On September 8, 2020, CEE Legal Matters reported that the Lithuanian office of Cobalt had advised INVL Baltic Sea Growth Fund on its acquisition of a 48% stake in MBL from Accession Mezzanine Capital III and the Lauritsen family. CEEIHM spoke with Nerijus Drobavixius, Partner at INVL Baltic Sea Growth Fund, to learn more about the deal.
CEEIHM: To start, tell us a few words about the INVL Baltic Sea Growth Fund and its investment strategy.
Nerijus: We are the first PE house in the Baltics, having started our activities in 1991 and having over 28 years of direct private equity investment experience investing from Invalda Group's balance sheet (not as a fund though). To capitalize on our history as a private equity investor we launched INVL Baltic Sea Growth Fund (BSGF), which reached EUR 165 million after its final close in February 2020. Our team is one of the most seasoned PE teams in the Baltic region with a unique combination of different experiences. BSGF focuses on the historically proven strategy, successfully implemented in the past covering the Baltic Sea region and the whole EU – investing in Baltic companies and using them as a stepping stone for further expansion. We strongly believe that the region has a very positive economic outlook – these are fast-growing, prudently managed economies, that offer emerging market growth but a developed market downside protection. We have four key investment themes that we focus on:
- Consolidation. We look for companies that are large enough to become a platform for further consolidation and for a segment that has no single strong player. We capitalize on synergies that arise once smaller players are consolidated and we also add value to our customers by providing a wider range of services once a larger player is born. We believe that a strong market player will be an attractive acquisition target for a foreign investor at the time of our exit. There are many sectors where consolidation is still ongoing. An example can be the private healthcare sector, where more than 700 clinics are present and that need to be consolidated in order to provide top quality services;
- Growing market, expert industries. We like sectors where Baltic companies are growing and demonstrate strong expertise. Those include food processing, wood processing, textiles, agriculture. The thing that we like is that local expertise can be transferred outside the Baltics via add-on acquisitions, that we are capable to do;
- Local industry leaders, with growth potential. There are companies in the Baltics that are local leaders and have the potential to continue further expansion into the EU, but do not do so because of lack of management resources, an unwillingness of existing shareholders, etc. These are matured companies that need an additional kick to leave their comfort zone and continue expansion on a bigger scale. We as a private investor dare to challenge this shyness and to initiate further growth;
- Operational, strategic improvements. This theme refers to companies that face financial, legal, shareholder, or other issues, that suffer from temporary market disruptions, or that lack proper management. Having a wide set of management experience we can help the company to come over the issues and to restore its operations.
The fund has already deployed approximately EUR 55 million in four portfolio companies in healthcare, civil engineering/metal processing, plastic recycling, and waste treatment sectors.
CEEIHM: What was the main driver for the deal from your end? Was it a planned exit from Accession Mezzanine Capital III or did you initiate the acquisition? And what was it about the target that you found particularly appealing?
Nerijus: It was the end of 2018 or the beginning of 2019 when Deloitte approached us with the question of whether we would be interested in investing in a leading mobility device manufacturer. At that moment they only indicated that the company has more than one factory and that their headquarters are EU-based. They did not share a teaser nor other information at this stage. We made some market analysis and we came with an idea that it could be MBL. It proved to be the right guess when Deloitte shared a teaser in 2019. What we specifically like about MBL is that it fits our strategy when expertise is planned to be exported to other markets. The product that MBL manufactures is quite specific, though, and our expertise is limited when it comes to R&D and selling of that product. Therefore we decided that one of the conditions for us to invest is that the current expertise stays in the company. This was secured by the Lauritsen family staying on as shareholders and as managers. We as a fund benefit from this investment as this expands our penetration into the healthcare segment. BSGF has another portfolio company with a private chain of clinics, while the investment into MBL represents its entry into the medical devices sector. We as a team have successful experience in growing healthcare manufacturing companies (such as Sanitas and Jelfa) and we believe that this experience can contribute to MBL’s development as well.
CEEIHM: As a result of the deal, you acquired shares from both Accession Mezzanine Capital III and the original founders of the company. Were negotiations carried out together or separate/in parallel for the deal?
Nerijus: The negotiation for this transaction was one of the strangest in my experience. Not because of counter-parties, but because of the market situation that all parties were in. We started our negotiation in 2019 and had a few “regular” rounds of negotiations. But when we needed to wrap things up, COVID-19 started in China. This slowed us down a bit, as MBL has a factory in China. At that moment we did not expect that it would turn into a global pandemic thus we were only interested in how China’s operations will be impacted. We saw that the company is managing the crisis and we continued our discussions. But then in early 2020 COVID-19 started to spread to other countries and turned into a global pandemic. Countries locked down. We as a fund had to answer a difficult question: Do we proceed with the transaction given the uncertain environment or we drop it? We decided to continue, the main driver for the decision being the family’s confidence in their business plans proven by MBL’s current trading results.
When it comes to the negotiations themselves, we had two lines: one with the family and the mezzanine together and one with the family only. Both parties participated in the transaction-related topics, while negotiations with the family covered topics related to the future development of the company (the SHA, etc.). Some commercial topics were agreed-upon with the family only, as they had authority delegated by Mezzanine to agree on certain conditions. This made negotiations much easier, as there was no need to align the interests of three parties in one meeting (i.e. in some cases the family as a party represented both – the family and Mezzanine).
CEEIHM: What would you say was the most complex/challenging aspect of the deal from a legal perspective?
Nerijus: The transaction covered 4 jurisdictions: Denmark, Poland, China, and Lithuania. It was quite difficult to (i) organize the due diligence process, as we needed to understand how the company was run and (ii) get the transaction documentation ready. The documentation was unexpectedly difficult, I would say, as we had to deal not only with several jurisdictions but also with a number of different advisors. The selling shareholders decided to make some changes in the shareholding structure before the transaction and it made the process even more complex. We were drafting documents and making structural changes in parallel. We needed to get clearance on all those documents from tax authorities, banks, and our internal committees as well. Every single change of the final documentation took something like one day to approve, as we had seven or so parties (including legal advisors) to approve it.
CEEIHM: Why did you ask Cobalt to advise you on this transaction and what aspects did they assist with specifically? Were they involved in the negotiations as well or brought in to iron out the contract side of things only?
Nerijus: We chose to work with Cobalt, as they offered to assist us not only in DD and negotiations but also to coordinate the work of different lawyer offices. For us it is quite important to have one counter-party when dealing with certain topics – it saves time if you can get information from one source (e.g., Cobalt), and you can trust it. If we hired other lawyers directly, we would have spent more time on interim discussions and we would also need to make sure that lawyers from different offices agreed between themselves on certain things. Cobalt took this responsibility and they did a good job at consolidating lawyers’ deliverables into one stream. When it came to the negotiations, it was not the first time we worked with Cobalt, therefore it was relatively easy as they know what are deal-breakers for us and therefore they can properly address red flags to the transaction documentation.
Originally reported by CEE In-House Matters.