Poland Doing Better than Most
According to Ron Given, Partner at Wolf Theiss, “the Polish market is doing better than most of the world where M&A is down.”
Indeed, Given believes the market’s potential is still not fully being realized. “I read a front page Wall Street Journal article recently about how Germans are now gravitating more towards the Czech Republic, but we haven’t really been seeing it. On the other hand, with valuations what they are and with the Warsaw Stock exchange still being relatively weak alternative, I’m a bit surprised there are not more deals.”
Still, Given pointed to the January 2016 sale of Smyk as a recent deal of significance: “I particularly remember that one because everybody in Poland knows the store opened in 1952 – the year I was born. It was essentially a fund to fund deal but certainly not a bad sized one – it was sold by Penta Investments and Eastbridge Group to Bridgepoint.”
In terms of players to watch, Given described Warburg Pincus as active in Poland, with its 2016 acquisition of Apteki Gemini – a discount pharmacy chain – likely to generate some add-on investments, and reports that it might be looking to sell the INEA cable TV company, which it acquired in 2013. Another recent “flagship deal” Given pointed to is MCI Management’s sale of the INVEA travel portal in the Czech Republic and Poland to Rockaway Capital (Czech Republic). Given explained that, “unless you’re talking about monster deals that catch the attention of Blackstone and others,” the CEE-based private equity houses tend to both be more active and “in some ways more savvy in the region than their international competitors.”
Another interesting market player, Given reports, is a fund new to the region: Coast2Coast. Its arrival shows that CEE “continues to attract as a region,” Given says, noting that the fund tends to invest off its own balance sheet rather than raise funds from third parties, which “gives them a bit more agility and flexibility.” The Wolf Theiss Partner is intrigued by the fund – “not really a CEE-based but not a Blackstone either” – and said he first became aware of them when they acquired the Sonko rice cake producer in Poland and then again when his Hungarian colleagues assisted them in acquiring a nutritional production company.
Looking at the current pipeline, Given commented: “Mid Europa Partners is one of the huge outfits, of course, and we expect a couple of their portfolio items to be up for sale soon.” Given referred to Mid Europa’s likely sale of the Zabka Polska chain of retail stores, which he described as “a huge deal of at least EUR 1 billion – a classic potential for the likes of KKR, Advent, Blackstone, etc.,” and expectations that Mid Europa will sell the Diagnostyka business, which, due to its relatively smaller size, “will certainly involve people like Penta and more local buyers.” He expects to see the sale of Allegro by Napsters – which some estimate to be worth over EUR 3 billion – as “another obvious target for the bigger league outfits.”
Romania is Picking Up Speed
According to Lucian Bondoc, Managing Partner of Bondoc & Asociatii, the Private Equity market is picking up speed in Romania. “We see a lot more determination to look at the country, a phenomenon that’s been building up for the last two years already,” Bondoc commented, noting with pride that “we’ve been lucky enough to be involved in some of the most notable deals to date.”
Bondoc said that especially in light of Mid Europa’s 2015 acquisition and subsequent expansion of Regina Maria in the country, healthcare is a popular target for PE investments in Romania. He explained: “The private healthcare sector has seen considerable growth. Both because Romania was one of the lowest spending countries in the EU in terms of healthcare but also because we had over 10,000 doctors leave the country, we’ve had some gaps in the sector. Combine that with the overall growth of the economy and increased demand as a result, we’ve seen considerable growth on the private side of this.” In terms of Mid Europa specifically, Bondoc commented: “They are coming in from the Polish experience and with a considerable regional approach.” He pointed out that healthcare is not the only sector with real potential in the country, but “in terms of what’s been closed, yes, we can see a focus on it.”
IT and Internet-based start-ups are another sector of interest, Bondoc reported, pointing to the recent acquisition by eMag – the largest online retailer in Romania – of Fashion Days, and its ongoing purchase of PC Garage, which is pending approval by the country’s Competition Council.
But Bondoc maintains a degree of caution in his positive outlook. “While our plate is pretty full at the moment I admit I am looking out for the fall-out of various elements. such as the Brexit and the situation in Turkey,” he commented. “Despite being rather comfortable in geopolitical terms relative to both, we may see a slow-down, or even a bust, at a pan-European level. I see no real downside for now related to either, but I am starting to feel a temptation from the investors’ side to wait and see.”
In terms of the profile of potential investors looking at Romania, Bondoc explained that, primarily for historical reasons, it might prove “difficult for those that do not have a local team in terms of assessing what’s on the ground.” While Mid Europa and CVC are some of the big names looking at the market, there are also several funds “that are more prudent and go for the small- and mid-sized deals.” For all of these, he emphasized, whether they actually close anything comes down to both the size of and their abilities to understand the specifics of the market. “Once you complete a deal here, you get comfortable, but it depends on what you are ready to digest at your first go,” he concluded.
SEE Markets at an Interesting Point in Their Development
“On one end you have the developed markets like the Czech Republic and Poland with a lot of activity and large deals with many of the usual names,” explained Peter Huber, Managing Partner and Head of the International Corporate Transactions team of CMS Austria at CMS. On the other, he said, “and probably more interesting, we have the smaller and not so developed markets in the region where we’ve seen changes over the last few years.”
Referring to SEE in particular, Huber pointed to KKR’s investment in Telemach as a “breakthrough in the region in many ways,” both due to the size and the fact that it was a secondary deal. “We might see a lot more secondary deals here and I am happy to see that the larger players are increasingly prepared to take into pricing certain risks that come with the region.” Mid Europa’s 2015 investment in Danube Foods of Serbia was another notable secondary deal that Huber pointed to.
Huber agreed that, for CMS, the Balkans are a particularly attractive region these days in terms of targets, noting that unlike in Poland, the Czech Republic, and even Russia and Turkey to some extent, deals like KKR’s and Mid Europa’s in SEE are a relatively recent development. Such deals, Huber claimed, result from more entrepreneurs who started their businesses in the 90s now becoming more open to selling. “Of course, we might also see more situations like the disposal of SABMiller, where large corporates are trying to focus geographically and some of them considering CEE as non-core, which might stimulate deal flow even further.”
Huber expect to see additional deals in the consumer products, retail, and healthcare industries. Laboratories, he said, are a particular submarket to watch since there seems to be significant room for consolidation in the market. Another interesting case to keep an eye on, according to Huber, is the privatization of the Komercijalna banka in Serbia, “where there should be considerable PE interest.” When asked if the Serbian Government would consider PE funds or is likelier to look for a strategic investor, Huber responded that “it will be a level playing field with price obviously playing an important role. I do not believe that PE will at a disadvantage.” He added: “there are probably only a few large EU banks that would be taking on an M&A of that size in Serbia. There might be the odd Chinese conglomerate but I would definitely see room for PE on this particular situation.” The CMS Partner wondered only whether Serbia’s price expectations “are realistic or if they are somewhat inflated as with some of the privatizations in Slovenia.”
The Austrian market has been “somewhat more quiet recently but we are seeing deal flow in the mid-market segment.” The market is small, and not cheap, Huber said. “There might be opportunities in listed companies where the valuations of some tend to be lower than their counterparts in Germany or other markets but very few targets in terms of private holders would lend themselves to a PE transaction,” Huber explained. He pointed to retail, healthcare, and property as sectors with the most potential.
We thank the following for sharing their opinions and analysis for this report:
- Ronald Given; Partner; Wolf Theiss
- Lucian Bondoc; Managing Partner; Bondoc & Asociati
- Peter Huber; Managing Partner; CMS Austria
This article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.