Since the merger between Viking Malt and Danish Malting Group, formerly owned by Carlsberg, took effect around two years ago, the SBR has been in dialogue with the new Viking Malt in order to publish an article giving our readers some insight into what the merger means for Viking Malt itself, the company’s customers in general and the brewing industry in our region in particular. In this article, the former MD of Viking Malt, Antti Orkola, gives us unique views into the rationale for the merger – or acquisition as it really was – of DMG into Viking Malt as well as a little peek at the consequences and results so far.
Author: Antti Orkola
As the brewing industry has been consolidating during the last two decades, maltsters have been through the same development – although at a bit slower pace. Viking Malt – a company that is probably familiar to most brewers in both the Baltics and Scandinavia – is one of those malting companies that have been able to grow through acquisitions. In Viking Malt, we have always had a firm philosophy saying that, being a maltster, you need to be able to source your grains locally. In Sweden, Lithuania and Finland, Viking Malt have established local sourcing in good co-operation with local farmers and traders. Therefore, DMG, with operations in Denmark and Poland, was a natural preference for Viking Malt when looking for growth options through acquisition. Denmark today is an important producer of malting barley – FOB DK price for malting barley indicated by major bulletins is an evidence of this. In Poland, DMG had been developing a strong local sourcing which gave us confidence of the sustainability of their operations. So, looking at the rationale for an acquisition of DMG by Viking Malt, we could list a few criteria:
1) GROWTH IN SIZE
Size matters – If you are a big brewing group, you need to be of credible size. While the brewing industry has been consolidating, also the bargaining power of brewers has been growing. To get this position more balanced, also maltsters need to get bigger. You can grow by investing in new capacity. The cost of investing in new malting capacity is today about 600 EUR per ton annual capacity. With the existing price levels for malt, investing in capacity does not pay off, especially recognizing that it takes time before you can get the operating rates up. On the other hand, the acquisition of DMG will improve Viking Malt’s capability to better serve its customers worldwide and strengthen Viking Malt’s position as the leading maltster in Northern Europe. DMG had one malting plant in Denmark and two in Poland. As Viking Malt had its maltings in Finland, Sweden and Lithuania, the expansion to the neighboring countries was a natural step. After the transaction, Viking Malt has a malting capacity of 590,000 tons per year, which brings Viking Malt to the number 5 spot in Europe and number 9 in the world, as regards size in the malting industry at the time of acquisition.
Malting is typically a low margin business where 60 to 70% of the cost comes from raw material. Therefore, efficient operations with access to local barley need to be in place. DMG had a history of producing cost-efficiently for a big brewing group. We at Viking Malt recognized this and saw an opportunity to get this knowledge to serve our existing operations. Together with DMG, we were able to double the number of malting plants located in geographically rather concentrated areas. This has given us a possibility to optimize the production between the sites so that we can use the strengths of each site to ensure consistent quality and fluent deliveries to our customers. And, naturally, the overhead cost of operations per ton of malt (admin, marketing, R&D, etc.) will be lower with the bigger total capacity.
Viking Malt has always had a strong development function with high focus on new products and quality. Often new developments are applied to help your customers in local market. With a bigger home market and capacity, we saw that we could utilize these developments more easily to a wider number of home market customers. In Poland, the former DMG has been building malt roasting capacity and thereby the market for specialty malts for years. We at Viking Malt were thrilled about acquiring the roasted malt production of DMG Poland to complement our existing specialty malt portfolio. Combining our existing portfolio and capacity, we can state that now Viking Malt is the leading producer of specialty malts globally. Hereby, we can offer a wider range of solutions to the brewing industry, including the strongly growing special beer market.
4) EFFECT ON MARKET
In every acquisition, you need to predict what would be the effect of the transaction on the customers. Typically, acquisitions do not change the supply/demand balance on the market, which makes it easier to predict the future deliveries. At the time Viking Malt decided to bid for the operations of DMG, the market outlook for malt was positive. This is due to the fact that there has been no major capacity increase in the global malting industry while the demand for malt has been growing due to global beer consumption growth and the growth of craft beer. When supplier companies merge, it often reduces the number of suppliers for some customers, creating a situation where there are not enough alternatives available. In the case of Viking Malt acquiring DMG, this was not an issue as DMG had been supplying practically only to Carlsberg. For our existing customers, this merger brought additional alternatives and security of availability compared to the situation before. We feel that most of our customers are more comfortable with us than before the merger.
5) RISK MITIGATION
Securing the availability of good quality raw material is of vital importance for malting industry, and we have historically seen surprisingly different growing conditions around the Baltic Sea. Earlier, we had three sourcing areas, and now after the merger we have Poland and Denmark on top, balancing the risk. The first two years of operations as bigger Viking Malt have been showing the benefits of this setup in terms of securing our quality. Also, our home markets for brewing may also develop differently in the future due to local conditions and, e.g., changes in legislation. Therefore, having a wider home market area reduces the risk of being too dependent on one market. When deciding to bid for DMG, we looked into the above criteria, but we also evaluated how easy or difficult it would be to make all the potential synergy effects materialize. What made us confident of succeeding was the fact that Poland and Denmark were neighbouring countries to our existing operating areas. Close geographical distance helps in utilizing the synergies while steering the operations. On the other hand, we did recognize that the cultures in each country could be quite different. We were used to living with cultural differences earlier – e.g., people in Lithuania and Sweden expect totally different types of management and leadership. Now we are trying to learn how to work together with five different nations and business climates, and we´ve seen that this is possible, although not always self-evident. However, I think that we have been able pick up some beneficial practises from each country, and I feel that – at least so far – the cultural diversity within Viking Malt has been for the benefit for our customers. We have launched a lot of new products and taken new practises in use which will secure the quality and deliveries to our customers. One important factor to get this happening has been the fact that the key people haveboth been staying in the company and also been highly committed to work for the success of the renewed company. After the merger, we did choose a management team with representatives from both old Viking Malt and former DMG – this has definitely helped in getting the merger to happen successfully. We are happy to conclude that after the acquisition of DMG, the new Viking Malt has become the leading supplier of specialty malts globally and leading maltster in Northern Europe. We still at Viking Malt make malt based on local barley and are thus having good control over the variety development, farmer cooperation and grain quality. Nordic Brewers have now gotten an even stronger Nordic Maltsters to support them in developing our beer culture.
About the author
Antti Orkola was born 1956 , and holds a M.Sc. in Chemical Engineering. Antti started his career in Kemira Oyj, where he had various positions in production, production planning, sales and business management from 1980 to 1993. He worked as President of Kemira Phosphates Oy and Vice President of Kemira Siilinjärvi plants & mine.from 2001 to.2002, in charge of Kemira GrowHow Oyj SBU Industrial Solutions from 2005 to 2007 and then as Executive Phosphate Director before joining Viking Malt, where he started as Managing Director in September 2009. Antti retired from Viking Malt 1st of February 2018.