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New player on the Estonian M&A market – the Competition Authority

Experience in recent years shows that the new reality for an undertaking operating in a globalising and consolidating Estonia is the Competition Authority, having been vigorously added to the ranks of parties shaping M&A transactions. In the case of an undertaking that is looking to sell a business with a strong market position, it has brought about a new and important risk of time and money being lost during the course of an M&A transaction. 

Last year was a notable one in Estonia in terms of the number and value of mergers and acquisitions involving undertakings operating in Estonia. Blackstone paid EUR 1 billion for a 60% holding in Luminor. The sale of 85% of the shares in the energy company Utilitas netted its owners EUR 320 million. Eesti Energia subsidiary Enefit Green paid EUR 289 million for Nelja Energia, plus loans in the amount of EUR 204 million. There were other transactions where the value also exceeded EUR 100 million (the sale of Olympic, the Port of Tallinn IPO, Daimler’s financing of Bolt). An exceptional year in every respect. In the case of Estonia, a transaction of twenty million or so could be considered to be a serious transaction, although that kind of cash bonanza hasn’t been seen in a long while. Cheap money, a favourable economic environment and liquid financial markets have all served to foster the above.

Consolidation increases the threat of conflict

Even so, all transactions may not reach a happy ending, regardless of the fact that the buyer and the seller have reached an agreement regarding the price, and the terms and conditions. This happened last year with the concrete element manufacturer AS TMB, which had essentially shaken hands on an agreement with Consolis, a European provider of concrete solutions. Investment Agency was honoured to serve as one of the advisors to AS TMB, along with the law firm Cobalt. Last year, there were four similar instances in which the deal fell apart due to the decision of the Competition Authority or a negative initial assessment, which is not a lot considering the high volume of transaction activity (the Competition Authority received a request for permission for concentration in 45 instances, which is approximately half of all transactions). Taking a look at recent history, the number is higher than usual and, taking into consideration how much money and time merger and acquisition transactions (M&A transactions) take, it pays for the undertaking and its advisors to deal with it ‘the sooner the better’.

Consolidation is a normal part of the economy, during the course of which the number of competing undertakings in a given field decreases. Not everyone survives competition and many are pushed out of the market; in parallel to this, mergers and acquisitions are taking place. As a result the market shares of winners are growing similarly to the risks arising from the activities of the regulator. In Estonia, the fuel retailer market has been very active in this plan. There is always something taking place.

Precedents from Estonia and nearby neighbours

Looking to the south, the most pronounced incidents also involve retail sales. Last year, a EUR 200 million transaction failed to take place in Lithuania, when Rimi attempted to purchase Iki, a competing retail chain. At first, the local Competition Authority set the requirement for the transaction that Rimi must sell 17 of its 232 shops. Rimi found a buyer for the shops, but the competition authority found that the buyer was not satisfactory and the transaction failed to take place. In this case, a discussion arose in Lithuania regarding whether the competition authority had abused its rights. Without knowing all of the details, I wouldn’t want to dwell on this at length, but in a certain sense the incident is significant. The retail sector has developed quickly and the market is dominated by big players. There has been a decline in the number of smaller corner shops and trading on the market. If one of the larger chains wants to sell itself off, then finding a buyer may not prove that easy. It is often the case that all of the competitors have shops next to each other at some sweeter intersection. For example, Rocca al Mare, where Prisma, Maxima, Rimi and Selver are all located in close proximity to one another. In terms of competition, the situation is excellent until one of the four wants to begin buying up a competitor. On occasions such as these, it is definitely reasonable for one to do their homework first and to analyse the transaction from a regulatory perspective. An investor who is looking to invest in the field should also do the same, although they should look for a possible exit, or sale of their holding in the future. In some instances, one must look very far away to find the counterparty to the transaction. Luckily, there is free capital in the world. In this sense, the sales of Utilitas and Magnetic are, of course, very good examples of money being found on the other side of the world.

TMB deal a happy ending, but a cautionary example

Now back to the AS TMB transaction. There are probably quite a few people thinking that there are so many interesting thoughts, but how were you unable to foresee that risk yourself. Consolis is already operating in Estonia with its undertaking AS E-Betoonelement and together with AS TMB they rank among the biggest market participants. As can be read from the competition authority’s decision, together they have a market share of 40% which, pursuant to the Competition Act means that the undertaking enjoys a dominant position in the market. Up to this point, everything seems to be clear. Now comes the question – which market are we talking about? The Competition Act states that a goods market is an area covering, inter alia, the whole of the territory of Estonia or a part thereof where goods which are regarded as interchangeable or substitutable by the buyer, by reason of price, quality, technical characteristics, conditions of sale or use, consumption or other characteristics, are circulated. In its decision, the competition authority finds that concentration would significantly damage competition involving concrete construction products, more specifically the manufacturing and sale of concrete elements in Estonia.

The crux of the matter is how to define the market. The Competition Authority views it narrowly as the concrete elements market. At the same time, ready mixed concrete is a direct competitor to and replacement product for concrete elements, and it is used extensively in Estonia. The market picture could have been entirely different if this had been taken into consideration. It is clearly impossible to foresee all possible risks, and at some point the line becomes blurry, depending on the assessment of what the right way would be to approach one question or another. Anyway, it pays to already deal with this when analysing potential counterparties to the transaction. Nonetheless, the story of AS TMB ended with a transaction, one that had to be significantly restructured in comparison with the initial version and meant compromises by both parties.

In summary – undertakings and M&A advisors must adjust to the new reality, where all large-scale transactions face an increasing need to take into consideration a new unknown in the equation – the Competition Authority.


Sulev Raik

Investment Agency

The article was published in Äripäev on 15.05.2019