Aleksei Vorbojov, Senior Analyst at Prudentia Tallinn
Tiina Sõber, Analyst at Prudentia Tallinn
The year 2021 has been record-breaking in the field of M&A - according to Mergermarket, in the first three quarters of the year, $4.5 trillion worth of M&A transactions have been made worldwide. Low interest rates and the large-scale money printing of central banks have led to a situation where, by the end of the year, the total value of M&A transactions will probably break the current 2007 record of $4.6 trillion.
What are the so-called hot sectors where the biggest deals are made? According to Mergermarket, the global leader is the technology sector (27%), followed by healthcare (10%), real estate (7%), the financial sector (6%), and utilities and energy (6%). Over the recent years, several large transactions have been made in these sectors in Estonia as well. For example, from the TOP 101 ranking, Luminor Bank, Graanul Invest, Gren Eesti (formerly Fortum Eesti) and Gren Tartu (formerly Fortum Tartu) have changed owners in recent years. Speaking of the technology sector, according to the Estonian Founders Society, Estonian-origin tech sector companies have raised almost € 1 billion in funding this year.
Comparing the highlighted sectors with the TOP 101 rankings, the under-representation of the health care sector in the ranking of Estonia’s most valuable enterprises stands out. This is primarily due to the fact that the medical field in Estonia is very fragmented. Large public hospitals are the exception. The latter have been left out of the top, as they mostly operate in the form of a foundation and don’t compete in the market like other companies (most of their income comes from the state budget). Of medical companies, SYNLAB would probably have reached the leaderboard, but at the time of compiling the TOP, the company had not submitted its 2020 annual report. Although medical companies are not represented in the TOP 101 rankings, in terms of M&A, the sector is also active in Estonia. For example, the pharmacy reform completed in the spring of 2020 and the sale of the Qvalitas Medical Center and the Unimed Group to the Finnish healthcare group Mehiläinen in the spring of 2021.
The real estate sector plays a very important role in the Estonian economy. There are 22 companies in the TOP 101 ranking, whose main activity is the operation or development of real estate. Their total value is € 4.4 billion and the sector accounts for 15% of the total value of the TOP 101. Looking at the European real estate market as a whole, it was one of the sectors most affected by COVID-19. In the first half of 2020, there was a great deal of uncertainty about the future. In order to prevent the spread of the virus, people’s mobility was restricted, which meant that the turnover of hotels and companies in the entertainment sector essentially disappeared overnight. In its review, BNP Paribas points out that the logistics subsector was the only real estate sector to grow under COVID, due to a change in consumer purchasing behavior. Namely, during the pandemic, more goods were ordered online and more places were needed to store the products.
In the context of M&A, 2020 was a difficult year for the real estate sector. In 2020, transaction activity in Europe fell by 16% compared to 2019. According to S&P Capital IQ, the largest transaction in 2020 was the sale of Igsa Service Limited to the Blackstone Group. Igsa Services Limited owns and operates student accommodation facilities in the United Kingdom and the transaction was worth € 5.4 billion. Among the transactions that took place in Estonia, it’s worth pointing out the purchase of the main building of SEB Bank in the center of Tallinn by the East Capital Fund in June 2020 for € 46 million.
Like other areas, the real estate sector has reactivated in 2021. Various national aid packages to reduce the effects of the corona and large-scale US and European Central Bank bond-buying programs have accelerated inflation, prompting investors to look for places to invest free capital. Investors are looking for good cash flow properties and one could find them in real estate. But in terms of the future, there are also signs of danger in the air. China Evergrande Group, a major Chinese developer, is facing big challenges in meeting its obligations, which could have a cooling effect on the global real estate industry.
In addition to the M&A market, 2021 has also been a very good year for the Tallinn Stock Exchange. Since the beginning of the year, the OMX Tallinn general index has grown by 25%. LHV Group and Coop Pank have contributed to the growth of the index, as their share values have increased by 122% and 168%, respectively. Could their success be replicated by Bigbank, the only non-publicly traded bank in the TOP 101 ranking? Or Admiral Markets, which has grown strongly in recent years in terms of both volume and profitability? The most valuable real estate company in TOP 101 is Riigi Kinnisvara, which could also make part of its shares publicly traded and thus offer an alternative to local real estate funds.
The year 2021 has been successful for Estonian companies in terms of value growth. This is reflected in the 40% increase in the total volume of the TOP 101 rankings, the rising Tallinn Stock Exchange and the active M&A market. Major transactions over the recent years show that Estonian companies are able to attract larger investments and are also attractive to investors further away in geographical terms.
