland. This should stimulate consolidation.

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THIS LEAD'S VALUATION
Size (€ mln) 55
Sector confectionery
Asset Quality Estonian no.1 branded
Seller mid-cap plc
Buyer private equity
P/S 1,0
P/Ebitda n/a
Type enterprise value
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