Domestic activity
Domestic deals as a proportion of overall M&A activity (by volume) increased by 5% in 2006 – from 56% to 61%. The highest proportion of domestic deals, as in 2005, was registered in the Russian Federation (76%) and Poland (62%). These markets recorded domestic deal activity of 72% and 53%, respectively, in 2005.
A similar trend was noted in countries with less concentrated M&A markets such as Croatia, Slovakia, Slovenia and Ukraine. This could well be due to the strengthening of domestic corporate players keen to capture a larger share of their home markets.In contrast, countries such as Bulgaria (30%) and Hungary (30%) experienced a significant drop in their proportions of domestic deal activity. This compares with 40% and 52%, respectively, in 2005. Possible reasons for this decline are the higher inflow of foreign capital and the large volume of mega-deals closed, primarily, by foreign investors. However, as PwC has learned from researching previous years, smaller or less ‘interesting’ transactions generally enjoy considerably less press coverage and are often, therefore, inadvertently omitted from the statistics, leading to an under-estimation of deal volumes.
Inward investment
The total disclosed capital invested in companies in the CEE region last year was approximately USD 46bn. This represents a nearly 20% drop over 2005.
In contrast, the proportion of inward transactions dropped, in volume-terms, by 6% – from 40% to 34% of total activity – to total 866 transactions.
The countries topping the charts as the most attractive target countries – based on inward deal volumes – remained unchanged from the previous year. The lead was taken by Russia with 186 transactions followed by the Czech Republic (127), and Poland (121).
The second-tier includes Hungary, Romania and Ukraine which all attracted between 88 and 93 deals. However, Ukraine demonstrated the most improved performance of all CEE countries with its inward deal volume rising by 105% from 43 to 88 transactions last year.
However, inward deal ratios decreased in most CEE countries except Bulgaria, Hungary and Ukraine. Lowered inward ratio was, with exception of the Czech Republic, accompanied by a higher domestic share of all deals. This indicates that M&A activity is increasingly being driven more by domestic players than by foreign investors.
The foreign investors’ role has been overtaken by domestic players who, consequently, have eased up on their dependency upon foreign capital. They have now showed considerable strength and competitiveness in the domestic corporate segment.
However, a contrary tendency was seen in Bulgaria and Hungary. Ukraine posed as an exception in this comparison managing to increase both inward and domestic investment at the same time.
Most active investors – the UK, Germany, US and Austria
The most active foreign investors in CEE last year remained the UK (13%), Germany (11%), US (11%) and Austria (8%).
- UK investors are increasing their presence in CEE in huge leaps. In 2006, 115 deals were completed by UK-originated acquirers and investors compared with 71 in 2005. In addition to closing an increased number of deals in Hungary and Poland – the red-hot destinations during 2005 – UK investors moved eastwards to embrace Bulgaria, Romania and Russia. Additional investments in these three countries numbered 31 (out of the UK’s 44 extra deals over 2005), representing almost 70% of all additional transactions last year.
- US investors maintained their interest in the region, closing 92 deals in 2006 compared with 90 in 2005. Top US targets, by deal volume, were Russia (29), Poland (17), the Czech Republic (15), Romania (11) and Hungary (9).
- Investors from Germany and Austria completed 92 and 72 transactions respectively. While doubling investments in Russia, German companies continued to strengthen their presence in – Central Europe – Czech Republic, Hungary and Poland. Austrian investors distributed transactions across the entire region with special emphasis laid on neighbouring countries and slightly more interest in Ukraine and Russia.
The next most active countries investing in the CEE region, by deal volume, are France (42), Italy (32) and the Netherlands (30). Their preferred industry targets tend mainly to be financial services, manufacturing, utilities and food & beverages companies.
Outward investment
Following the unprecedented growth of outward transactions in 2005, the momentum continued during 2006 with slightly reduced growth figures. The 11 countries participating in this PwC survey closed 248 deals abroad in 2006. This represents an almost 33% increase on 2005 when 187 international deals were recorded. Due to robust growth in outbound deals, the share of outward transactions of all deals increased from 4% to 5% in 2006.
Outbound investors - buyers travel further
As in 2005, the most active outbound investor was Russia with 102 transactions followed by the Czech Republic (44), Poland (29) and Hungary (28). These last three countries closed a total of 101 deals in 2006 compared with 74 in 2005. These top four outward bidders of CEE presented 82% of total outbound deals compared to 74% in 2005.
- The growing figures in terms of both number and concentration of deals indicate where the major M&A powerhouses of CEE are. Russia remained strong at acquiring targets in neighbouring countries such as Armenia (2) Belarus (6), the Baltic States (5), Kazakhstan (2) and Uzbekistan (4), while shifted into a higher gear in penetrating more far-reaching countries such as the UK (8), US (7), South Africa (2) and Canada (1) and others.
- The trio of Czech Republic, Hungary and Poland completed 25 more outward deals last year than in 2005 of which 23 were in Russia, Ukraine and Serbia. Deals in more distant locations were also on a higher level last year with transactions in China, Singapore and the US.
- Similarly, second-tier countries – such as Slovakia, Slovenia, Croatia and Ukraine – have also begun to target distant markets with deals in the UK (2), India (1) and Costa Rica (1).
Taken as a whole, the successful acquisition of more far-reaching targets can be seen as a clear sign of the deepening maturity and strengthening competitiveness of the CEE region.
Investment targets
The Ukraine tops the target list with 37 transactions, followed by the Czech Republic (19), Slovakia (18), Serbia (14), Romania (12) and Bosnia Herzegovina (11). These destination countries give a clear indication of the investment strategy of many CEE investors. They tend to acquire neighbouring targets first and then reach farther out to more distant locations as they become more confident. On the other hand, the investment interest by CEE countries in their neighbours reflects their realistic market knowledge and judgement of these territories.
