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CEE trendspotter: Baltics strong, activity slows down elsewhere

  • Energy, consumer and retail among the most active sectors
  • Valuation gap and worries over macroeconomics impact deal-making

M&A trend dynamics in the wider Central and Eastern Europe were uneven in 1H18, with strong performance in the Baltics, larger, outlier transactions in Hungary and the Balkans and comparatively far fewer Czech and Polish deals.

The region’s total deal value this year to date (YTD) was up by 50.2% to EUR 9.43bn, according to Mergermarket data for the CEE (excluding Russia), but the deal count was down by 23.9% to 169, due to a vendor-buyer valuation gap and uncertain global economic prospects. Dutch financial group PPF‘s EUR 2.8bn buyout of Telenor’s [SWX:TEL] mobile phone operations in Hungary, Bulgaria and Montenegro this month was the biggest deal by far, ahead of Advent International’s purchase of Czech generic drugs manufacturer Zentiva for EUR 1.92bn.

Given the present deal pipeline comprised of smaller deals, and the scarcity of larger targets, the region’s markets will continue to rely on smaller transactions, activity by sponsors like Innova CapitalV4C or CEE Equity Partners, which have recently raised new funds; and inbound interest from both European and other investors, bankers and dealmakers say. “There are far fewer large transactions, but the mid-market is quite active across the region,” Jacek Michalski, partner and Head of Corporate/M&A at Wolf Theiss law firm in Warsaw, said. Private equity houses have collected large amounts of cash from investors and are seeking targets, he said. Chinese investors are also increasingly active, Michalski said, highlighting the May takeover of Slovenian white-goods manufacturer Gorenje [LJ:GORE] by China's Hisense as an example.

Baltics to see energy, tech, banking deals

The total deal value YTD in the Baltics increased 93.6% to EUR 1.05bn, compared to the same period last year, but the deal count was only slightly higher, at 32 compared to 27 in 1H17.

The region has seen a couple of years of favourable macroeconomic trends, with businesses boosting their EBITDA and valuations, creating a perfect situation for further PE exits, Toomas Prangli, co-managing partner at Sorainen, said.

BaltCap, which recently exited several Estonian and Latvian investments, is now said to be looking to sell Lithuanian clinics chain InMedica and coffee chain Caffeine Roasters, while LitCapital is mulling the sale of Lithuanian smart-security-systems producer Eldes, and Plaza Venture Partners is marketing its Lithuanian road marking specialist Biseris.

The existing Baltic deal pipeline suggests the energy, renewables and infrastructure, consumer and retail, IT and technology and banking sectors could see M&A in 2H18, dealmakers in the region said.

State-owned Estonian energy group Eesti Energia is looking for new renewable targets, and is preparing to float its renewables arm Enefit Green once it has completed a EUR 493m deal for domestic renewables group Nelja Energia, the region’s largest YTD;. Eesti’s competitor, Lithuanian state-owned Lietuvos Energija, is said to be looking to buy wind farms held by local Stemma Group.

Lithuanian food retailer Palink is seen as a potential target in the longer term, after its sale to domestic rival Rimi Lietuva was blocked by regulator this spring. Potential targets in the pharma retail sector Gintarine vaistine and Limedika, owned by Polish wholesaler Pelion.

The IT sector will be kept active by tech startups looking for capital, several dealmakers say. Estonian players Click & GrowStigo and Bikeep, Latvia’s PlayGineering, and Mintos, and Lithuanian Interactio are among those looking to raise growth funding.

The Latvian banking sector is undergoing consolidation due to recently tightened regulations for retail banks serving non-resident clients, several dealmakers say. While lender ABLV announced it is preparing for a liquidation process, Privatbank and Norvik Banka are reportedly looking for various tie-up opportunities.

The Czech Republic

Despite a slowdown in M&A, Czech bankers and regional funds are positive about the balance of 2018 as the deal pipeline and the competition for assets remains strong. The country’s deal flow plummeted from 49 deals in 1H17 to 26 so far this year, worth EUR 2.1bn, according to Mergermarket figures. With labour shortages pushing up staffing costs and squeezing margins, the resultant pricing gap prevents some deals from closing, several bankers say.

Succession sales, via which founder-owners who set up companies in the 1990s seek to retire, and plentiful available funding continue to be the key M&A drivers, bankers polled say. A positive macroeconomic environment in the Czech Republic is also encouraging many company owners to try a sale now, one local PE fund executive says.

Industrial manufacturing, automotive and healthcare are among the sectors seeing the most M&A activity, local advisers say, and retail in particular could see further activity. The sector has seen recent transactions, including the sale of fashion company Pietro Filipi and leather clothing manufacturer and retailer Kara to local fund C2H, part of a trend that could continue in the coming months given rising rental prices, rising staffing costs and competition pressure in the segment, one adviser says. A second adviser highlights the automation sector as seeing very strong investor interest in the wake of labour shortages across all industries.

Among the top Czech deals expected in 2H18 are the sale of hospital equipment manufacturer Linet, with a reported likely valuation of around EUR 400m, including debt; the Czech assets of German energy distributor Innogy SE [ETR:IGY], with a potential deal value of EUR 3.9bn; and steelmaker ArcelorMittal Ostrava, which had 2016 sales of CZK 28.8bn (EUR 1.14bn), advisers say.

One notable trend is Czech companies established post-2000 looking for acquisitions abroad, to expand outside the domestic market, a third adviser and the second PE fund executive say.  Examples include bookmaker Maxi-Tip considering acquisitions in the CEE region, energy company Seven Energy seeking targets in Western Europe, and juice-bar chain Fruitisimo looking at Austria and Romania.

Poland

M&A activity in Poland fell sharply, with 46 deals worth EUR 1.54bn YTD compared to 66 transactions totaling EUR 3.83bn in the same period in 2017, according to Mergermarket data, as prospective bidders worry about threats to global trade spilling over into the export-dependent Polish economy and investing near the top of the macroeconomic cycle.

Nonetheless, domestically focused companies in the mid-cap segment remain active; the 2H18 auction pipeline includes online payment-processing firm Przelewy24, locomotive rental company Industrial Division and medical diagnostics-centre operator Voxel [WSE:VXL], advisors say. An uptick in activity is also expected in the furniture and furniture components industry, several bankers said, citing ongoing deals. Early-stage sale prospects include textbook publisher WSiP, held by Advent International since 2012, another advisor says.

The food-processing industry is also likely to see further activity in response to consolidation in the retail sector, one industry source says. In retail, discount grocer Jeronimo Martins [ELI:JMT] is pursuing a cluster of supermarket locations now owned by the more upscale chain Piotr i Pawel (PiP).

IPO activity is expected to remain weak, with a very limited pipeline of new listings due to the stagnant Polish stock market. The state of the market is underlined by the recent, sudden collapse of sponsor-backed debt collection firm GetBack [WSE:GET] , one ECM advisor says.

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