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Bulgaria’s M&A Market – The Calm Before the Storm or Simply the “New Normal?”

Bulgaria’s M&A Market – The Calm Before the Storm or Simply the “New Normal?”

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It has been a challenging year for the Bulgarian M&A market, with limited activity, just like in 2019. Undoubtedly, one of the reasons for the slowdown is that business is overshadowed by the coronavirus pandemic. Many acquirers abandoned expansion plans in order to focus on protecting both their financial stability and their employees, while waiting to assess the market environment and evaluate potential next steps. Many planned or already-started deals were cancelled at early stages (such as following a letter of intent or during preliminary due diligence) as uncertainty about the fulfilment of potential goals made the transactions risky.

Acquirers are cautious, as the prospects for many businesses remain vague. According to recent forecasts, the risk of bankruptcy has increased by about 20% since 2019. The sectors which are most severely affected by the crisis are transport, tourism and leisure, manufacturing, and non-essential retail/consumer accommodation and food service activities. It seems probable that the series of measures undertaken by the state to mitigate the impact of the coronavirus crisis on businesses will only temporarily postpone bankruptcy filings for some companies. In addition, a domino effect, with bankruptcies of some companies leading to the bankruptcy of others in the chain, is also a real possibility.

The telecommunications, media, technology and innovation, and essential retail sectors have proven to be COVID-19 resistant and are likely to recover first.

Regardless of the turbulence in the year for both companies and investors caused by the pandemic, deals are still happening, although they remain modest in number and value, with investors who are mainly regional or local. In July the First Investment Bank announced a successful capital increase, which was a condition for Bulgaria to apply for accession to the Eurozone’s waiting room (ERM II) and the Banking Union. The new shareholders in the bank – which now ranks fifth the country in terms of assets –  are the Valea Foundation (owned by Czech entrepreneur Karel Komarek) and the Bulgarian Development Bank, which subscribed all the shares of the new issue. Also in July, the Bulgarian government finally signed a concession agreement for Sofia Airport, which will be handed over to the Sof Connect consortium for a period of 35 years. In September, the Bulgarian Commission for Protection of Competition approved another consolidation on the media market: the national broadcaster Nova TV will acquire another three TV channels and four commercial radio broadcast stations.

The Bulgarian IT sector continues to perform really well and attracts most of the investments on the market, as Bulgaria is becoming a more and more vibrant hub. The number of deals in this sector is relatively large, but the transaction values are not high. Some of the deals are the result of a long-awaited distribution of European funds intended to stimulate the Bulgarian economy, while others represent a genuine interest in Bulgarian innovative companies and the development of the IT ecosystem in the country. A notable event during the pandemic was Eleven Capital’s listing on the Bulgarian Stock Exchange – the first venture capital company to do so. The achieved result of over BGN 2.1 million of raised capital, which will be transferred on to Eleven Capital’s portfolio companies, is quite impressive considering the time of listing and the situation on the domestic and global capital markets. Furthermore, the number of venture capital funds investing in high growth Bulgarian SMEs with the support of EU investment initiatives continues to grow. The fourth alternative investment fund has been established with the participation of the Fund of Funds, which is managing BGN 1.2 billion under four EU operational programs, and the fifth one is currently at the contract award stage. The Fund of Fund’s allocations will create a new wave of funding for start-ups and technology companies with growth potential over the next few years.

The M&A environment has changed, and dealmakers will have to adapt, as it is evident that they will be forced to operate under enhanced uncertainty for a prolonged time. Despite these challenges, the current situation is generating opportunities for companies wishing to strengthen their businesses through consolidation, or for those with strong balance sheets that are looking to make acquisitions at depressed asset prices. Skilled acquirers may gain an advantage while other prospective buyers are still figuring out the next steps. The M&A market, however, will most likely continue to be predominantly domestic-focused.

By Dimitrinka Metodieva, Senior Partner, Gugushev & Partners

This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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