Transaction adviser's view on the ranking of Estonia's most valuable enterprises

Tõnis Tamme

Law firm Triniti, Partner and attorney-at-law

The fact that banks dominated also this year’s TOP101 ranking of the most valuable enterprises in Estonia should not come as a surprise to those who are familiar with the high equity requirements that Estonia has imposed on financial institutions. Understandably, the purpose of these strict capital requirements is to ensure the crisis resilience of our financial system and the protection of customers and depositors. Most of us should remember the last major financial crisis at the end of the first decade of this millennium, which seriously tested the stability of Estonian and global banking, and wiped out several large banking groups altogether.

Bank profits have skyrocketed in recent years, mainly thanks to high interest rates. However, it should not be forgotten that only a few years ago, Estonian borrowers enjoyed record low or even zero interest rates, and that at that time also the profits of banks were more modest. At present banks are the only companies in Estonia that pay corporate income tax to the state in the form of quarterly income tax. Since 2026 all enterprises in Estonia will be paying corporate income tax.

It is likely that in the coming years the profits of our financial institutions will be affected by the year-on-year increase in labour costs, as well as by the numerous additional regulations and due diligence measures imposed by the state on banks, including the obligation to comply with sanctions. Due to the small size of the Baltic market and the high market entry barrier, it is unlikely that new providers of financial and universal banking services will enter the market. However, the change of ownership of some larger banks such as Luminor or further consolidation of the banking sector in the Nordic countries may also result in changes in the Estonian banking market.

Transactions such as mergers and acquisitions (M&A) offer opportunities for fast growth.

In addition to organic growth, several companies ranked in TOP101 have also used M&A transactions to expand their operations or to finance their core business by selling some ancillary activities. One of such Estonian enterprises is AS Infortar that is listed on the main list of the Tallinn Stock Exchange and is active in passenger shipping, development of commercial property and energy sectors.

Developments in the M&A market in recent years have been reminiscent of a ride in the American mountains of an amusement park. In the spring of 2022, Russia's full-scale aggression in Ukraine, which led to the freezing of most of the Baltic M&A transactions, was replaced by high market activity due to the sales decisions of more risk-sensitive (foreign) investors in the second half of 2022 and in 2023. Increased readiness of financial investors or the need to sell their Baltic investments have created good opportunities for management buy-outs (MBOs) and regional consolidation.

Technology vs energy

During the period preceding the full-scale war in Ukraine (2020-2022), the Baltic M&A market was dominated primarily by transactions in the technology sector, as shown by the findings of the study "Baltic Private M&A Deal Points Study 2024", which was prepared in cooperation with Baltic private equity and venture capital associations and seven leading pan-Baltic transactional law firms. IT, telecom and e-commerce accounted for as much as a quarter of larger transactions (with a transaction value of more than one million euros) during this period. In the next period in review, from 2022 until 2024, the majority of transactions were made in the energy sector and the utilities sector.

Foreign buyers and investors have not completely disappeared from the Baltic market, but are now almost exclusively focused on the information technology sector. The likely reasons for this are the high professional level of Baltic IT companies as well as their innovation, scalability and the greater crisis resilience when compared to the so-called conventional enterprises. In this segment, one should mention the rapid relocation of a considerable number of Belarusian IT sector companies to the Baltic states (especially Lithuania) as a result of violent suppression of popular movements that demanded democracy by Belarus authorities and the subsequent wave of repressions, as well as the relocation of many Ukrainian IT and consulting companies to various European countries, including Estonia, after the beginning of a full-scale war.

Most transactions made in Lithuania, mostly involving strategic investors

Comparing the activity of M&A transactions in the last two years in the Baltic countries and assessing it by the main market of the acquired company, we can see a significant increase in the number of transactions in Lithuania, a relative stagnation in Latvia and a slight decrease in the number of transactions in Estonia. Among both sellers and buyers, the share of strategic investors has increased significantly compared to the previous period (70 percent vs. 46 percent). The activity of financial investors and private equity has decreased somewhat on the sellers' side (29 vs 36 percent) , but increased almost by the same amount on the buyers' side (24 vs 16 percent). Management buyouts are on a growing trend and the purchasing activity of wealthy individuals and families, including family office-type companies, has decreased drastically compared to two years ago (2 vs. 36 percent).

Estonian transaction market is dominated by local capital

In the Estonian transaction market, the deals which have attracted the most attention include the recent privatization of Operail by the owners of Tartu Mill as well as the successful MBO of French capital from TREV-2 by the company's long-time CEO Sven Pertens. Transaction activity is also noticeable in some other economic sectors, such as agriculture, where the sale of (family) businesses is often driven by the change of generations, during which the descendants of founders and managers may not always be interested in continuing the business started by their parents and are seeking new owners for the family business.

On transaction that should be mentioned is the acquisition of Technopol Ülemiste, the largest business campus developer in the Baltics, by Mainor. Law firm TRINITI had the opportunity to advise the legal preparation and execution of a multi-party transaction, during which the existing Finnish investors sold their shares and Mainor Ülemiste AS involved new shareholders representing Estonian capital who want and have the opportunity to contribute to the continued development of Ülemiste City, which has become a modern business card of Tallinn.

What could the future bring?

The progress of large-scale infrastructure projects such as Rail Baltic is definitely benefiting the business of infrastructure construction companies, which helps them to survive the current slowdown in the construction market of commercial and residential real estate. One hopes that we will also see the completion of modern, fast and safe 2+2 highways between Tallinn and Tartu as well as Tallinn and Pärnu, which would fill the order books of Estonian road building companies and increase their corporate value.

When Rail Baltic is completed and becomes operational in the next decade, it will definitely affect the enterprises that are currently operating bus lines to Rapla, Pärnu and Riga. There are several of them in this year's TOP101 ranking.

If Estonia continues preparations for the use of nuclear energy and at one point starts building a nuclear power plant, one estimates that at the latest in a decade, companies developing nuclear energy such as Fermi Energia will find their way to the TOP101 ranking.

We will definitely find Estonian companies engaged in (renewable) energy production in the ranking of Estonia's most valuable enterprises also in the future. Further consolidation can be expected in the utilities market, and among Estonian water companies, which are predominantly owned by local governments. This should take place already in the coming years.