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Joining the forces in Baltic dairy processing industry – unavoidable

Dairy production and processing industry has experience significant changes during the last few years due to several external factors. To begin with, the market was negatively affected by the Russian embargo on dairy products from the EU. Furthermore, the end of EU milk quota regime draw the prices down both in the raw milk and dairy production markets. These fluctuations and changes of market conditions made all of the market participants to think “what next” – how to change or make the business more efficient to survive in these conditions.

Taking into consideration that the economies of the Baltic States are relatively small and open to compare with the Europe in general, it is important to understand that the companies in the dairy industry are not competing only locally, they have to compete on a global level. Even if we look at the dairy shelf in the market, it is clear that there is a tight competition among the local Latvian companies, companies of other Baltic States and close geographies, and also large multinationals.

Therefore, to keep our competitiveness in the European and global market, we need to understand that “every man for himself” is not the best tactics in this situation. There is a need of becoming more efficient than the competitors, a need to gain economies of scale, and a need to getting an economic benefit from exchange of know-how. This article will name few of the factors why industry’s consolidation through mergers and acquisitions (M&A) is necessary for the Latvian dairy market.

If we look at the statistics, we can see that the M&A in dairy processing industry in the Central and Eastern Europe (CEE) as a share of the whole Europe has decreased overall in the last three years; however, we need to note a minimally positive tendency in 2015. Several important industry deals have been announced during the last year. For example the acquisition of SIA Rīgas Piensaimnieks by Meridian Capital – the financial partner of Food Union – in 2015, also the deal in the beginning of this year in Romania, where the French Lactalis Group announced an intention to acquire the local dairy producer Albalact for around 90 mEUR, and other. This latest deal was already named as the largest and most important transaction in a five years’ time in the Romanian food industry.

If we look at the tendencies in the dairy processing M&A market, we can observe that in both the CEE and Western Europe the horizontal mergers dominate the market, which means that the target company and the investor are operating in the same sector, in this case dairy processing. When looking at the other categories, we see a tendency in the Western European market that also vertical integrations are quite popular. In majority of cases the dairy production cooperative acquires a dairy processor, for example, when the UK’s dairy cooperative Dale Farm announced an acquisition of cheese manufacturer Fivemiletown Creamery. Although there are few cases when we can see also such deals in our geography, for instance, the recent announcement that the cooperative Latraps is interested in acquiring the majority shares of “Latvijas Piens”, overall these kind of deals are not common here. It could be because the dairy cooperatives have relatively smaller influence in the industry’s development here than that is in, for example, Denmark, the UK etc. It is of course quite possible that the vertical integration at some point will pick up the speed also in the Baltic States, but to forecast such scenario in the short run would be too soon.[1]

To compare the Baltic States among themselves, even with the relatively small economy sizes, there are huge differences in the levels of consolidation. What concerns the dairy processing, the Lithuanian market seems to be more advanced than Latvian, which therefore allows the Lithuanian companies be more competitive in the local and export markets. As a result, four out of five largest Baltic dairy processing companies by the turnover are located exactly in Lithuania. Regardless of that, the total number of companies that are classified under the industry “manufacture of dairy products”, in Lithuania is almost the same as in Latvia (47 and 48 companies, respectively).

From that it results in the fact that the average turnover by the dairy product manufacturer in Latvia is below the average in the EU, which directly shows on the necessity for consolidation in this industry.[2]

To sum up, for Latvian and Baltic companies to move closer to the average level of the European Union, the companies will need to think of joining the forces. Higher competitiveness is needed so that we could better compete on the global level, where we are present already now.

Dace Medne, Associate Director

[1] Source: Capital IQ database

[2] Source: Eurostat data for companies with NACE code of “manufacture of dairy products” for 2014

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