Home / Emerging Europe M&A Report 2019/2020 / Forward-thinking firms shape up for the future

Forward-thinking firms shape up for the future

Feature 7: Restructuring
Interview with
Ana Radnev
Ana Radnev, Partner, Head of Banking and Finance, CMS Romania
Jelena Nushol Fijačko
Jelena Nushol, Partner, CMS Croatia


The global economy is in a fragile state after the weakest growth since the financial crisis, but if there is another severe downturn, emerging European companies will be better prepared than last time around.

Many companies have used the intervening years to get themselves into good shape so that they will be more resilient in the face of economic headwinds. There is a growing realisation that it is wise to review and restructure while conditions remain relatively benign rather than wait for the storm to hit.

Whatever the economic outlook, companies need to update their business model to avoid being left behind by changes in their industry and more innovative competitors. Digitalisation is a priority because it can transform internal efficiency and enable businesses to address new markets by building an online presence. Bricks-and-mortar retailers have had to adapt to e-commerce by becoming omnichannel retailers to survive, while travel companies have had to improve their internet offers to keep pace with platforms that have evolved from the sharing economy.

Keeping pace with change

Economies in emerging Europe have generally enjoyed robust growth compared to their western neighbours, but their reliance on exports means they could be vulnerable to a recession in Germany or a trade war between the US and China. There is little evidence of any widespread increase in insolvencies across the region, although the picture is patchy, which may reflect the broader economic picture and the growing perception that it is better to restructure before insolvency becomes the only option.

The rescue of Agrokor, the debt-laden Croatian food producer and retailer, from near-bankruptcy has shown what can be achieved. As an employer of 52,000 people in 20 countries, it was a critically important business in the Balkans. It took two years to complete the restructuring of the business, which had been in state-run administration, and required a new emergency law on Extraordinary Administration Proceedings.

In April, a new holding company called Fortenova Group, taking in 159 companies, began operations.

According to Jelena Nushol, finance partner at CMS Croatia, Agrokor was so big it required a new approach to restructuring. She said: “This was a very complex case, but there are valuable lessons for other companies and one of them is that they must not leave it too late to restructure or they will pay the price. This is not just about being ready for another crisis, it’s also about being innovative in markets that can change very quickly.

Restructuring is not just about being ready for another crisis; it’s also about being innovative in markets that can change very quickly.
Jelena Nushol

The prospect of another economic crisis might focus minds on the need to reorganise, but to remain successful companies must go through constant reinvention. Airlines, for instance, have had to respond to the growth of the low-cost carriers such as easyJet and Ryanair and the relentless shift to online bookings. Those that have failed to evolve have been left behind.

Under the microscope

The first step is to conduct a widespread review of the business, even for those that are in apparently good shape. That starts with a thorough financial analysis to understand working capital flows and capital requirements, so that companies can put the right structures in place. If necessary, they should talk to their banks to rearrange repayment schedules or arrange new working capital facilities. Banks have become more experienced at dealing with these issues and working with companies before it gets to the stage of insolvency. Private equity sponsors are also well-versed in dealing with restructuring. As far as bringing in new investors is concerned, one challenge is to persuade family owners not to delay over this difficult decision for too long. 

One of the trends the region has seen is the arrival of specialist investors in distressed debt or special situations. Many foreign investors see this as a route to gaining an interest in a company. This will result in more businesses being rescued and contribute to more M&A activity.

Financial restructuring is only part of the solution, and any strategic review should look at the whole business model to identify which parts are core and which act as a drag. This might mean reducing costs by closing part of the business or cutting jobs, but it could also mean stepping up investment in research and development in new products and services. Disposals are one option, but what about acquisitions? One company’s non-core business is another’s attractive growth opportunity, and this constant churn also contributes to M&A activity.

With any disposal it is important to consider the implications for the remaining business. Transitional arrangements need to be put in place to protect key areas such as employees, IP and any future liabilities. Other options may include flexible working for employees, reviewing supplier terms and using factoring to improve cash flows. Relocating parts of the business and accelerating digitalisation should also be considered.

Legislation is evolving to reflect the benefits of a more consensual process, and the Agrokor case is likely to be used as a precedent in other countries. The new EU Directive on restructuring and insolvency is designed to encourage out-of-court restructuring as the best way to retain value. Even in those legal regimes that are outside the directive there is a will to change, although the regulatory pressure to pursue insolvency through courts remains.

Creating value

Ana Radnev, international finance partner and head of banking and finance at CMS Romania, said larger markets such as Poland had more experience in restructuring and insolvency, although there were good examples of successful outcomes in Romania, Bulgaria and Ukraine. She added: “We see a growing willingness among market players to look at restructuring situations with a view to maintaining or creating value and keeping a business alive rather than going through a court process that ends in insolvency.

We see a growing willingness among market players to look at restructuring situations with a view to maintaining or creating value.
Ana Radnev

Successful companies must evolve to stay ahead of their rivals, but after the impact of the last crisis there is also now more awareness of the implications of a downturn. Some casualties are inevitable, but the extent of any damage should be limited through action taken now by companies, lenders, investors, advisers and lawmakers.

Feature 6 button
Download report button
Feature 8 button