Market
06.02.2014
By mergers.lv
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While the availability of investable private equity funds has been developing steadily (more on that in our editorial on the last Baltic Private Equity and M&A Conference), the number of successful exits still remains quite modest. On 23 January 2014 BaltCap, a leading Baltic private equity house, announced the sale of its shares in Primekss SIA to Green Gateway Fund managed by Wermuth Asset Management GmbH, a German fund manager.

Established in 1997, Primekss SIA has developed a proprietary approach to concrete production. Its flagship product, PrimeComposite, is said to employ revolutionary hi-tech approach that makes concrete tougher, stronger, crack-free and ecologically friendly, and makes it well-suited for industrial, logistics and supermarket flooring, reservoirs and other applications. Since 2004 the company’s primary focus has been on expanding its activities internationally.

The BaltCap investment of EUR 1.4 million in November 2010 is notable for the reason that this became the first disbursement from the JEREMIE program funds designated to support growth businesses and administered by selected private equity fund managers. As at the end of 2009, the year before investment, the company reported sales of EUR 4.4 million, negative EBITDA, equity of EUR 170 thousand and interest bearing debt of EUR 2.5 million. Apparently betting on the future growth potential, BaltCap’s investment, which provided it with a 47.9% stake, had implicitly valued the business at EUR 5.4 million, or 1.2 times the year 2009 sales.

The recent exit transaction, given the timing of announcement, was most likely based on the provisional 2013 financial results, which are not yet available. As at the end of 2012 the company reported sales of EUR 7.4 million, EBITDA of EUR 66 thousand just at the break-even level, and a negative net profit. Its interest bearing debt had been decreased to EUR 1.8 million while accumulated losses had eaten into equity, reducing it down to EUR 694 thousand. Assuming that the whole amount of EUR 10 million received from the new investor was paid to BaltCap, the transaction would implicitly value Primekss’s business at c. 22.6 million, or more than 3 times its 2012 sales - a very high multiple indeed, which does not sound realistic. It would have permitted BaltCap to bag a cash multiple of 7.1 on its investment, a fantastic achievement for a private equity investor.

More careful reading of the announcement reveals though that EUR 10 million from the new investor is raised at the holding company, i.e., at Primekss Group level, and is to be used both to finance further development of Primekss and to buy the shares from BaltCap. No allocation of the invested funds has been revealed.

Unless 2013 has been an extraordinary leap forward for the company financially, it is still working on unlocking its full potential and translating it into strong financial performance and profitability. The application of the same sales multiple of 1.2 as at entry would value the BaltCap share at c. EUR 3.5 million, or provide it with a cash multiple of 2.5 on its investment. Such a valuation, however, is not supported by any other performance or valuation metric. A more conservative analysis suggests that BaltCap has been able to exit at a valuation of c. 0.7 times the 2012 sales, or for a consideration of close to EUR 1.5 million, returning the principal and providing it with a modest compensation for holding this investment for 3 years.

While not a spectacular financial success story for BaltCap, this investment from the European Union-supported program funds has served its purpose by allowing Primekss to reach a new stage of development and to raise commercial funding internationally. Well done, indeed!

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