Christmas brings big bucks

The Baltic Times, TALLINN
Dec 17, 1998
Interviews by Kairi Kurm

Kairi Kurm checked up on managers at Tallinn’s biggest shopping malls for a look at shopping habits and trends this holiday season.

Ene Andruskevitsus, Stockmann marketing manager

Christmas sales have increased by 10 percent compared to last year. People save money during the year to shop at the end of it. The Christmas campaign is one of Stockmann’s biggest campaigns, which makes up about one-fifth of the total turnover. The increase in sales was really noticeable in November during a “preparations for Christmas” campaign. The food department is our main source of income. Special services like Christmas baskets are very popular.

This year was successful for us although the crisis in the banking sector and in Russia has had an impact on every trading company. Compared to the previous year, we have stayed on the same level, financially speaking.

Stockmann’s traditional, conservative and well-planned marketing is the key to our success. But the competition is becoming more serious, as Kristine Center, which brings in Italian trademarks, opens its doors.

Urmo Valner, Tallinna Kaubamaja financial manager

This year we expanded. We opened the fourth floor at the Gonsiori Street center and also opened a center in Mustamagi. We have altogether four trading centers and a car-parking building.

Tallinna Kaubamaja’s profit in 1998 will be smaller than last year due to losses from closing the center in Helsinki. I believe that the 1998 economic results for most of the Estonian shops will be worse than they were last year. Their sales will increase but the profits probably will not.

Kaubamaja’s December sales are bigger than other months’ sales, which is usual in trade. But this year, it seems that the purchasing power of people has declined due to a loss of faith in the future and decreasing wages. Many people have lost their jobs and most do not receive unemployment benefits. There have been several bankruptcies and people, who haven’t yet lost, are afraid of losing their jobs.

Sari Sopanen, Sokos managing director

This year has turned out much as we planned it. We had an increase in sales and we’ll make the profit that we budgeted for. Our sales may increase by 10 percent compared to last year. The final result depends on December. The increase in sales in December may not be as remarkable at our store because we sell clothes, fashion articles, shoes and cosmetics. We do not have household goods, which are popular Christmas items.

But sales will be much higher in December than they normally are. The most popular goods at this time of the year are cosmetics, toys, underwear and nightwear. In the cosmetics department, men can find presents the easiest.

Raul Kadaru, Maksimarket Oismae Center manager

Maksimarket’s third center was opened in August and its sales have not had much impact on Maksimarket’s total yearly turnover. So sales in December may account for 12 percent of the year’s total sales. We expect a 30 percent increase in December. Candy, turkey, candles, and scarves – these are the traditional Christmas products.

About 55 percent of our goods are food products, 25 percent are household goods and 20 percent are wardrobe garments.

We gained a big market share this year. Neither the amount of cash nor the population has increased in Tallinn and its vicinity, but our turnover has almost doubled. This means that we have become stronger.

Next year we are planning to open a new trade center in Tartu.

Computer assembler fears coming apart

The Baltic Times, TALLINN
Dec 17, 1998
By Kairi Kurm

When the Pennu computer assembler engaged in the leasing and real estate business it thought it would increase its profits, instead these extra activities might bring the company a total 36 million kroon ($2.7 million) loss.

In fear of financial trouble, Pennu’s new owner Baltic Cresco Investment, Hansapank and the new management say the company should quit unrelated activities and return to its core business.

Cresco became the company’s main shareholder Dec. 2, when it bought half of Pennu’s shares, and together with the bank is now dictating company policy.

The press has speculated that by influencing changes in management and reorienting the company, Hansapank is trying to protect itself from financial trouble. The bank was Pennu’s biggest creditor and the computer assembler owes it up to 50 million kroons.

Alo Koop, Pennu’s founder and former board chairman, said the previous management knew in spring that they needed to get out of the real estate business although the leasing and real estate business was still considered profitable by most Estonians.

Most Estonian companies saw expanding into other businesses as a good way for dispersing risks – receiving profit when sales were decreasing. As Pennu’s sales were not increasing, it launched an office building project and started a leasing branch.

The Tempelman investment company evaluated Pennu’s core business and found that computer assembly was not growing.

“Three percent rise in the net turnover was achieved thanks to the good results in the second half of 1997,” said Tempelman’s in its assessment.

Koop said the real estate branch was established only to administrate Pennu’s 50 million kroon building, which the company intended to sell after the construction was completed.

The construction of this office building was beyond Pennu’s resources, and it has large loans to pay back. All attempts to sell the building failed. The Scandinavian telecommunications company Ericsson, which is now renting the building, declined the offer.

According to Tempelman’s assessment, the land and buildings account for 36 percent of the company’s total assets. Pennu now has to sell the property to cover claims, and according to Aripaev, might loose up to 11 million kroons on this office building project.

Pennu’s leasing company, which was founded originally to provide financing for the purchase of computers, may also bring along big losses.

According to Aripaev, half of the 50 million kroon leasing portfolio is made up of bad loans. Only 20-25 percent of the portfolio is made up of computers, while the rest is real estate and cars.

To find a way out of these difficulties, Pennu planned to merge with Macrolink, the largest computer company in the Baltics. But since negotiators could not find an acceptable solution for both parties, the talks broke off.

Jaanus Rahumaa, Pennu’s provisional board chairman, said because of the previous management’s mistakes the company’s shares are underestimated. The new provisional board is auditing the company and the results should be available at the shareholders’ meeting on Dec. 22.

Estonian Air lands new partner

The Baltic Times, TALLINN
Dec 10, 1998
By Kairi Kurm

Clients of Estonian Air can soon benefit from greater travel opportunities and bonus flights thanks to a cooperation agreement with new partner Scandinavian Airlines System.

Estonia’s national carrier, Estonian Air, signed a long-term cooperation agreement with SAS Dec. 2. On the basis of the contract, Estonian Air will from March 28, 1999 be a member of SAS’ EuroBonus frequent flyer program and the airlines will start a code-share flight between Tallinn and the Scandinavian capitals. A code-share flight means that the clients of Estonian Air can fly with SAS and vice versa.

Estonian Air held talks with four groups dominating the European scene – One World Alliance, Swissair, KLM-Alitalia and Star Alliance – and settled on Star Alliance’s SAS, finding it the best partner for co-operation.

But the partnership means that Estonian Air’s cooperation with Finland’s Finnair on the Tallinn-Helsinki line has to be discontinued from March 28 next year, when the contract ends. Finnair cooperates with British Airways, which belongs to One World Alliance, a competitor to Star Alliance.

The most notable benefit for the clients of Estonian Air will be the EuroBonus point system. This enables frequent flyers of Estonian Air to collect points on flights with Estonian Air as well as SAS and other EuroBonus partners, including Lufthansa, United Airlines, Thai Airways, Air Canada and Icelandair. From the points collected, a client can choose a premium flight from among all the flights offered by the EuroBonus partners.

As from March 28, Estonian Air and SAS aim to start code-share flights between Tallinn, Stockholm, Copenhagen and Oslo, which means greater flexibility and more flights between Tallinn and the Scandinavian capitals for the customers of both airlines.

The airlines would also coordinate their timetables to support transit traffic through Copenhagen, Oslo and Stockholm to the rest of the world and through Tallinn to the CIS and Baltic countries.

The cooperation agreement does not have any impact on Estonian Air ownership and management. Estonian Air, which belongs to the Estonian state (34 percent), Baltic Cresco Investment Group (17 percent) and a Danish private airline Maersk Air (49 percent), will remain independent and retain its identity as the national carrier of Estonia, says the Estonian Air press release.

SAS was also one of the candidates in the privatization of the Estonian airline company in 1996, but lost the deal to Maersk Air. SAS and Estonian Air were also competitors in the past. Now they can arrange a more reasonable timetable, having flights at different times during the day.

Estonian Air operates with two Fokker 50 and three Boeing 737-500 aircraft to 13 destinations: Helsinki, Stockholm, Oslo, Copenhagen, London, Amsterdam, Hamburg, Frankfurt, Kiev, Moscow, Minsk, Vilnius and Riga.

The company received a 516 million kroon ($37.8 million) turnover last year, which is 152 million kroons more than the year before. The company’s loss for 1997 was 56 million kroons, 30 million kroons less than it lost the previous year. According to Olev Schults from Cresco Investmets, the company had planned to profit in the fourth year after the privatization. In 1997 the company served 281,000 passengers and had 380 employees.


Petrol prices rise in Estonia

The Baltic Times, TALLINN
Dec 10, 1998
By Kairi Kurm

Taxes constitute more than half of gasoline prices, but Estonia decided to add another excise tax of 0.5 kroons per liter Dec. 1.  Drivers felt the change the same day they drove into gas stations to fill their empty tanks. They paid 6.50 kroons ($0.48) per liter for 95E gas, while a day before they would have paid only 6 kroons.

In 1997, the government decided to increase the additional excise tax on gas step by step until the year 2001.

“By the end of the planned increase in excise tax, its level will be comparable to those of Western countries,” said Ain Ulmre from the Ministry of Finance.

Most gas stations said drivers filled their tanks before Dec. 1, and there were fewer clients the week after the price increase.

“The sales of fuel decreased for a short time due to the impact of increasing prices. People bought more fuel before that. But they will get used to higher prices in a short time,” said Indrek Randver, retail sale manager at Alexela Oil.

He also noted gas stations sometimes have to lower their prices despite high excise taxes.

“As of tomorrow, the price of 95E gas per liter will be 10 cents cheaper due to decreasing prices on world markets. We react to these changes quite fast, although sometimes not on the same day,” said Randver.

The average price on the world market is still higher than the price in Estonia. According to the business magazine “Tulu,” only the average gas prices of Romania, Russia and Lithuania were below the Estonian ones.

In February, the price of 95E per liter cost 6.50 kroons in Estonia, while the price was almost 16 kroons in the Netherlands, Sweden, Finland and the UK. In Norway, prices even exceeded the16 kroon level. In Lithuania, it costs 10 cents less and in Latvia 1.50 kroons more than in Estonia.

According to the daily business newspaper, Aripaev, the price of 95 E fuel is comprised of 1 kroon VAT, 3 kroons excise tax, 0.82 kroons retailer’s revenue and 0.48 kroons wholesaler’s revenue, while 1.20 kroons is the actual price per liter.


Danes storm security market

The Baltic Times, TALLINN
Dec 10, 1998
By Kairi Kurm

The Danish-owned security company Falck Group started its invasion of the Baltic states by acquiring a 65 percent stake in the Estonian Security Service, the biggest security company in the Baltics, and plans to increase its presence here by eventually moving into Latvia and Lithuania.

The price of the deal was not disclosed, but both parties seemed to be satisfied.

“We are proud of being able to open up activities in the Baltics and having this co-operation with ESS. It took us 90 years in Denmark to win a market share, but six years for ESS in Estonia. We would like to complete that development in Latvia and Lithuania,” said Lars Norby Johansen, president and chief executive officer at Falck Group.

Falck Group has widely expanded during the last 10 years, and now owns companies in nine Baltic Sea area countries.

“It is not a take-over. There would be a majority of Estonians on the board. The success you have built is fantastic,” said Johansen.

Urmas Sooruma, head of the council of ESS, previously owned 35 percent of the company’s 11 million kroon ($807,000) share capital, while Hansapank and Uhispank were the other big shareholders.

“The present management has a very strong know-how of the local market. That is where synergy arises. We can together make a very strong foothold in Latvia and Lithuania,” said Johansen.

In Latvia and Lithuania, ESS has operations in close to 10 cities. ESS also owns an insurance company in Lithuania and Estonia. As ESS does not have a substantial market share in Latvia and Lithuania, Falck Group has decided to find partners in those two countries in the near future. The management of Falck Group believes that the service and management philosophy pursued in Estonia can be transferred to these two countries.

According to a Falck press release, the Latvian and Lithuanian markets are not quite as developed as the Estonian market, but may grow by approximately 25 percent in the next few years. The Estonian security market is expected to grow by 10 percent to 15 percent annually over the next three to five years. The largest operators in the Latvian and Lithuanian security markets, which are partially government-owned, are expected to be privatized.

In addition, Falck group has an option to buy the remaining 35 percent of the shares in ESS. ESS is also planning to sell some of its subsidiaries, which services differ from the ones that Falck group is offering.

ESS turnover in 1997 was 177 million kroons and the company earned 8.5 million kroons in profit. This year, the company predicts a 290 million kroon turnover due to the takeover of the Estonian security company EVK Group this summer. Falck’s turnover is close to 11 billion kroons and together with ESS it has about 20,000 employees including ESS’s 3,000 employees. ESS holds 40 percent of the Estonian security market and 66 percent of the guard services.

In connection with the acquisition, ESS will also be removed from the Tallinn Stock Exchange as the company no longer adheres to the exchange requirements and the new strategic investor satisfies the company’s needs for capital. The amount of freely traded shares is below the required 25 percent and there are less than the required 100 shareholders.

In order to save the rights of the small shareholders, who might not receive the same information about the company, their shares will be bought back by other big investors.

” The stock exchange is necessary for increasing capital. If one is operating through an international concern, it is better to increase capital through a parent company,” said Rain Tamm, manager of the investment banking division at Hansapank.

“For a developing company it is characteristic that additional capital is frequently needed because it is not possible to develop endlessly with one’s own resources,” said Sooruma, the man who founded the first private security company in Estonia seven years ago. “We have won the market share thanks to the hard work of our employees. We could then manage with the capital that we had, but now we need a strategic investor.”

This is already the second merger of an Estonian security company with a foreign investor.

Two months ago, Europe’s largest security company, Securitas, which also had a subsidiary in Estonia, acquired the third biggest security company, Estonian Security Center. Akropol holds the second position on the Estonian security market. Each of these companies control about 10 percent of the local market.


Oil terminal heads Estonian Top 100

The Baltic Times, TALLINN
Dec 03, 1998
By Kairi Kurm

Oil shipping, wood processing and telecommunications are the most prosperous businesses in Estonia, according to a recent survey conducted by the business newspaper Aripaev and the Estonian Chamber of Commerce and Industry.

The Pakterminal oil terminal, Imavere Saeveski sawmill and cellular phone provider Eesti Mobiiltelefon were the most successful companies in 1997. Six different lists were made, first to measure the 500 most successful companies in Estonia. They were measured by profit, turnover, profitability rate and the increase in these categories from the previous year. The most successful companies were then arranged into a Top 100 list according to their positions in former calculations.

Pakterminal, which earned 454 million kroons ($33.6 million) from a 756 million kroon turnover was also the leading profit maker in 1997. The company earned a 60 percent profit last year, which gave it the second position on the profitability list. The average profitability rate of the 500 companies was about 3 percent.

The first place in the competition for the highest profit percentage was given to Talinvest, an investment fund, but there was some disagreement about the choice.

According to Mati Feldmann from Aripaev, it should have been left out of the Top 100 competition, as the economic figures in an investment bank have different meanings from those of a manufacturing enterprise. Banks and insurance companies were not included in this competition as their turnover estimation is different from those of manufacturing companies.

Eesti Energia, the state energy company, has held the first place on the turnover Top 100 list since these calculations began in 1993. Since its growth has not been as remarkable, it is in the 52nd position on the overall list. Eesti Energia was the only company in 1997 whose turnover exceeded 3 billion kroons and the only one in 1996 with a turnover above 2 billion kroons. The number of companies with sales exceeding 1 billion kroons in 1997 was eight, while in 1996 there were only three such companies.

The profit limits in 1996 and 1997 were set by Pakterminal, the only company whose profit exceeded 200 million kroons in 1996 and 400 million kroons in 1997. Only six companies earned more than a 100 million kroons in 1997 and four in 1996. Eesti Mobiiltelefon and Eesti Telefon have held the second and the third position on the profit list for two years now.

Pakterminal was also the most successful company in 1995. In 1996 it was held by the water utility Tallinna Vesi and in 1994 by the Saku Olletehas beer brewery.

Aripaev credits Pakterminal’s efficiency as the secret of its success. The newspaper also said that Pakterminal has established successful cooperation with the Tallinn Harbor and Estonian Railway.

Pakterminal has created a strong partnership with Pakhoed International, one of the largest terminals in the world, and good business contacts with Estonian and Russian oil companies, said a competitor from EOS terminals in an interview with Aripaev.

In 1997, the turnover of the 500 biggest Estonian companies increased by 29 percent over the previous year, indicating that this was a successful year. The total turnover of the 500 biggest companies has increased from 65 billion kroons to 84 billion kroons. The profit almost doubled from 1.4 to 2.7 billion kroons. This shows that the average profitability is 3 percent. Only one out of the 14 biggest companies could manage to earn above one kroon per every 10 kroon sales last year.

According to the Baltic Business Power Project, which does a similar survey in the Baltic states, there are many small-scale profitable companies in Estonia. But only two – Pakterminal and Eesti Energia – hold a position in the Baltic Top 10 list. Latvian state energy giant Latvenergo and the oil company Ventspils Nafta from Latvia and the telephone company Lietuvos Telekomas from Lithuania hold the first three positions on the Baltic Top 10 list.

State cheers sale of telephone company

The Baltic Times, TALLINN
Dec 03, 1998
By Kairi Kurm

Many say the Estonian government made a mistake when it offered stakes in the monopoly telecommunication company Eesti Telekom to Sweden’s Telia and Finland’s Telekom, but government officials are cheering.

The government decided to increase Eesti Telekom’s share capital by offering shares to Scandinavian investors. Eesti Telekom is a majority shareholder in its two subsidiaries, Eesti Telefon and Eesti Mobiiltelefon, where Telia and Sonera control the remaining 49 percent of shares. The Scandinavian companies each own 24.5 percent of shares in each subsidiary.

According to the government’s new plan Telia and Sonera will exchange their stakes in Eesti Telefon and Eesti Mobiiltelefon for 23.25 percent stakes in Telekom. Both subsidiaries will be controlled by Eesti Telekom after the restructuring.

Estonian Transport and Communications Minister Raivo Vare in his interview to Aripaev called the deal a success because these investors will increase confidence in the company and will push the share price up when it’s quoted on the stock exchange next year.

The government gave Telia and Sonera an opportunity to increase their mutual share in Telekom from 46.50 percent to 49 percent in an initial public offering. The state will sell 23.72 percent of its shares in Telecom on the stock exchange next year.

The state can still control the company through “a golden share,” which would be issued specially in order to protect the interests of the state and give it a right of veto when important decisions are made.

Two and a half months after the announcement of the initial public offering, the shares would be quoted on the stock exchange.

No matter how much politicians rejoice, many believe the state could have gotten a better price for these shares.

Toivo Jurgenson, head of the political party Pro Patria Union, believes that it would be better if both subsidiaries were sold to different owners in order to create competition.

A representative from competing mobile company Radiolinja Eesti said state shares in Telekom are being sold cheaply to Scandinavian companies. Several specialists also said the state could have received more money if there were competition for those shares.

“Their privatization scheme differed from what we had suggested to them some years ago. It would have been more useful to sell the shares in the holding company first instead of selling the stake in the subsidiaries,” said Vaino Sarnet, head manager at the Estonian Privatization Agency. “The state would not get maximum value now while it is dependent on [investors’] decisions.”

In the course of the deal Telia and Sonera had to give up a 2.5 percent stake in Telekom, which the government uses as the only positive argument to prove the sucess of the deal.

The government also approved Eesti Telefon’s business plan for the period between 1999 and 2008. According to this plan the company has to invest more than 700 million kroons ($51.9 million) annually over the next ten years.

Estonia’s born-again bank starts fresh

The Baltic Times, TALLINN
Dec 03, 1998
By Kairi Kurm

After being sntached from the jaws of bankruptcy by the government, Optiva Bank is enjoying a new beginning. Last week, the third largest Estonian bank after Hansapank and Uhispank announced it will concentrate on corporate banking providing services to companies engaged in international business.

Optiva was founded as a result of a merger between Investeerimispank and the deeply troubled Forekspank, and the state had to bail it out of bankruptcy in October, buying a majority stake in both banks.

The Bank of Estonia now controls 58 percent of the shares in the new bank, and Investeerimispank and Forekspank shareholders control 28 percent and 13 percent respectively.

After the merger, Optiva will be able to serve as a principal bank to clients who have only used either of the banks as providers of a limited number of services. Investeerimispank used to offer investment and consulting services to corporate clients and Forekspank provided a full range of services to small and medium-sized companies.

Optiva is primarily looking for companies engaged in export and import transactions, for whom the bank is able to offer the best service through uniting Investeerimispank’s experience in financing export-oriented projects and Forekspank’s skills in international payments and giving loans to exporting and importing companies.

Neither Forekspank nor Investeerimispank alone would have been able to compete on the fast consolidating Estonian market.

“The limited amount of owner’s equity, which was decreased by big losses, did not allow us to develop as fast as was necessary,” said Ranno Pajuri, director of marketing communications at Forekspank. “The merger was also necessary in terms of competition on the market. It is more difficult to compete alone than it is together.”

Forekspank’s inadequate capital was a restraining factor in financing major investment projects. Forekspank incurred a 250 million kroon ($18.5 million) loss due to the crisis in Russia and slipping share prices. Investeerimispank managed to earn a 15 million kroon profit, but the newly found Optiva bank predicts a 220-million kroon loss for 1998.

In addition to traditional banking operations, Optiva Bank will also be providing consulting services using the respected long-standing experience of Investeerimispank. The bank announced its decision not to build a wide office network, but to develop on-line services instead.

As soon as the merger is completed the bank might throw a fishing line for a strategic international investor to ensure long-term positions in the domestic market and expand to neighboring markets.

Through a strategic investor Optiva Bank hopes to obtain know-how of western banking and establish international partnership contacts as well as improve access to international finance markets.

Pajuri said the bank’s share capital after the stock issue to Investeerimispank’s shareholders will amount to about 413 million kroons.

The Bank of Estonia, which bought the shares of the troubled banks this year, has decided to sell its stake to a strategic investor before the end of next year.

At the end of October Investeerimispank’s and Forekspank’s assets amounted to 1.7 billion kroons. After the merger the new bank’s assets are estimated to be about 3.957 billion kroons.

For 1999, Optiva Bank predicts an increase in assets to 4.7 billion kroons, and by 2000 the assets are expected to reach 5 billion kroons.