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Accession to the European Union on May 1 will not bring instant wealth to the eight central European applicant states. But it might bring more deals for investment bankers.
Much of the corporate activity since the fall of the Berlin Wall has been aimed at bringing in foreign investment and pump-priming local capital markets. Although that process is fairly advanced in the major central European states, it is still continuing as states release their grip on strategically sensitive assets.
Hungary, for example, is selling a majority stake in Dunaferr, the country's largest steelworks. And the Czech government is tempted to sell down its 51% stake in Cesky Telecom, following the successful recent placement by Swisscom and KPN of a 27% holding in the telecom company.
Another growing trend is consolidation in key sectors. This is partly about creating the added scale necessary to compete with western firms in more competitive markets. But it is also being driven by a desire to bulk up and to fend off potential bidders.
Hungarian oil company Mol is a good example of how this process might unfold. The company is no stranger to deals. Many attribute this to the group's deputy chairman, Sandor Csanyi, who is one of Mol's largest individual shareholders, one of eastern Europe's most active dealmakers and the boss of leading Hungarian bank OTP.
Late in 2002, the group bought a 36% stake in Slovakia's biggest refiner, Slovnaft, and later took full control. Then it clinched a deal to buy Croatia's INA, and set up an exploration and production joint venture with Russia's Yukos. This may not sound like much. But Mol has accounted for three of the four biggest East European cross-border takeovers since 1999, according to Dealogic.
More crucially, Mol's dealmaking isn't finished yet. Next, it hopes to swoop on energy firms in Romania and the Czech Republic. Most recently, it signed a letter of agreement to merge with Poland's PKN. Completing this deal – which would be Mol's biggest – might take years. After all, government interference and national sensitivities have blocked earlier merger talks.
Bulking up but still bite-size
But the fact that the Hungarian government plans to steadily sell down its 23% stake, even though it had to pull a recent attempt, bodes well. And accession provides another spur for both sides to overcome those prickly cultural concerns. If they don't combine, someone else might snap them both up.
If the tie-up does go through, Mol will create a group with a market capitalization of about $6 billion. That's quite a mouthful for potential acquirers, even western majors such as BP and Total. Yet it's not indigestible. After all, a regional oil company with a dominant refining and retail presence in every East European country, and tentacles into some western ones such as Germany, should be very attractive, especially to one of Russia's big oil companies.
The Russian oil companies lack any major retail presence abroad, and it is on the petrol station forecourt that cash enters the oil chain. Mol's size, as well as scarcity, should also command a bigger premium from a potential bidder.
When might a big deal happen? By 2008, Mol will have removed restrictions that limit any investors' votes to 10%, no matter the size of the stake. That is also the year when Hungary plans to adopt the euro. Csanyi has plenty to do if he is to build a tasty central European downstream oil group. But if he succeeds, he might make himself – and his investors – quite a lot of money.
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