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Fall in rate of mergers and acquisitions in Estonia continued in 2023

Tallinn skyline.
Tallinn skyline. Source: Siim Lõvi /ERR

The trend towards a fall in mergers and acquisitions transactions continued for the second year running in 2023. The on-year fall stood at 28 percent, to 137 transactions, according to data from analytics company Mergermarket and law firm Raidla Ellex.

Raidla Ellex advises on mergers and acquisitions.

On the other hand, several larger mergers, acquisitions and sales stood out last year, including Estonian companies Infortar and Eesti Gaas acquiring Latvian gas network operator Gaso.

Raidla Ellex highlights as significant recent transactions the merger of boatbuilders Baltic Workboats and Suomen Työvene and of district heating firms Tallinna Soojus and Utilitas, and the saleS of Estonian defense firm Milrem to UAE state-owned company Edge, and of steel roofs, rainwater systems and roof accessories makers AS Toode to Irish-based firm Kingspan Group.

Holding company Infortar's floatation on the Tallinn Stock Exchange was also significant, the law firm said.

While the decline in larger transactions was less significant, Ellex Raidla partner Sven Papp said in general the decline in transaction activity in Estonia was even lower than the rate worldwide.

Sven Papp also noted a rise in the volume of preliminary work conducted when carrying out transactions.

Papp said: "One of the reasons is for sure a significantly more complex economic environment, which, on the one hand has made more viable some deals that would not have happened during the good times, but on the other, has made entrepreneurs significantly more diligent and thorough when concluding agreements."

Another reason is the cost of borrowing, which has led to caution, while the third is a tightened regulatory environment.

Papp added that: "A separate big and developing topic is environmental, social and corporate governance (ESG) . Whereas formerly, ESG was largely a formality, a box-ticking exercise as it were, nowadays it is a very real thing and requires ever-increasing attention, both in the preparing of transactions phase and in companies when shaping day-to-day operations after acquisition."

Raidla Ellex says 2023 saw 61 venture capital transactions, four large real estate transactions, nine share issues and 63 traditional merger and acquisition transactions.

Risto Vahimets, partner and head of transactions at Ellex Raidla, forecasts that the new year could see more transactions in sectors less affected by the downturn, such as defense industry, energy production, pharmaceuticals and entertainment.

The real estate sector is likely also to become more interesting in the new interest rate environment, Vahimets said.

While the number of transactions decreased for the second year, to almost 250 transactions in Estonia in 2021, Ellex Raidla does not consider this too problematic in its overview of transactions.

2021 and 2022 were quite good years in terms of transactions overall, the firm said.

In 2023, meanwhile, 43 transactions over five million euros in value were reported, totaling €456 million, compared with 59 for 2022, to a value of €1.4 billion in total.

The largest transaction in 2023 in the Baltic states generally related to the purchase of Gaso, subsidiary of Latvijas Gāze, the Latvian natural gas distribution network, by Estonian companies Infortar and Eesti Gaas (Infortar is the holding company which owns Eesti Gaas).

The raising of capital for  supercapacitor and battery energy storage Skeleton and cleantech firm Elcogen were next, in terms of value.

For the next six months of 2024, Raidla Ellex says it expects the current transaction activity lvel to be maintained, but somewhat affected by the cost of borrowing.

Overall, Papp said that although transaction activity has fallen both worldwide and in Estonia, there is still a large amount of available funding out there, including in Estonia, which is looking for an application.

"Deals are not going away: deals are made in good times and bad. It is only the terms of the deal which differ, at different times," Papp said.

The Estonian Tax and Customs Board (EMTA in collaboration with the Ministry of Finance announced this week that it is in the process of revising the tax guide, with the aim of increasing income tax payments on mergers and acquisitions.

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Editor: Andrew Whyte, Huko Aaspõllu

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