Executive summary

M&A market value tripled since 2004

In line with the UK and continental Europe which last year achieved their strongest M&A performance in recent history, transaction activity in CEE was also extremely buoyant. In total 2,527 publicly-disclosed private transactions were completed last year in the 11 countries of the CEE region. Overall, deal volume rose by 37% last year while the total value of these transactions rose by 79% and reached a record-breaking USD 163bn compared with USD 91bn in 2005.

Robust growth in CEE means that M&A activity last year doubled that seen in 2005 and more than tripled the aggregate value of M&A recorded in 2004.
Much of this growth was due to an outstanding performance by Russia which recorded 1,210 transactions totalling USD 111bn during 2006.
As a whole, however, M&A activity in CEE remained strong with new stars such as Ukraine and Serbia beginning to attract considerable investment attention.

Privatisations up by 52% but down in market value by 70%

The 11 countries participating in this PwC survey – newly joined by Serbia – reported 490 privatisations in 2006. This compares with 322 in 2005. This was due mainly to ongoing programmes in Russia, Serbia and Ukraine. Serbia alone has contributed 210 privatisations to last year’s tally.
In contrast to the generally upbeat M&A trend, the total value of privatisations dropped dramatically last year, from USD 22.8bn in 2005 to USD 7bn in 2006. This could be a positive sign, indicating that much of the CEE region has matured beyond the State sell-off stage. Privatisation activity in the less advanced markets of Serbia, Russia and Ukraine increased last year to account for 80% of total privatisation deal volume in CEE.

Investment flow moved eastwards

Based on experience from previous years, investment flows continued to move eastwards into Bulgaria, Romania and Russia with large-scale transactions and privatisations. This has boosted investor confidence in the region. In the more matured parts of CEE, notably the Czech Republic, Poland and Hungary, the M&A focus is expected to begin shifting towards mid-sized industry targets and one-off mega-deals.

Domestic activity – Russia and Poland dominate the home front

Domestic deals as a proportion of overall M&A activity (by number) increased by 5% in 2006 – from 56% to 61%. The highest proportion of domestic deals was registered in Russia and Poland, averaging at 70%.

Inward investment dropped by 6%

In contrast, the proportion of inward transactions dropped, in volumeterms, from 40% to 34% of total activity – to 866 transactions. Those countries topping the charts as the most attractive target countries – based on inward deal volumes – were Russia followed by Czech Republic and Poland.
The most active foreign investors in CEE last year were the UK, Germany, US and Austria.

Russia – most active outbound investor

Meanwhile, the 11 countries in this PwC survey closed 248 deals abroad in 2006 – an almost 33% increase on 2005 when 187 international deals were recorded. Russia was the most active outbound investor followed by the Czech Republic, Poland and Hungary.

Industry highlights

• Top target industries: manufacturing, financial services, food & beverages, energy & utilities

Looking at industry sectors by M&A activity, a similar picture to previous years emerged in 2006 with manufacturing remaining the most active sector. It is followed by financial services, food and beverages and energy & utilities. These four top industry sectors last year represented 54% of the total of deals by volume.

Nearly three-quarters of all financial services transactions closed in CEE in 2006 were concentrated into four countries: Russia, Ukraine, Serbia, and Bulgaria.
M&A activity in the food & beverages sector grew by 47% in terms of deals numbers across CEE last year with growth seen as a general phenomenon across the region. Meanwhile in the energy & utilities sector average deal size shot-up by 162% from USD 29m to USD 76m while the volume of deals increased by 21%. ‘Hot-spots’ of activity were Russia, Czech Republic, Hungary and Poland.

• Pharmaceuticals & chemicals companies are the ‘most valuable’

The pharmaceuticals & chemicals industry earned the title of ‘most valuable industry’ in CEE with a 344% increase in the average deal size from USD 45m to USD 200m in 2006.

• The greatest increases in M&A activity

However, with regard to year-on-year deal volume growth, construction, transport, financial services and retail & wholesale last year showed the greatest increase in M&A activity.
Transport, with an average deal size of USD 11m, was the least expensive. Despite this relatively low average value, however, this figure is actually seen as an achievement given that deal volumes in the transport sector nearly doubled last year from 47 in 2005 to 76 in 2006.