Last week finally brought the confirmation of what had been on the rumour mill for many months already - Orkla, the Norwegian manufacturer of branded food and bakery products, acquired NP Foods Group, which controls a portfolio of Latvian leading brands, for an undisclosed consideration.

It would be hard to find a more “local” brand in Latvia than Laima, a confectionary producer which traces its beginnings back to the 19th century. The other brands acquired by Orkla - Staburadze, Selga and Gutta - are relatively younger but well recognised and respected in the market nevertheless. The portfolio of leading food brands had been put together by Nordic Partners over a longer period of time. The beginnings of this process date back to year 2000 and are attributable to Gisli Reynisson, the controversial Icelandic investor who set up Nordic Partners. The global financial crisis of 2008, which led to the collapse of Landsbanki, the Nordic Partners’ main lending bank from Iceland, was followed by Gisli’s untimely death in spring of 2009. The group resurfaced out of restructuring in its current shape and form only in 2010, when the management team led by Mr Daumants Vitols acquired it from the bank.

The present structure of NP Food Group is quite complicated and the complete picture is hard to put together from the public sources. It is clear that Orkla has agreed to acquire 100% of shares held by Nordic Partners Food Limited, a Maltese company, in NP Foods SIA, Laima AS, Staburadze AS, Gutta AS and Detente SIA in Latvia, and Margiris UAB in Lithuania. From the financial statements it appears that NP Foods acts as a marketing and sales services provider to the manufacturing companies, charging a fee for its services. Given the volume of intra-group transactions it is hard to estimate what the consolidated numbers are on the basis of annual financial statements only. For that reason we have to rely on Orkla’s statement that the consolidated sales of NP Foods amounted to EUR 77.1 million and normalised EBITDA – to EUR 7.5 million in 2013.

With market capitalisation in excess of NOK 57 billion (EUR 7 billion), Orkla is one of the largest publicly traded companies in Norway. The stock market has lately been valuing it at more than 28.0x its trailing twelve months earnings, 1.9x its book equity, 1.65x its sales and 13.7x its EBITDA. While Orkla is significantly more diversified in terms of businesses, its EBITDA margin of 10.7% is not that dissimilar from the 9.7% reported by NP Foods Group.

It is hard to imagine that Orkla was willing to use higher multiples to value the acquisition target than its own valuation on the stock market. Using the same valuation metrics and the few data points about NP Foods available would result in a maximum value range of between EUR 103 and EUR 127 million. Any lower number could then be attributable to different factors, including the condition of manufacturing facilities and anticipated investment needs , and, of course, to the sellers’ willingness to sell and to Orkla’s negotiating prowess. Taking all the factors into account, in our opinion, the actual transaction price was based on the value that might come close to but remains below EUR 100 million.

If and when the competition authorities in Latvia, Lithuania and Estonia approve this deal, Orkla is likely to double the size of its operations in the Baltics as a result. Because of its positive record in maintaining and strengthening the local brands in its portfolio, it is expected that the Laima brand will not disappear from the market. Irrespective of what the future is going to be, one of the expected jumbo transactions promised in on our earlier note has arrived!

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