Rising levels of interest from private equity in Central and Eastern Europe has been instrumental in steadily growing M&A across the region in recent years. It is expected to remain a key catalyst for further activity in an otherwise underfunded and underinvested market, encouraged by the success of recent transactions, panellists said during the Mergermarket CEE M&A and Corporate Financing Forum 2018 in Vienna last week.

Mid Europa Partners’ 2017 acquisition of Romanian supermarket chain S.C. Profi Rom Food from Poland’s Enterprise Investors for EUR 533m stands out as a significant game changer that is expected to trigger further private equity-driven transactions in this price bracket.

Private equity buyouts have contributed EUR 1.1bn already this year, accounting for 17.9% of the total EUR 6.4bn of M&A conducted in the region, up on the 12.4% seen throughout 2017, according to Mergermarket data. The EUR 1.1bn invested across 14 deals to date looks a favourable start to the year when pitted against last year’s equivalent data that stood at EUR 3.4bn from 73 deals, according to Mergermarket.

Among this year’s activity sits Starwood Capital Group’s offer to buy 26% of CA Immobilien Anlagen [VIE:CAI] for EUR 706m and Novalpina Capital’s EUR 230m takeover of Olympic Entertainment Group, according to the data. These were ranked the third and fourth largest deals targeting the region respectively in a list usually dominated by corporate dealmaking.

A combination of a maturing market, increased profits from companies based in the region and deal optimism is driving increased interest in the market, panellists said.

“Moreover, exit markets are alive and kicking, and over the last two years there has been a development of the secondary exit route,” Robert J Manz, Managing Partner at Enterprise Investors, said during the conference.

Over the past couple years, sale processes in the CEE region to other private equity firms accounted for approximately 39% of exits (measured at original cost), trade sales amounted to 34%, and public market exits totalled around 12% overall, according to Manz.

While Mergermarket YTD figures show a small dip in M&A – EUR 6.4bn being spent across from 112 deals this year versus EUR 8.8bn and 163 deals a year earlier – sentiment remains optimistic.

“The entire CEE market is very lively at the moment,” Alexandra Nagle, Managing Partner of Austria & CEE at Alantra, said during the conference.

Interest is coming from an increasingly global investor set, as well as private equity and players from within the region pursuing a cross-border strategy, Nagle said.

“While Romania was previously considered a difficult market, it is attracting significantly more attention in recent years due to its GDP growth and several notable deals, for example in the consumer and healthcare space,” Nagle added.

Risk takers

“There is an entrepreneurial atmosphere in CEE,” Manz said. “People are not afraid to start businesses and they are not scared to sell them either,” he said.

However, not all is rosy and deals have also failed to complete. In 2017, nine deals lapsed, including China Security & Fire Co’s attempted EUR 110m takeover of Poland-based Konsalnet. This compares to 11 deals announced 2016, with UPC Polska’s EUR 695m acquisition of Multimedia Polska finally lapsing in late March 2018, according to Mergermarket.

Strong sectors

TMT, business services and consumer foods/retail remain hot CEE sectors, panellists said. Digitalisation has woken companies up to the necessity of adapting to changing business models, much as it has worldwide, they added.

When it comes to buying in the technology sector, post-acquisition integration is becoming the greatest challenge for firms in terms of risk post takeover, they said.

The TMT sector received its second highest number of deals on record last year with 87 deals worth a combined EUR 4.2bn taking place, eclipsing the previous record by one - 88 deals and EUR 7.1bn - in 2016, according to Mergermarket.

So far, 2018 has started strongly with 19 deals targeting the sector worth EUR 3.4bn. Of the 10 largest deals targeting the region in 2017, five were within the TMT sector, including PPF Group’s EUR 2.8bn takeover of Telenor’s subsidiaries in Bulgaria, Hungary, Montenegro, and Serbia, according to data.

Outlook: 2018 and beyond

Similar to neighbouring regions such as DACH, the CEE market is witnessing a rise in succession issues, leading to increased deal flow, panellists at the conference said.

Moreover, the establishment of more family offices in the Czech Republic and Slovakia is creating increased competition for buyers in auctions, along with the continuing challenge of overheated sale multiples and contrasting price expectations between buyers and sellers, panellists said.

However, the outlook for 2018 and beyond is positive with great potential in the market and a reasonable number of sizeable deals, they said.

“We expect to see continuing strong interest from investors in the CEE region in 2018 and beyond. This will be driven by CEE-specific themes sometimes, but often also by global sector trends. CEE companies have come of age and many targets are now viewed by strategic and financial investors from around the world as European players who happen to be based in CEE,” Klaus Vukovich, Managing Partner of Austria & CEE at Alantra, said.

“In terms of regional trends, the catch-up story with Western consumers is still there, some sub-scale strategic investors are withdrawing, and new regional champions are emerging in numerous sectors, banking being a very visible one. In addition, the EU perspective for Serbia and other SEE countries will give added impetus to developments there,” Vukovich said.

Emma-Victoria Farr Financial Reporter Mergermarket

Emma-Victoria reports on M&A activity in the DACH region for Mergermarket. Previously she has worked for Bloomberg in Frankfurt, The Daily Telegraph in London, Deutsche Presse Agentur (dpa) in Berlin, and Falter Verlag in Vienna. She has a Masters in German Literature from Oxford University.