WHAT DIFFERENCE DOES a decade make? In 1997, communism in central and eastern Europe was still a recent memory. Privatization had begun just a few years before, and even the biggest companies were still finding their feet. Some firms from the region had started to spread their wings abroad but the companies they were buying were tiny. According to Dealogic, the top three cross-border M&A deals to be announced in 1997 where the acquirer was a CEE company reached a cumulative total of just $161 million.
Ten years later, even if the acquisitions made by the Russian natural resources companies are excluded, the figure will be more than 10 times as big. By August this year, the top three foreign acquisitions announced by CEE companies (discounting Russia) had already reached a total of almost $2 billion, according to Dealogic.
Corporate CEE, it seems, is feeling the benefit of having eight of its countries join the European Union in 2004.
The biggest firms in countries such as Poland, the Czech Republic and Hungary are no longer content to snap up the smallest companies in neighbouring states. As they increasingly take advantage of opportunities in CEE countries outside the EU, they are laying the groundwork to be able to compete against, and perhaps even overtake, their more western-based rivals. Soon, say industry insiders, CEE firms in the EU might be able to break western Europe’s dominance in the CEE M&A market, and win a majority of even the biggest cross-border M&A contests.
CEE firms from EU countries have begun to make tentative forays into western Europe. Earlier this summer, Hungarian oil and gas company MOL, for example, acquired Italian refining company IES for $954 million.
So it might, for some, come as a disappointment that as far as cross-border M&A deals in central and eastern Europe are concerned, western European and north American firms are still, for the moment, overwhelmingly dominant, both in pre- and post-EU accession countries.
According to the most recent report on the CEE M&A sector by accounting firm PricewaterhouseCoopers, in 2006 the number of cross-border deals initiated by CEE companies was less than a third of the number of deals in CEE initiated by companies from outside the region (principally the UK, Germany, the US and Austria). According to Dealogic, the top five cross-border M&A deals against CEE and CIS targets to have been announced in the first seven months of 2007 included just one deal in which the acquirer was from the CEE/CIS region. This deal, an acquisition of a 50% stake in Belarusian gas transporter Beltransgas by Russian natural resources company Gazprom, might be said to have relied on a willingness to exploit natural resources sprung from the largest country in the world.
The $2.07 billion takeover by Italy’s UniCredit of 95% of Ukraine’s UkrsotsBank, announced in mid July, is more of a case in point. At the time of its announcement, the deal was, according to Dealogic, the fifth-largest M&A transaction involving a CEE or CIS target to be announced so far in 2007. But while the bank was eyed up by Hungary’s OTP bank, OTP eventually had to cede place to its richer western rival and be content with the smaller scraps of the Ukrainian banking sector.
Ukrainian lessons
The same thing happened in 2006 in the bidding for UkrSibBank, Ukraine’s fourth-biggest bank by assets. OTP initially investigated the possibility of buying a majority stake in the Ukrainian firm, hiring PricewaterhouseCoopers to help it carry out due diligence. But France’s BNP Paribas was the eventual victor.
The Ukrainian banking sector might be said to be more generally representative of the extent to which EU central and eastern European firms are now a force to be reckoned with in the region’s cross-border M&A market, especially in those countries not yet in the EU. Ukraine’s banking system is particularly fast growing, and the country itself enjoys GDP growth of about 6%. It is geographically close to, and has a similar culture and socio-economic background to the ex-communist 2004 EU accession countries. It might be a particularly fertile ground for acquisitions by such companies as Hungary’s OTP and Slovenia’s Nove Ljubljanske bank (NLB), both of which are leaders in their home markets. Nevertheless, according to Klaus Requat, UniCredit Group’s head of the EEMEA investment banking at the subsidiary Bank Austria Creditanstalt: "The financial institutions sector in Ukraine has in recent years been taken over almost in its entirety by western European banks."
Until about four years ago, most cross-border acquisitions made by CEE companies were minuscule. Discounting the odd big purchase by Russian natural resources companies such as Gazprom and Lukoil, the biggest deals, according to Dealogic, tended to be between $30 million and $50 million.
Hungarian oil and gas company MOL became, at the beginning of the present decade, something of a pioneer of cross-border M&A transactions made by CEE companies. Its purchase for $262 million of a 36% stake in Slovak oil refinery Slovnaft in 2000, and of another 32% for $515 million in 2002, were both more than twice the size of the next biggest cross-border M&A transactions made by CEE and CIS companies excluding Russia during the first three years of the decade. MOL’s purchase of 25.01% of Croatia’s state-owned oil incumbent INA for $505 million was also the biggest cross-border M&A deal of 2003 to be announced by a CEE or CIS company (excluding Russia).
Discounting Russian companies, it has only been in the past three years (not coincidentally, since the 2004 entry into the EU of eight CEE countries) that other players in the outbound M&A market in CEE have begun to follow MOL’s lead. Significant jumps in the number of foreign acquisitions by CEE companies have taken place every year since the EU’s big bang of 2004. PWC’s CEE M&A survey shows that 248 foreign acquisitions were made by CEE companies in 2006, compared with 43 in 2003, 70 in 2004, and 187 in 2005. The survey’s author, Margaret Dezse, says similar growth is expected to continue.