INSIDE CORPORATE WOLF THEISS Corporate Monitor FY 2015 CONTENTS 4 Foreword 27 M&A overview 30 Country focus 6 Introduction ALBANIA AUSTRIA 7 Regional focus 16 Deal experience 30 32 25 Conclusion CROATIA SURVEY FINDINGS SURVEY 38 COUNTRY M&A FOCUS COUNTRY ROMANIA SERBIA 46 48 AUSTRIA BOSNIA- BULGARIA HERZEGOVINA 36 34 CROATIA CZECH REPUBLIC HUNGARY POLAND 40 42 44 SLOVENIA UKRAINE SERBIA 52 54 SLOVAK REPUBLIC 50 FOREWORD Welcome to the newest edition of the Wolf Theiss Corporate Monitor. As in previous years, the Wolf Theiss Corporate Monitor provides insights into the current and prospective M&A environment in Central, Eastern and South Eastern Europe (“CEE/SEE”). Together with Mergermarket, we have analysed the main drivers and challenges for corporate transactions in 2015 and beyond in each of the countries that make up the region. In order to put our statistical analysis into a broader and more meaningful context, we have also surveyed dealmakers from many different industries as well as private equity firms who have been Horst Ebhardt involved in regional transactions in the past year. Finally, we have Wolf Theiss also outlined some of the main legal developments that affect M&A transactions in each country in CEE/SEE. While there are some overarching regional trends that almost make CEE/SEE a separate asset class, our analysis highlights the wide range of economic indicators by country and the breadth of investment opportunities. Overall, the region continues to be a major emerging market, still growing at twice the speed of Western Europe, with many of its countries making significant progress in reaching EU standards. From a political perspective and from a risk diversification perspective, CEE/SEE has again become a relatively safe harbour for equity investors seeking to benefit from emerging market dynamics in a region that also offers stability, combined with easy access to the European Union, the largest consumer market in the world (measured by purchase power). As the Wolf Theiss Corporate Monitor draws upon the extensive practical experience of people on the ground, we believe it will offer you valuable insights regarding the current market practice in planning and implementing M&A transactions in CEE/SEE. Kind regards, Horst Ebhardt Wolf Theiss Tel: +43 1 515 10 5100 Email: [email protected] 4 SURVEY FINDINGS METHODOLOGY In H2 2015, Mergermarket surveyed 150 senior-level executives about their experiences and outlook on M&A in the Central Eastern European region. Half of the respondents were based in the CEE region, while the other half was drawn from outside of the region. One third of the respondents are part of private equity firms, while the other half is comprised of corporate respondents. All participants in the survey have made at least one acquisition in the CEE region over the past 12 months. The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analysed and collated by Mergermarket and all responses are anonymised and presented in aggregate. INTRODUCTION Central and Eastern Europe saw a year of Buyers who come into the region expecting stable growth in 2015, as economies continued favourable valuations for quality targets may be to recover from the global economic crisis and surprised to find a fiercely competitive bidding subsequent volatility in the eurozone. According environment that has raised seller expectations, to the European Bank of Reconstruction and particularly in countries such as Poland and Development, Central Europe experienced Romania. Supporting the overall trend, private respectable overall growth of 3.0%, while South equity reached a four-year high in 2015 as Eastern Europe grew by just 1.6%. These levels funds piled in to capitalise on a better regional are still generally below the rates seen in the growth outlook and a range of attractive middle of the last decade, and while they are targets. The single biggest deal was LSREF III expected to continue in 2016, they remain GTC Investments’ €988m acquisition of 33.5% of vulnerable to external shocks. Polish real estate developer Globe Trade Centre, indicative of the perceived strong potential of The M&A environment reflected the broader Poland’s property sector. macroeconomic picture, stable but somewhat constrained by factors including eurozone Looking into 2016, distressed opportunities are uncertainty and domestic political concerns, expected to grow even as economies recover, with elections held in countries including as over-leveraged companies that have failed Poland, Ukraine, and Croatia, and governments to restructure run out of steam. Distressed including Romania’s under mounting pressure. opportunities are anticipated predominantly in Deal values totalled €23.2bn, down 5% year-on- the Ukraine, where the economy has been hit year from 2014, while the number of deals was hard by war and fiscal crisis. Across the region, 2% higher in 2015 with 473 deals. the energy, mining and utilities sector is also expected to yield distressed debt opportunities, The level of infrastructure in place ranked as commodity prices across the board from steel second in investors’ calculations; here Central and coal to oil are in the doldrums. Europe is stronger than the frontier markets of South Eastern Europe. WITHIN THE CONTEXT OF STABLE DEAL FLOW, COMPETITION FOR QUALITY TARGETS HAS BECOME STRONG AND HAS DRIVEN UP PRICES IN SOME OF THE MORE MATURE MARKETS The consumer sector and technology, media, and telecommunications (TMT) were the two biggest magnets for M&A. Both sectors continued a trend of consolidation from previous years. The consumer sector has seen both regional companies such as Croatia’s Podravka grow through acquisitions, and international players like Heineken look to expand their presence in CEE. In TMT, privatisation of state telecoms companies and the acquisition of promising developers have contributed to M&A activity, despite the sale of both Serbia and Slovenia’s national telcos stalling in 2015. Within the context of stable deal flow, competition for quality targets has become strong and has driven up prices in some of the 6 more mature markets. REGIONAL FOCUS SURVEY Over the past few years, both domestic and foreign investors have valued robust economic growth and high-quality infrastructure in many Central Eastern European countries. The big story is of course playing out in Poland and the Czech Republic, however, Romania and Hungary have also emerged as popular destinations with promising targets in sectors such as healthcare and financial services. In many other CEE countries, Bosnia-Herzegovina for example, transparency and regulatory compliance remain challenges to an improved M&A climate. The countries that are seen as most likely to attract M&A activity in the future are Poland, IN WHICH COUNTRY/IES ARE YOU CURRENTLY with 68% of respondents saying that they are LOOKING FOR NEW OPPORTUNITIES? interested in targeting the country, the Czech (PLEASE SELECT ALL THAT APPLY) Republic (53%), and Romania (47%). The least attractive countries are Albania (2%), Bosnia & Poland 68% Herzegovina (3%) and Serbia (5%). Czech One good reason for this is market size. After Republic 53% Austria, Poland, the Czech Republic, and Romania are the three biggest economies in Romania 47% CEE; Serbia, Bosnia and Albania among the smallest. Poland’s nominal GDP is more than Austria 34% ten times bigger than Serbia’s, according to the IMF, and its population of 38.5m represents a large domestic market. Hungary 24% “Poland is a big market and our next target in Bulgaria 19% the region will be in Poland, which will give us good potential for growth,” a partner in a US- Slovak based company says. Republic 16% But higher economic growth is a more important Croatia 9% factor than sheer size for most. Poland and Romania are favoured not only because of their large GDP and populous markets, but because Slovenia 9% they are growing quickly. In its November 2015 regional economic outlook, the European Bank Ukraine 9% for Reconstruction and Development (EBRD) forecast growth of 3.7% and 3.3% in 2016 for Romania and Poland respectively. The IMF Serbia 5% forecasts 2.6% growth for the Czech Republic, after a remarkably good 3.9% in 2015. By Bosnia and 3% contrast, Serbia is expected to grow at just 1.8%. Herzegovina “Out of all the countries, Poland is the most Albania 2% attractive market and we can expand our business size considerably by utilising the strength of its economic value and growth prospects, the country has experienced robust growth throughout the past few years,” the finance director of a Slovenia-based corporate says. 7 WHAT ARE THE FACTORS THAT WILL FROM WHICH REGION DO YOU THINK THE MAJORITY OF MOST IMPACT YOUR CHOICE OF INBOUND DEALS INTO THE CEE REGION WILL COME FROM COUNTRY FOR YOUR NEXT DEAL? IN 2016? (PLEASE RANK 1 TO 6, WHERE 1 = TOP INBOUND) 1% Level of economic growth 1% 1% 85% 3% 1% 1% 6% 6% 11% 7% Level of infrastructure 65% 15% 19% Stable regulatory/ 21% 29% legal framework 55% Rest of North Asia-Pacific Europe America region Stable political 44% environment 80% 60% 39% New/ investment- 43% favourable regulation Availability of distressed 41% assets for sale 2% 1% 1% 1% 1% Skill of local labour force 35% 1% 6% 5% 14% 17% 17% 19% Taxation laws 23% Sub-Saharan Latin 37% MENA Currency risk 17% Africa America 38% 29% Level of GDP per capita 15% 77% 34% Rank: 1 2 3 4 5 6 Overall, those surveyed said that they were attracted to markets first and foremost by economic growth (85%), followed by the level of infrastructure development (65%). The Czech WHAT DO YOU PERCEIVE AS THE BIGGEST CHALLENGES Republic is seen as historically having the most TO INVESTING IN YOUR SPECIFIC COUNTRY OF CHOICE? robust infrastructure in the region, benefitting (PLEASE SELECT ALL THAT APPLY) its exporters in particular, and thus helping to account for its popularity as an M&A Competitive bidding 70% destination.