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E&Y: M&A transactions in the Czech Republic grew 30% in 2012

  • Investors in the CR expressed greatest interest in service companies; interest in IT firms dropped compared to previous years

Within the Central and South Europe region, the Czech Republic ranked third in number of completed transactions behind Turkey and Poland. The region’s mergers and acquisitions market saw a slight drop in activity in 2012 in both the number and total estimated value of completed transactions. In contrast, the number of transactions increased 30% in the Czech Republic from 119 to 155. The estimated value of transactions effected in the Czech mergers and acquisitions market increased 39% to USD 8.32 billion. The extraordinarily large SPP transaction is behind this large increase in the CR and Slovakia. The Czechs were also the most active investors in Central and South Eastern Europe (12 transactions), followed by Poland (9 transactions). The sectors most attractive to investors in the CR were services, followed by manufacturing and real estate. In contrast, there was a surprising drop in interest in IT firms, These are the results of the ranking of mergers and acquisitions entitled “M&A Barometer in the Czech Republic and Central and South Eastern Europe region” compiled by Ernst & Young.

Transaction values were disclosed for 21% of transactions in 2012, representing an 18% drop year on year. Based on the volume of transactions with disclosed values and accounting for other transactions, the size of the Czech mergers and acquisitions market can be estimated to be USD 8.32 billion, which represents a year-on-year increase of 39% or USD 2.34 billion.

Petra Wendelová, Partner for mergers and acquisitions at Ernst & Young in the Czech Republic commented on the survey results: “This most recent league table can without a doubt be considered a success for the Czech Republic and Czech investors because Poland and Turkey have much larger economies. It is with satisfaction that we can also report that the M&A activity results mean a third year of estimated transaction volume growth for the Czech Republic. The vast majority of transactions represent so-called secondary sales, which reflects strategic changes in the distribution of power among bigger market players in a specific industry and region. It is gratifying to note the important role played by Czech firms abroad, whose activity has systematically increased over the past decade.”

“More than half of transactions took place between wholly Czech entities. Moreover, in 2012 Czech firms reported 21 significant foreign acquisitions, which is the largest number ever. Indeed, the strength of the Czech Republic and its entrepreneurs is gradually and subtly coming to light. We’ve come a long way from being just a target for cheap acquisitions; our firms are active players in the region, where they’re investing in a multitude of interesting projects. In the more than twenty years of their existence, they’ve amassed the sufficient knowledge and equity to do so. In addition, at a time of record low interest rates there is no problem securing acquisition financing,” adds Petr Kříž, Executive Director, transaction advisory services, Ernst & Young in the Czech Republic. 

Domestic and Central Europe region investment predominates among Czech investors

Once again, purely domestic transactions predominated on the Czech mergers and acquisitions market. In 2012, the share of these transactions showed no year-on-year increase, remaining at 61%. Some 12% of all transactions represented outbound investment by Czech investors. The majority of this investment went into the Central, Eastern and Western Europe region – mainly Slovakia, Hungary, Germany and France. In 2012, Czechs became the most active investors in Central and South Eastern Europe (12 transactions), followed by Poland (9 transactions).

Inbound investment came primarily from the United States (8), Germany (5), Russia and Great Britain (3 investments each). While US investors did not focus on a specific sector, Russian and German investors concentrated on manufacturing. The British focused on pharma.

The most significant transaction carried out by Czech investors abroad was the acquisition of SPP (Slovenský Plynárenský Priemysel a.s.) by Energetický a průmyslový holding a.s. (transaction value: USD 3.467 billion). Strategic investors were once again more active on the market, strengthening their predominant position by 6 percentage points to 80%. “In contrast to the period immediately preceding the crisis, private owners of Czech firms – private individuals are starting to re-enter the acquisition market by seeking out strong take-over partners,” notes Petra Wendelová.

Most attractive sectors for mergers and acquisitions

The most attractive sectors in 2012 were services and manufacturing, with a combined share of 19% of total transactions. Real estate came third with 12%. Every tenth transaction carried out in 2012 involved investment in energy and mining. In contrast, the IT sector fell sharply to account for 4% of the total number of transactions (compared to 15% in 2011).

“The transaction activity statistics for the Czech Republic are heavily influenced by the SPP mega-transaction, where a Czech investor spent nearly USD 3.5 billion on an acquisition in Slovakia. The table of largest transactions also confirms the trend of the continuing attractiveness of utilities and energy. According to expectations, the Net4Gas transaction should be a winner in the upcoming period,” says Petra Wendelová.

Mergers and acquisitions in the Central and South Eastern Europe region

The mergers and acquisitions market in Central and South Eastern Europe (Bulgaria, Croatia, Czech Republic, Greece, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and Turkey) on the whole saw a 1.8% decline in the number of transactions in 2012. Of the 11 countries, 5 reported an increase in the number of completed transactions – in addition to the CR, also Turkey, Poland, Greece and Slovakia. The most transactions were carried out in Turkey (297 transactions vs. 272 in 2011), followed by Poland (276 transactions vs. 254 in 2011) and the Czech Republic (155 transactions vs. 119 in 2011). Greece reported the highest year-on-year growth – 47.4% (from 19 to 28 transactions). In contrast, the greatest year-on-year drop occurred in Croatia (63.5%, from 52 to 19 transactions) and Bulgaria (40.7%, from 81 to 48). “Despite our undeniable regional success, we mustn’t forget that Europe’s significance in global terms is decreasing and will continue to do so for a long time. Thus, our enterprises are taking an ever-greater bite out of an ever-shrinking pie. The most successful of them are, at the very least, regularly monitoring investment opportunities outside Europe,” says Petr Kříž.

In 2012, 1 108 completed transactions with an estimated total value of USD 41.8 billion were reported in the region. The most attractive sectors by number of transactions were manufacturing (135 transactions), services (116) and energy (115). In terms of transaction volume, however, the leaders were banking and financial services, food & beverage and energy.

Domestic transactions were most popular in Hungary, the Czech Republic, Poland and Serbia. It is interesting to note that only 4.2% of transactions exceeded USD 100 million. The largest transaction by reported value in the Central and South Eastern Europe region was the acquisition of the Turkish DenizBank in the first half of 2012 by Russia’s Sberbank for more than USD 3 851 million.

12-month outlook

Due to less optimistic economic forecasts for the euro area, a number of analysts are predicting mergers and acquisitions market stagnation or decline. Clearly, it is buyers, not sellers, who are influencing the market. For enterprise owners, the rule always be ready sufficiently in advance for a potential sale applies. This trend toward permanent transaction readiness places significant demands on management. “Transaction implementation time can successfully be reduced through good transaction preparedness,” adds Petra Wendelová.

Several exceptional transactions have been conducted in recent weeks in the USA (Dell was acquired by founder Michael Dell with his investment firm MSD Capital, the private equity firm Silver Lake and Microsoft for USD 24.4 billion, and then the company’s shares were delisted. Warren Buffet’s Berkshire Hathaway acquired Heinz for USD 28 billion), with the common denominator in these transactions being private equity fund involvement. Such huge transactions can be carried out primarily owing to the extraordinarily low interest rates in Western Europe and the relatively easy access to debt financing for these large investors. Therefore, it is more than possible that in the CR or Central and South Eastern Europe region we can expect some similarly significant unforeseen transactions involving private equity funds.

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