A record-breaking leveraged buy-out in Poland highlights both the growing appetite of global private equity firms for central European assets and the increasingly favourable financing conditions in the region.
South African media and internet group Naspers is selling Allegro, Poland’s largest online marketplace, for $3.25 billion, to a consortium of European private equity funds, including Cinven, Permira and regional specialist Mid Europa.
The deal, which is the largest M&A transaction in Poland since June 2011, proved a magnet for private equity funds after it was announced on October 14. Seven made it through to the final bidding round, while many more participated in the earlier stages, say bankers involved in the process.
“The majority of private equity funds we cover looked at this deal,” says Gergely Voros, head of emerging market investment banking at Morgan Stanley, which advised Naspers.
To some extent, the enthusiasm of cash-rich private equity firms for Allegro needs little explanation.
“It is a very unique company,” says Voros. “The only global comparables are eBay, Alibaba and MercadoLibre in Latin America. Allegro is growing faster than eBay and has higher margins than MercadoLibre.”
What is perhaps surprising is that the firm is located in central and eastern Europe, a region that global private equity firms have traditionally been wary of. Voros says the line-up for the Allegro deal shows that such reservations are a thing of the past.
“Central Europe, and particularly Poland, has matured and is effectively being viewed as western Europe now,” he says. “People are comfortable putting billions of dollars to work there.”
The presence of regional specialist Mid Europa Partners in the winning consortium, however, suggests that international funds still feel the need for local expertise. This is confirmed by Robert Knorr, co-managing partner at Mid Europa.
“The comfort provided by the sector in which Allegro operates and its own strength as an asset were slightly offset for some global private equity firms by the fact that it is in CEE,” he says.
Nevertheless, market participants agree that prejudices against central Europe, at least, are rapidly falling away. Partly, this is due to the region’s impressive macroeconomic performance.
Countries such as Poland, Romania and Slovakia are all growing at more than 3% a year, while public debt levels remain modest.
As Knorr notes, central Europe also still lags the western part of the continent in terms of living standards and consumer spending by some margin, leaving room for a considerable catch-up effect.
“In some countries, the conversion from traditional retail to modern retail is still to come, while throughout the region the middle class is growing and getting wealthier,” he says. “It is a developed but still developing region, which is what makes it attractive for investment.”
Improved financing conditions are also enhancing central Europe’s appeal for private equity buyers, say bankers. Historically, the scale of funding required for larger deals was only available in euros, exposing funds to currency risk.
Willing to lend
Rising levels of local deposits, however, combined with dwindling returns, have made banks in the region much more willing to lend in larger size into leveraged buy-outs, says Rizwan Shaikh, head of CEEMEA loan structuring and syndication at Citi.
“They have very high liquidity in local currency and are keen to deploy it in high-yielding assets, particularly in Poland where the bank tax is squeezing profits,” he says.
Meanwhile, historically low interest rates across the region make for better returns for investors, notes Voros. “Rates in central Europe today are close to where euros are in terms of financing costs,” he says.
Another limiting factor on private equity interest in central Europe has traditionally been the relatively small size of the assets on offer. The Allegro acquisition was the largest ever in the region by international funds, while only a handful of leveraged transactions have topped the $1 billion mark since the financial crisis.
Allegro’s place in the record books looks set to be short-lived, however. October saw the long-awaited launch of the sale of SABMiller’s CEE businesses, which are being spun off to reconcile European antitrust authorities to the group’s £79 billion takeover by Anheuser-Busch InBev.
The disposal – which includes leading beer brands in the Czech Republic, Poland, Hungary, Romania and Slovakia – is expected to raise up to €7 billion. A plethora of private equity firms have already been named as potential suitors, including US funds KKR and Bain Capital, as well as Europe’s Advent, CVC, BC Partners and PAI Partners.
Private equity players were also prominent in the auction for Poland’s second-largest mobile telecoms operator, Play, which was cancelled in early October after valuations of €3.5 billion apparently failed to satisfy its Greek and Icelandic owners. Blackstone and Warburg Pincus were involved in the final bidding round, along with CVC and Cinven.
The upcoming exit by Mid Europa from Zabka, the leading Polish convenience store network, is also expected to attract widespread interest from the sector. The sale is tipped to fetch up to €1 billion.
Robert Manz, managing partner at regional private equity fund Enterprise Investors and chairman of Invest Europe’s CEE Task Force, says such deals are helping to convince international funds to take a closer look at the region. “We are seeing more and more private equity investors and investors into private equity recognizing that this is an interesting corner of Europe that they need to pay attention to,” he says.