M&A activity in the Czech Republic and CEE/SEE
June 2016 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The goal of this article is to provide an analysis of the main drivers and challenges for M&A transactions in the Czech Republic and Central, Eastern and South Eastern Europe (CEE/SEE). First, we will introduce the region from an economic as well as an M&A perspective. Second, we will have a closer look at Chinese investments in the Czech Republic. Third, we will focus on the main trends and drivers for M&A activity there. Finally, we will present our view on the region’s future.
Insight into the region
CEE/SEE continues to be a major emerging market, still growing at twice the speed of Western Europe. From a political point of view, some countries like the Czech Republic became a safe harbour for equity investors who aim to benefit from emerging market dynamics, but at the same time seek stability and a solid legal framework. These features, combined with access to the EU market, the largest consumer market in the world (measured by purchase power), provide an attractive environment for new investors.
Looking at the real numbers for 2015, Central Europe grew by a solid 3 percent while South Eastern Europe grew by a promising 1.6 percent. Similar trends are naturally present in the number of M&A deals in CEE/SEE. The overall number of deals grew by 2 percent year-on-year in 2015, reaching 475 in total, while the total deal value dropped by 5 percent to €23.2bn. With regard to the number of deals, the region is led by Turkey, followed by Poland and the Czech Republic.
Focusing on the Czech Republic, most active investors are still domestic ones. M&A is dominated by established local financial groups (e.g., EPH, PPF, KKCG, Rockaway and Penta) which have a high appetite for broadening their investment portfolio. However, Swedish industrial group Trelleborg bought Česká gumárenská společnost, a Czech tyre and rubber company, for €1.16bn, securing the gold medal in terms of deal size.
Turkey and the Czech Republic are also leaders in terms of outbound investments. In 2015, EPH acquired seven Italian power plants and the Eggborough power station located in North Yorkshire, England. The acquisition of a majority stake in Slovenské elektrárně, the largest energy company in Slovakia, shortly followed. Penta purchased a majority stake in Sberbank Slovensko and Rockaway was very active in the field of start-ups and internet retail business. This activity resulted in the acquisition of Invia.cz, a Czech online tour portal with a subsidiary listed on the Warsaw Stock Exchange. This transaction followed local acquisitions of CZC.cz, major Czech e-shop for electronics, Mall.cz, the second largest Czech internet retailer, and Heureka.cz, a price comparison server, leaving Rockaway the number one player in the Czech internet commerce environment.
Asian investors, in particular Chinese private companies, increased their activity in the Czech Republic last year. However, so far we have only seen them acquire stakes in existing businesses, rather than make direct investments. The scope of their interest is wide and includes industrial enterprises, the leisure sector and real estate. The most important Chinese investor in the Czech Republic is CEFC, the biggest private company in Shanghai. CEFC acquired stakes in SK Slavia Praha, one of the two major football clubs in Prague, Travel Service, the biggest Czech airline company, and Lobkowicz Group, a traditional Czech brewery.
The dawn of Chinese investments in the Czech Republic compensates, to a certain extent, the decline in Russian investments due to the economic challenges Russia faces. As mentioned, the main concern of economic commentators is that Chinese investors acquire well functioning businesses or high-profile real estate assets which do not require significant investment following the acquisition. Thus, their investments are not creating real social value such as new infrastructure projects, nor are they creating jobs. Further, many complain that Chinese investors receive political support, leaving key investors from other countries at a competitive disadvantage.
Trends and drivers
Among the countries within the region, Turkey, Poland and the Czech Republic remain the most attractive from an investor’s point of view. Their market size on the one hand and the comparatively higher economic growth on the other are reasons for their attractiveness among investors.
The importance of economic growth was confirmed by many investors we surveyed. We asked them about the most important factors when choosing a country for their next deal. The majority (85 percent) indicated that the level of economic growth was an important factor, followed by level of infrastructure (65 percent), stable legal framework (55 percent) and stable political environment (44 percent).
Consumer, manufacturing, and technology, media and telecommunications (TMT) are the three trendiest industry sectors for M&A in CEE/SEE. These sectors grow constantly, which in turn attracts more investors.
Competition for quality targets has become strong in recent years. Investors who expect that the region only offers highly profitable investments may be surprised by a competitive bidding culture and the sophistication of local sellers. In other words, the region offers quality targets and favourable valuations; however, foreign investors, as well as local investors, compete for these assets, leaving their price higher than expected by many. In the Czech Republic, it is not unusual that targets are purchased for 10 times EBITDA.
An important trend emerging in the Czech Republic and other CEE/SEE countries is the sale of family owned businesses. Local businessmen who started their businesses in the 1990s are now considering retirement. Where there is no prospect that their descendants will take over the businesses, they seek a sale. This will, of course, create new opportunities for domestic as well as foreign investors.
The outlook for the future of the Czech Republic is optimistic. The economy will hopefully follow the trend initiated at the beginning of 2014, and continue to grow. We expect that some industry sectors may of course experience temporary or permanent decline, but retail and e-commerce will grow significantly while energy and finance retain their strong position within the economy. Other countries of the CEE/SEE will likely follow similar growth trends, but we will watch closely how political changes in many of them (e.g. Poland or Hungary) will influence investors’ appetite for entering their markets.
Jan Myška is the co-managing partner and David Šimek is an associate at Wolf Theiss. Mr Myška can be contacted on +420 234 765 223 or by email: firstname.lastname@example.org. Mr Šimek can be contacted on +420 234 765 250 or by email: email@example.com.
© Financier Worldwide
Jan Myška and David Šimek