Corporate M&A 2021 Trends and Developments in Latvia

Source: Chambers Corporate M&A 2021 Global Practice Guide *

 

Overview of 2020 M&A Activity

In March 2020, the European M&A market came under a significant pressure due to the various political, economic and social developments in the EU and beyond. The global COVID-19 pandemic became the key factor holding sway over the economy and fanning the flames of the smouldering intra-European division instigated by the refugee crisis and Brexit-like movements in other EU member states. The COVID-19 pandemic precipitated an unexpected and unprecedented economic crisis that will, most probably, redefine the world for the years to come.

 

M&A dynamics in the first half of 2020

Unsurprisingly, the COVID-19 pandemic caused a considerable decline in M&A activity at the end of the first quarter and throughout the second quarter of 2020 across the European market, including its Latvian segment. Negotiations in a number of inbound M&A deals were terminated due to the cautious approach of the bidders to the expansion of their business in a turbulent macroeconomic environment. However, an absolute majority of the buyers, who passed the due diligence phase by the end of the first quarter, remained firmly committed to proceed with the acquisition, subject to revision of the terms and conditions designed to accommodate previously unforeseen risks.

One devastating effect of the crisis was a dramatic decrease in the number of air passengers in the second quarter of 2020. The financial support measures adopted by the Latvian state to mitigate impacts of the pandemic on the transportation sector culminated in the largest local 2020 disclosed M&A transaction, involving capital injection of EUR250 million into the Latvian national air carrier Air Baltic Corporation AS in exchange for an additional capital stake of 10.95%. Unfortunately, state aid support mechanisms have been used less efficiently to support other heavily distressed sectors, sowing seeds of doubt among representatives of the consumer, retail and leisure industries in the ability of the state to manage the crisis.

 

M&A dynamics in the second half of 2020

During the third quarter of 2020, a series of consolidation activities by the European, Nordic and Baltic players followed, taking advantage of the opportunity to establish or bring their presence on the local market to a new level. The most prominent example of the consolidation trend in the distressed sectors was the largest pan-Baltic 2020 disclosed M&A transaction, valued at EUR65 million, for the sale of 100% capital stake in the Estonian cinema operator Forum Cinemas OÜ, including its Latvian branch. Despite the relative weakness of domestic GDP growth in the third quarter, Latvian M&A activity picked up the pace, encouraged by the uptick in investor and consumer confidence.

An impressive recovery of the Latvian M&A market continued into the final quarter of 2020, in line with the surprisingly positive M&A trends on other European markets. The second largest local 2020 disclosed M&A transaction, valued at EUR120 million, for the sale of an 83.14% capital stake in a leading European fibre-glass manufacturer, Valmieras Stikla Šķiedra AS, is considered the crown jewel of the fourth quarter. The intensity of the Latvian M&A activity in the second half of 2020 was solid enough in terms of aggregate volume and value to surpass the results of 2019.

 

Due Diligence Trends

Apart from the significant drop in the M&A deal volumes, the COVID-19 pandemic has also substantially transformed M&A deal-making practices. Indeed, it is one thing to overcome lockdown restrictions by getting used to videoconferencing platforms but quite another to learn building trustworthy relationships virtually. The virtual world provides much less opportunity for the emotional “handshake deals” that create a positive momentum and enable corner-cutting, when time is short. A completely detached and pragmatic approach based on the outcome of the rigorous due diligence is becoming a prevailing trend, putting an extra pressure on the legal professionals to deliver irrespective of the pandemic restrictions.

 

Transformation of the due diligence process

Obviously, virtual data rooms are not new to the Baltic region. A remote engagement with the executive management of the target, on the contrary, requires new approaches to interview techniques and cross-examination tactics. A limited ability to attend onsite inspections demands new rules of conduct and technological solutions, particularly when the core assets of a target comprise infrastructure, manufacturing capacity or real estate. In addition to the various procedural adjustments, the material scope of the due diligence has also evolved to cover new risks posed by the COVID-19 crisis, notably:

• the current state of grants, loans and tax deferrals designed to address the adverse effects of the pandemic;
• compliance of the representations and warranties forming part of the existing loan facilities;
• compliance with the commercial lease agreements;
• compliance with the new requirements of health and safety;
• impact of the lockdown on the supply chains of the target company;
• non-performance of the contractual obligations by the target due to the business interruptions;
• changes in the terms and conditions of the insurance policies, etc.
• Other due diligence considerations

Due to the growing number of consolidations as of the third quarter of 2020, we have been increasingly involved in the so-called "clean team" arrangements to review competitively sensitive information revealed by the sellers as part of the due diligence process. We have also noticed a rise in the number of vendor due diligence (VDD) requests, which demonstrates an overall commitment of the stakeholders to adjust their exit strategies in the light of the new reality. The minimal VDD scope has now been permanently extended to include a full-fledged review of the General Data Protection Regulation (GDPR) compliance risks. The threat of the reputational damage and significant increase in the amplitude of the fines has elevated GDPR compliance to the level of a potential deal-breaker in such booming sectors as: technology, media and telecommunications (TMT); and pharma, medical and biotech (PMB).

 

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*Chambers Global Practice Guides provide clients with expert legal commentary on the main practice areas in key jurisdictions around the world. Written with clients in mind - both in-house lawyers and senior management - they enable the business client to identify and compare current legal issues across jurisdictions in a range of business-critical practice areas.

The new Corporate M&A 2021 guide covers 59 jurisdictions. The guide provides the latest legal information on acquiring a company, antitrust regulations, restrictions on foreign investments, stakebuilding, negotiation, mandatory offer thresholds, conditions for a takeover offer, squeeze-out mechanisms, disclosure, duties of directors, defensive measures and shareholder activism.