Investors keep close eye on growing M&A market in the CSE

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According to a report from Mergermarket and Wolf Theiss, 98 per cent of M&A dealmakers in the Central and southeast Europe (CSE) region said they will continue to invest.

The “Corporate Monitor” report canvassed the opinions of 150 senior-level executives about their experiences and outlook on M&A in the CSE region and found that deal value reached EUR38.3bn, up 62 per cent from EUR23.6bn in 2015. Deal volume remained even y/y, with 507 deals compared to 516 in 2015.

Additionally, the report found that:

  1. Poland, Austria and the Czech Republic are seen as the most attractive markets for buyers;
  2. The leading driver for M&A in the region is a target’s intellectual property or technology suggesting that CSE is developing strong innovation;
  3. The main challenge for dealmakers in specific countries stems from the competitive bidding environment according to 51 of senior-level executives; and
  4. Investors expect distressed opportunities to grow in 2017, which should be of particular interest to buyout firms.

According to the most recent EY M&A Barometer, total estimated M&A deal value in CSE for 2016 was EUR42.6bn – an increase of 10.7 per cent on the previous year. There has been a flurry of merger and acquisition activity by leading industry players in the Baltic States, as Nordic military-industrial collaboration drives domestic and regional sector consolidation.

Nordic defense industry consolidation is fundamental to enabling leading national players grow to an internationally competitive size through domestic and cross-border M&A deals, Henk Welcker, an industry analyst based in The Hague, told Defence Online. “Take Finland, for example. It has around 100 significant defense sector companies. Patria stands out because most firms are privately owned, relatively small in size and operate in niche areas. Finland’s defense sector will show a cumulative turnover of under USD1.4bn in 2016. Around 40 per cent of its output is exported. So consolidation is not just happening regionally, it’s also happening domestically,” said Welcker.

Some 4,000 NATO – mostly the US – forces are being stationed in the Baltic states and Poland, including possibly the highly dangerous Suwalki Gap, separating the Kaliningrad enclave from mainland of Russia. Meanwhile, Moscow is preparing for massive military exercises in its western military region in September, and has deployed a missile system in neighboring Kaliningrad.

New realities, new strategies

And as a consequence, leading defense groups headed by Saab, Patria and Kongsberg are pursuing consolidation strategies. The main objective in ongoing consolidation and M&A activity is to enhance the Nordic defense industry’s competitive edge and ensure big-ticket domestic and regional contracts against expected increased interest and bids from foreign rivals.

“The strengthening the Saab’s “regional footprint” is a pivotal reason for its takeover of Nordic Defense Industries (NDI), the Denmark-based mine disposal company acquired in October,” Görgen Johansson, the head of Saab’s business area Dynamics, told Defence Online. The acquisition of NDI adds technology and innovation value, aside from a greater regional reach, to Saab’s continuing expansion in the unmanned, underwater and mine-warfare domain, he said. Specifically, the deal will fortify Saab’s capacity to design and produce disposal charge systems for the naval defense industry.

“This acquisition strengthens our position in the mine-countermeasures market and builds a foundation for continued profitable growth. Our regional footprint will be strengthened as well as our role as a global supplier of mine countermeasure solutions,” said Johansson.

Nordic defense companies are also closely monitoring developments within the framework of Nordic Defense Cooperation (NORDEFCO) run military-industrial programs. These programs are intended to promote deeper collaboration between industry and the military in the delivery of future Nordic joint procurement contracts.

In terms of regular contacts and cooperation, NORDEFCO liaises with the Joint Nordic Defense Industry Cooperation Group (JNDICG), which is headed by national defense industry associations in Sweden, Finland, Norway and Denmark. “Nordic military cooperation is important and ongoing, and it makes sense that defense industries in the participating countries should get more involved and benefit,” Peter Hultqvist, Sweden’s defense minister, told Defence.

Private investors dominate

The largest percentage of sellers were private entrepreneurs, however, compared to the Q1 (when they accounted for over 50  per cent of the offerings) there was only 27 per cent. Nonetheless, the situation should go back on track and the percentage of private companies that will be sold in the future will increase significantly. The most desirable industries are media/IT/Telco (24 per cent), energy (16 per cent), and healthcare (14 per cent). The largest transactions took place in the energy and real estate sectors. This is not a surprise, since at the beginning of the year it was expected that banks, developers, IT, media and telecom would be taken over.

Private Equity still keen

Private equity (PE) investment in the region reached its highest value ever, according to Mergermarket, with 103 deals worth a combined EUR11.3bn. “The CSE region is still offering better growth prospects than the rest of Europe, and PE investors have rewarded it with record deal value,” said Levente Zsembery, HVCA chairman and CEO of X-Ventures. “Hungary has contributed both advisory support and assets for some of the most important regional deals,” he added.

“Our latest M&A Barometer results show not only a strong M&A year in 2016 for the region as a whole, but also Hungary as a particularly attractive target for financial investors, with 32 per cent of all deals going to financial investors, a figure rivaled only by Slovakia,” Margaret Dezse, leading partner of Transaction Advisory Service at EY, said.

“Private equity and venture capital played an important role in CSEʼs transition to a market economy, by improving corporate governance and efficiency, rebranding products, and so on,” said Anikó Kircsi, head of corporate, M&A and Private Equity at CMS. “2016 was a record year. It seems to be a consensus among experts that this trend will continue in 2017. There is still high growth potential to be leveraged in CSE,” she added.

“GDP growth in most CSE countries has sparked investor confidence in the region,” said Sonja Caymaz, research editor at Remark, part of the Mergermarket Group. “There was strong appetite for TMT, real estate, consumer and energy targets, especially from PE firms, which led to a record value for PE deals in 2016. 103 deals worth a combined value of EUR11.3bn – the highest deal value for PE in the region ever recorded by Mergermarket. There is still plenty of room for digitalization in consumer and manufacturing businesses, and the ability to grow strong local brands across borders. As elsewhere in Europe, inbound activity from China into the CEE region also doubled compared from 2015,” she added.

PE activity on the sell-side is also constantly increasing. In Q2’2017 PE funds represented 19 per cent of the sellers (compared to 11 per cent in Q1) and were the second most active group on this side of the transaction. Poland’s Enterprise Investors was the most active seller once again. After Dino and itWorks they have finalized sales of Skarbiec Holding, United Oilfield Services and Polski Bank Komórek Macierzystych. Abris is following closely – after Novago, they have successfully sold another portfolio company, Mykogen, a leading producer of mushrooms. The buyer was the Belgian company Greenyard, a global leader in the market of fresh and processed fruit and vegetables, flowers and plants and growing media. Virtual Data Room technology has helped streamlining negotiations with a foreign investor.

Poland

Despite the expected recovery, activity on the Polish M&A market is still moderate, according to Alicja Kukla Kowalska of FORDATA. In the Q2 there were 51 transactions carried out, compared to 53 in the Q1 and 53 in the same period last year. It is consistent with the overall situation on the M&A market across the CSE region, which noted the worst results in all countries during the first half of 2017. The industry expects to revive soon.

In the Q2 Polish companies were dominant both on the sell and the buy-side. Foreign investors accounted for 27 per cent and represented mainly European countries. It seems that in the H2’2017 there will be several cross-border transactions worth noticing. Poland is a good bridgehead for Asian companies for further expansion. In addition, large transactions from 2016 put Poland “on the radar” of foreign funds. Poland is not yet their “must have”, but it’s definitely being closely watched.

Foreign investors flow that is seen in Poland (including new funds), is the result of changes that have taken place in Europe and globally. Many markets have closed. The British market remains uncertain due to the Brexit, and depreciation of pound; Turkey is no longer attractive, and the Russian market is closed.

Investments in Poland are undoubtedly favored by the macroeconomic situation, which is very stable. Economic growth and a well-functioning banking system have to be pointed as positive factors as well. Investment risk is perceived as equal to Western Europe.

“In terms of size of transaction, usually most of the Polish M&A activity is concentrated in the mid and small market segments. However, lately the market became hot in large transactions. There have been couple of them completed in late 2016 or H1’2017,” said Piotr Samojlik, Managing Partner of VCP Poland.  

The value of transactions remains the same as in the previous quarters. Among deals with disclosed price small (less than EUR23.4m) and average (value of EUR23.4-EUR93.8m) transactions dominate.

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