Top target industries: manufacturing, financial services, food & beverages, energy & utilities.
There are few surprises among the ranking of industry sectors by M&A activity in 2006 with a similar picture to previous years emerging. Manufacturing remains the titleholder for the most active sector with 499 transactions (384 in 2005) representing 20% and 21% of the deal total, respectively. It is followed by financial services with 16% (13% in 2005); food & beverages with 10% (9% in 2005) and energy & utilities also at 9% (10% in 2005).
These four top industry sectors last year represented 54% of the total of deals by volume, on a par with 2005. However, with regard to year-on-year deal volume growth, construction, transport, financial services and retail & wholesale last year showed the greatest increases.
Mega-deals
‘Mega-deals’ (those valued at USD 100m or more) are another indicator of heightened attention on individual industry sectors with utilities, manufacturing and financial services all ranked highly by this measure. In the utilities sector, the average size of deal in 2006 was approximately USD 76m compared with USD 29m in 2005. Due to a relatively high number of mega-deals in manufacturing, the mid-deal size across CEE almost tripled last year to reach USD 41m. The financial services
sector witnessed a similar progression with its average deal size arriving at USD 106m.
Deal distribution by countries
Participating countries seem to vary greatly in terms of their distribution of deals within industry sectors. Czech Republic (24%), Slovakia (23%) and Ukraine (23%) all attracted more manufacturing deals than the regional average of 20%. On the other hand, Bulgaria and Serbia have proved sluggish when it comes to attracting investors into their manufacturing sectors raising concerns about a dearth of suitably attractive targets.
The primary targets within the financial services sector were in Serbia (29%), Slovenia (25%) Ukraine (25%) and Croatia (24%) compared to a pan-regional average of 16%.
Increased activity characterised the energy & utilities sector with ‘hotspots’ in Russia, Czech Republic, Hungary and Poland with many deals driven by anticipated liberalisation, unbundling requirements and high demand for commercial activities in these countries.
As for less generally attractive industries CEE-wide, Russia outperformed the regional mid-figure of 6% in telecoms by 2%. Poland and Hungary did so in IT transactions by 9% and 4% respectively (average – 5%).
Media-related deals showed an exceptional focus on the Balkan states of Bulgaria, Croatia, Romania and Slovenia. These all scored at least 3-6% higher than the average of 5%. The main drivers for this appear to be ongoing liberalisation in these markets and, currently, a relatively low presence of foreign players.
Financial services – focus falls on Russia, Ukraine, Serbia and Bulgaria
Nearly three-quarters of all financial services transactions (397) closed in 2006 were concentrated into four countries: Russia (225), Ukraine (42), Serbia (16), and Bulgaria (11).
Russia and Ukraine
Both countries have several things in common concerning M&A activity in the financial services sector:
- Foreign banks demonstrated a great interest in retail banking market. This led to a number of significant acquisitions by large European banks.
- A fragmented market with low penetration by banks and a relatively large population as well as growing income served as additional motives to invest in the region.
- Other segments of financial services remained nearly untouched or much less attractive to foreign players restricted their acquisition activity to smaller institutions as a platform for further expansion.
One major contrast between Russia and Ukraine is the fresh new tendency among large Russian banks to begin their expansion abroad with the acquisition of several medium-sized banks in the Commonwealth of Independent States (CIS) region.
Market expectations are that deal flow in the financial sector will continue in 2007. However, it is expected to shift into the mid-tier banking segment. Further domestic consolidation may become the major source of M&A deals as smaller banks with higher capital costs find it more difficult to compete with international giants.
Transaction examples:
- United Financial Group (Russia) by Deutsche Bank (Germany)
- Import-Export Bank (Russia) by Raiffeisen Zentralbank Oesterreich (Austria)
- Investberbank (Russia) by OTP Bank (Hungary)
- International Moscow Bank (Russia) by Unicredito Italiano (Italy)
- Ukrsotsbank (Ukraine) by Banca Intesa (Italy)
- Raiffeisenbank Ukraine (Ukraine) by OTP Bank (Hungary)
- UkrSibbank (Ukraine) by BNP Paribas (France)
Bulgaria and Serbia
Both countries have witnessed considerable changes over the last years through mergers, takeovers, reorganisations and restructurings – all of them aimed at consolidating the sector. In contrast to the high concentration of power and control exerted by foreign banks over banking assets – 94% of total assets in Bulgaria and 70% in Serbia –, the rush for second or third-tier banks has shifted into an even higher gear.
Primary factors such as growing deposits and lending activity have kept not only retail banking hot but have also made complementary businesses appealing to existing and new players.
In Serbia, the Central Bank of Serbia’s decision to not issue any more greenfield licenses has forced new entrants to acquire already existing banks, mainly by winning auctions for state-owned banks through privatisation.
Transaction examples:
- DZI Bank AD (Bulgaria) acquired by EFG Eurobank Ergasias (Greece)
- Bulbank (Bulgaria) in integration with local HVB Bank Biochim and Hebros Bank (Bulgaria)
- Niska Banka, Zepter Banka and Kulska Banka (Serbia) acquired by OTP Bank (Hungary)
- Panonska Banka (Serbia) acquired by San Paoli IMI (Italy)
- Privatisation of Panonska banka (Serbia) bought by National Bank of Greece (Greece)
Energy & utilities – Central Europe is buzzing
The energy & utilities sector witnessed overall growth and higher activity in 2006 than in 2005 across the entire CEE region. Average deal size shot-up by 162% from USD 29m to USD 76m while the volume of deals increased by 21%. ‘Hotspots’ of activity were Russia, Czech Republic, Hungary and Poland.
- The buzz around Central Europe’s utilities sector can be deduced from different fundamentals. Liberalisation of gas and energy markets as of July 2007 has forced energy groups to realign and reconsider their strategies
- Compliance with unbundling requirements has resulted in the acquisition and divestment of upstream and downstream activities
- Other factors such as strict EU environmental protection, significant growth in long-term power demand and the prospect of a freer market have also heated an already hot industry further.
In Russia, the consolidation of core oil and gas assets by major government-affiliated companies in 2005 has continued, accompanied by a strong political will of restricting access to strategic resources for international players. However Russian energy companies seek to develop their production facilities and acquire assets abroad benefiting from high energy prices. This foreign expansion is likely to continue in the future.
Manufacturing – the most active sector
Transactions in the manufacturing sector captured more headlines in Russia, Czech Republic, Slovakia and Ukraine than in any other CEE country accounting for more than 70% of the M&A activity. Of all segments of manufacturing, metal and steel industry was the red-hot in 2006 due mainly to global consolidation moves embracing the CEE region.
In Russia, the metals M&A segment showed considerable growth and is now close to the energy & utilities sector. This growth was driven mainly by an increase in deals volume. The wave of consolidation affected base-metal as well as ferrous industry assets and the Russian metals companies also tend to acquire high-tech production facilities abroad. The acquisition of Czech firm MSA of the Dolni Benesov municipality, one of the largest European manufacturers of industrial fixtures, by Russian Group Celjabinskyj Truboprokatnyj Zavod, demonstrates the above point.
Food & Beverages – strong appetite for deals
M&A activity in the food & beverages sector grew considerably in terms of deal numbers across CEE last year with deals up by 47% to 241 from 164 in 2005. The growth was seen as a general phenomenon across the region as expansion embraced Bulgaria, the Czech Republic, Slovakia, Croatia, Serbia, Poland, Russia and Ukraine.
Higher market activity pushed the average deal size down from USD 16m to USD 12m. However the mid-figure in Poland, Romania and Russia stabilised well above average. Deal volume in Ukraine quadrupled indicating a positive trend towards further regional expansion.
The Slovak and Czech food industries witnessed a strong wave of consolidation among bakery and meat processing businesses:
- Czech Delta Pekárny acquired three bakeries in Slovakia (RFT, Peza and Dúbravanka, Pekáren a Cukráren)
- Czech Agrofert acquired 4 bakeries and 3 poultry producers in Slovakia
- The Czech bakery rush also spread to Hungary with Odkolek, a Czech bakery business, buying Vecsay which controls six bakery companies across Hungary
- In meat processing in Slovakia, Tauris was acquired by Eco Invest and Hrádok Masokombinát was bought by Slovak Mecom Agro
The meat industry in Bulgaria was among the most important sectors of the domestic economy with intensive development seen in recent years. The reported output of companies in the sector has doubled over the last five years, in line with a growing trend in the import of raw materials and finished products. Small and medium-sized meat processing companies are pre-dominant in the sector with eight certified for export within the EU.
Construction and Real Estate – rapid expansion
The entire CEE region has experienced rapid expansion in the construction sector. Deal volumes last year were almost double those seen in 2005 – up to 102 transactions from 52 in 2005. Those countries experiencing the bulk of this growth were Russia, Poland, Czech Republic and Hungary.
Average deal sizes in the sector across CEE grew ten-fold last year – up from USD 3m in 2005 to USD 31m in 2006. However, in the growth markets mentioned above (except Poland) average deals were in the USD 87m – USD 105m range. Real estate-related transaction volumes followed a similar pattern last year.
