Ivars Bergmanis, Head of Institutional Markets at LHV Bank

In June this year, the parent company of Liepāja Lauma Fabrics, European Lingerie Group (ELG) acquired the German lingerie manufacturer and retailer Felina. This particular deal was acknowledged by the Baltic M&A and Private Equity Award jury as the Outbound Deal from the Baltics of the year. The deal was atypical for the Baltic market for many reasons and may provide positive lessons for other small and medium enterprises (SME) of the region.

In particular, small and medium enterprises frequently face fundraising difficulties, especially internationally. However, at the same time, their growth and development has a decisive role in the economy, since they form a substantial part of the national economy in the Baltics and play a significant role in the creation of gross domestic product and employment.

So how is it possible that a Latvian based company became the owner of Felina, a company established in 1885 in Germany? How was such a deal, which no one could have imagined in the past, possible, and what can we learn from it?

We can develop westwards

First of all, the ELG acquisition deal of Felina contravenes the historical point of view and expectation of people that if a small or medium company from the Baltics attempts to do something internationally, then it will not be simple at all.

ELG acquired a company in Western Europe, moreover, with a larger turnover and number of employees than itself. Such courage and step-up is very welcomed from the perspective of business development, and in a way we can refer to it as one of the Latvian success stories of 2017.

With the acquisition of Felina, ELG has expanded their operation twice, creating a new vertically integrated structure with a combined income over 75 million euros and 1250 employees. The group also obtained new markets and a full lingerie production manufacturing cycle, as well as new business lines, including retail infrastructure. Thus, a stable platform for further consolidation and growth in the comparatively fragmented lingerie manufacturing market of Europe was created.

I am certain that the time has come to prove to other Baltic enterprises that they are capable of developing and taking over companies not only the in the eastern, but also in the western direction.

Financing from banks + securities market

The financing of the Felina acquisition and other similar transactions show that currently there are more financing options available to companies, not just the traditional bank loan. Banks also have defined parameters and limitations on how much they can lend, whether to a particular company, sector or geographically. An additional possibility here is a combination of bank financing with the help of capital market instruments, in the case of ELG – bond issue.

Question – who usually invests in such transactions? Answers may differ, but essentially these are institutional and strategic investors. Surely, to ensure their support, a simple phone call is not enough. It is necessary to explicitly prove that the company is developing and argument their vision on the future growth. With the help of investment sector advisers, such certainty was successfully created in the case of the ELG deal.

The financing of the particular deal was created with the combination of bonds and preferential debts, which was successfully implemented with cooperation from different partners. The investment bank LHV organized the bonds and the main investor was Invalda funds and their clients. Of course, the funding ensured by the two banks, Citadele Banka and BlueOrange (previously Baltikums Bank) had a significant role.

I believe that a professional team and business minded thinking were crucial factors which ensured the success in the implementation of this deal.

What next?

Discussing the further process, if the company develops and obtains trust in the investor world and fulfils their commitments within several years, then in the future it will be possible to attract additional capital resources in various ways, in both the local and global markets, and it will be much easier to take actions in order to achieve its business goals. That is, by obtaining trust, it becomes more preferable for companies to attract funds for their development in the capital market rather then addressing only banks.

If we look at Europe, then the specifics of European banks must be taken into account when considering the attraction of financing, as they are more willing to finance their country’s and large transactions. If you come from the same country as the bank, and the amount is at least 100 million euros, than it is quite possible that there will be no significant obstacles to receive a reasonable loan within set possibilities. As regards all other factors the Latin expression ‘ceteris paribus’ or “all other factors are the same” comes to mind.

However, if the aim is to make the purchase or implement an investment project internationally, or if you are a small/medium enterprise, then the cooperation policy tends to be more cautious. It reflects human commercial interests and the expected return from the analytical and administration perspective: the amount of work in both cases is similar, but it is much more difficult to recover invested time and resources. Other transactions may not be performed due to limited resources.

This problem is not characteristic only to the Baltics. It is a significant challenge also in the Nordic countries. In these countries, small and medium enterprises quite often address the bond market for additional financing, as banks refuse to issue loans.

It is also important to note that not all banks work with bond issue projects. These may be investment banks, and also universal banks that provide a wider scope of services.

The key word in the start-up phase – simplicity

Assessing tendencies in the context of this deal and the overall market, the conclusion is that both companies will search for a better solution themselves, and investors will always be interested in a qualitative outcome.

If a decision has been made to move forward, then it is important to address potential investors in a correct manner that is understandable to them. The key word here is simplicity – the simpler, the better. Namely, complexity quite often arouses suspicion and it pushes investors away rather than attracting them. Simplicity also makes it easier for big investors to report to their colleagues – what, where and why are they investing funds.

Vertical integration – good or bad?

In conclusion, vertical integration is considered as the main benefit from the ELG deal.

Certainly, discussions on the advantages of vertical integration are still ongoing in the world. Although opinions may differ, arguments in favour of vertical integration are quite strong. In the case of the ELG and Felina deal we can see a clear benefit of integrating the manufacturing of the lingerie source materials into one cycle with the finished production.

Alongside the classical benefits of vertical integration, a shorter period of time from the product manufacturing to sales, reduced risks due of diversification of business directions and savings from the economies of scale, the most visible benefit in the context of the sector is the flexibility to adapt to the market.

The gain of the German company Felina from this deal, is the opportunity to create and implement new products faster, which allows more experiments and the ability to implement innovations due to the direct access to the manufacturing of source materials. Whereas, the Latvian company Lauma Fabrics has obtained a valuable expertise in the production market and possibilities to expand their activity in Western Europe.

I believe that due to the set goals of the company, we will hear the name European Lingerie Group in the context of Europe’s lingerie market. As well as other successful Baltic companies, whose capital market resources in 2018 will also help them to implement development plans towards the West.