Transaction trends: resilience is the hallmark of CEE dealmaking

Higher interest rates used by central banks to curb inflation have certainly had an impact on dealmaking across Europe, impacting almost every sphere of economic activity and consequently affecting the number of M&A deals in the CEE region. But since hitting a low point in Q1 2023, regional M&A activity has shown distinct signs of picking up. Resilience continues to be the hallmark of CEE dealmaking with volumes remaining at similar levels over the last five years, except for a dip in 2020 when the Covid-19 pandemic first hit.

The initial shock caused by Russia’s invasion of Ukraine in February 2022 has since given way to a common narrative that the war has now reached a stalemate − at least in the short term. Its dramatic impact on energy prices and subsequent spikes in inflation and interest rates served to create a cost-of-living crisis and to diminish consumer confidence. Against this uncertain background, consumers braced for a possible recession.

Notwithstanding the reality of a protracted conflict in Ukraine and further concern over a wider potential conflict in the Middle East following Israel’s invasion of the Gaza Strip, the final quarter of 2023 saw the M&A market showing welcome signs of revival.

As economic concerns gradually began to ease, global equity markets also staged a strong recovery in Q4 2023, indicating a degree of market optimism for the year ahead. The potential resolution of some recent challenges may also help to lift M&A activity in 2024 as companies seek to implement growth, earnings, and valuation strategies.

Maintaining liquidity by holding on to cash, many businesses inevitably remain cautious in committing to M&A deals. But they have adapted, learning how to navigate through the turbulence of the new normal. As they continue to re-evaluate their forecasts and dealmakers reassess potential targets, that adaptability should form the cornerstone of success in future M&A transactions.

Overcoming adversity and significant uncertainty, levels of M&A activity in 2023 demonstrate just how resilient CEE markets have proven to be. Transaction volumes ended the year slightly down at 1,187 deals against 1,229 in 2022, but above the levels of 2019–2021.

Values fell by 1,4% to EUR 32.48bn, down from a post-pandemic peak of EUR 41.3bn in 2021, but higher than in both 2019 and 2020. There was also a notable uptick in bigger deals, with seven of the top ten transactions valued at more than EUR 1bn, compared to only three deals reaching that threshold in the previous year.

Core long-term drivers underpin M&A growth

In the near term, the most critical factors determining activity levels are inflation and interest rates. The sudden resurgence of more expensive debt has created an expectation gap between sellers and buyers in relation to M&A valuations, creating a drag on activity levels. But as inflation continues to ease gradually, interest rates will inevitably follow, narrowing that gap and leaving more room for the core long-term drivers, such as digitalisation, renewable energy, green technology, and new consumer trends, to underpin future growth in M&A activity across the CEE region.

Countries

In its Regional Economic Outlook published in November 2023, the International Monetary Fund noted that European emerging market economies were expected to grow by 2.4% in 2023 and 2.2% in 2024, compared with 1.3% and 1.5%, respectively, in Europe’s advanced economies. In Germany, for example, the forecast for 2024 is 0.9% (up from -0.5% in 2023).

The report concludes: “The near-term outlook in CESEE countries is mixed, with some exiting technical recessions (for example, Estonia and Lithuania) and some with upward revisions in 2023 as a result of trade improvements (Albania, Croatia, Slovenia).” Overall, the IMF forecasts a wide range of outcomes for 2024 compared to 2023 from 2.3% growth in Poland (up from 0.6%) to 3.1% in Hungary (up from -0.6%) and 3.8% in Romania (up from 2.2%).

A gradual economic recovery continues in Ukraine, with the IMF projecting economic growth of 2% in 2023 and 3% in 2024 after a dramatic 29% fall in 2022. Although businesses are still feeling the burden of the conflict, deal numbers moved up from 84 in 2022 to 89 last year, almost matching the levels reached in 2017 and 2020. Values picked up strongly by 66% to EUR 950m from EUR 570m in 2022, the fourth highest figure in the last decade as two deals managed to break the EUR 100m barrier.

As the region’s largest economy, Poland retained its position as a major M&A market, recording 284 deals, up from 250 in 2022 and the highest figure since 2018. Deal values, however, fell to a five-year low of EUR 7.45bn, less than half of the 2022 figure (EUR 15.97bn) which was boosted by the EUR 7.9bn merger of state energy firms PGNiG and PKN Orlen. Without a megadeal on that scale last year, six transactions surpassed the EUR 300m mark. The largest of these was the EUR 1.34bn acquisition of Techland by Chinese buyer Tencent Holdings.

Deal values in Hungary almost doubled to EUR 3.77bn from EUR 1.96bn, the highest level since 2018, largely thanks to the EUR 1.64 bn acquisition of Vodafone Hungary by the Hungarian state represented Corvinus and 4iG. However, the number of deals fell by 11% from 64 to 57, the lowest figure since 2020. Another standout transaction involved the PPF Group: UAE’s Etisalat (e&) purchased 50% of PPF’s assets in Hungary - as well as in Bulgaria, Serbia and Slovakia - for EUR 2.2bn.

Activity in the Czech Republic continued to rebound strongly. Deal volume increased by 11% from 125 to 139, the highest figure since 2019. Meanwhile, deal values jumped by 74% from EUR 2.14bn to EUR 3.73bn. The two biggest deals featured the Carlyle Group buying Meopta-Optika for EUR 677m and Colt CZ Group acquiring Sellier & Bellot for EUR 606m.

Deal volumes in Slovakia at 41 were static compared to 2022, but deal value surged from EUR 640m to EUR 3.3bn, the highest figure for more than a decade (ever recorded?). Two deals were primarily responsible: Nippon Steel’s EUR 2.7bn acquisition of the Slovakian business of US Steel, and the purchase of assets of PPF Telecom in Slovakia by UAE-based Emirates Telecommunications Group e& [Etisalat].

Bulgaria also had a strong year. Deal volume increased by 14% from 72 to 82 while value leapt by 74% from EUR 1.43 bn to EUR 2.48bn, the highest figure since 2019. Middle Eastern buyers were again prominent: in the two biggest deals, Saudi’s stc bought mobile tower infrastructure for EUR 812m while UAE’s Emirates Telecommunications Group e& acquired the assets of PPF Telecom in Bulgaria for EUR 750m.

Although deal numbers in Romania, the region’s second most active jurisdiction, fell by 15% from 234 to 199, deal values nearly doubled, rising 91% to EUR 5.54bn, a figure that almost eclipsed the record EUR 5.65 bn figure of 2018. Two deals accounted for the increase: Greece’s Public Power Corporation bought the Romanian operations of Enel for EUR 1.9bn and Dutch retailer Ahold Delhaize acquired Profi Rom Food for EUR 1.8bn.

Croatian deal volume ticked up slightly from 80 to 83, while deal value fell back from the record high of EUR 3.16bn in 2022 to EUR 1.91bn last year, the second highest figure in the last decade, which included the EUR 660m acquisition of Fortenova Grupa by private investor Pavao Vujnovac and minority shareholders.

Although Serbia has not yet imposed sanctions on Russia, it remains attractive to diverse buyers. Deal numbers were up by 12% from 56 to 63 while deal value jumped by 280% to a five-year high of EUR 1.44bn. Emirates Telecommunications Group e& led the way with a 50% stake in the assets of PPF Telecom in Serbia for EUR 650m.

The number of deals in Bosnia and Herzegovina jumped from 26 to 37, although values again dropped sharply from EUR 66m to EUR 31m.

Deal numbers in Slovenia slipped slightly with transactions falling from 41 to 39. Saudi’s stc EUR 202m acquisition of mobile tower infrastructure in Slovenia was the biggest deal as total deal values fell by 24% to EUR 470m.

Montenegro deal volume moved upwards, increasing from eight in 2022 to ten last year.

Albania moved from six deals in 2022 to 11 last year, as values surged from less than EUR 1m to EUR 148.9m thanks to deals in finance, mining and healthcare.

Sectors

Although the total number of deals fell only slightly last year from 1,229 to 1,185, there was a significant realignment of investor interest between sectors. Telecoms and IT remained number one by number of transactions at 266, although this was a decline from 336 deals in 2022. Aggregate deal value rebounded, however, from EUR 3.79 bn to EUR 9.1bn.

The value of manufacturing deals also surged from EUR 2.75bn to EUR 6.75bn, as the number of deals continued to climb from 170 to 181 last year. Wholesale and retail also increased by 59.8% from EUR 1.53bn to EUR 2.45bn, as did transport and logistics which jumped by 162% from EUR 743m to EUR 1.95bn.

Conversely, some sectors saw a notable decline in overall value. Mining (including oil & gas) fell by 91.7% from EUR 7.98bn to EUR 666m, as the number of deals declined from 91 in 2021 and 69 in 2022 to only 20 last year. Real estate and construction, which was the second busiest sector in 2022, saw a decline from 205 to 156 deals while value dropped by 62.9% from EUR 7.8bn to EUR 2.9bn. Despite an increase in deal numbers from 69 to 85, Energy also slipped by 18% in value from EUR 4bn to EUR 3.3bn.

Private equity and IPOs

Although the global IPO market picked up in the second half of last year, regional listings continued to be scarce, declining from 13 to just eight in 2023, compared to a peak of 60 in 2021. IPO values did, however, recover sharply from EUR 40m to EUR 2bn, thanks to one big listing: Hidroelectrica on the Bucharest Stock Exchange, for EUR 1.89bn. Given the recent recovery of global stock exchanges, more CEE companies may choose to go public in the near future.

Private equity continues to be a major force: the trends driving PE investment remain strong as do the number of deals and their aggregate value. Notwithstanding the strong consistent performance of PE across the region in diverse sectors, it still trails some way behind the levels of PE investment in western Europe, leaving considerable room for growth, particularly in consolidation between operations in its fragmented markets.

Although PE deal volume slipped back to 248 deals last year compared to the 289 deals recorded in 2022, deal value increased by 57% to a four-year high of EUR 15.7bn. Among the big-name US PE houses that were active, the Carlyle Group acquired Meopta–Optika in the Czech Republic for EUR 677m and Advent International bought MyPOS in Bulgaria for EUR 500m.
 

Foreign vs regional

In terms of deal volume, US investors are still the most active even though the number of US-originated deals fell from 126 in 2022 to 96 deals last year. The decline in deal value was even more acute, dropping from EUR 8.67bn in 2021 and EUR 3.49bn in 2022 to EUR 2.06bn in 2023. Replacing the US in the top slot by value, the UAE shot up from EUR 540m in 2022 to EUR 3.16bn last year. Even though the number of UAE deals, which increased from five to nine, remains modest, their average value is EUR 350m. Meanwhile, Japan jumped to second place in the value table, rising from EUR 0.9m in 2021 to EUR 2.75bn.

The UK remains the second busiest foreign investor and the number one European investor, with 72 deals, a decline from 88 in 2021. The UK declined to ninth overall by value, down from EUR 812m to EUR 800m. The third largest by transactions, with 69 deals down from 74, Germany was ranked 12th by value. Greece was the biggest European investor by value at EUR 2.05bn, but only 15th largest overall by volume at nine deals, up from seven. French deal values rose to EUR 1.1bn from EUR 1bn as deals increased from 40 to 52. By value, the other top ten investor countries were the Netherlands, China, Saudi Arabia, and Austria.

Cross-border deal activity fell back from 815 to 744 deals, as values rose sharply from EUR 22.7bn to EUR 30.5bn. Even though domestic deal volumes grew from 414 to 441, values fell sharply from EUR 10.3bn to EUR 1.7bn. Within emerging Europe, the largest investor countries were the Czech Republic (EUR 1.8bn), Hungary (EUR 1.8bn) and Poland (EUR 1.2bn).

Deal drivers

Recent economic turbulence and geopolitical events may have dampened M&A activity levels, but they are invariably short term or cyclical by nature. Things always bounce back: five years after the global financial crisis, M&A activity levels in CEE reached a new record, for example.

 The current challenges may even stimulate further activity, as opportunistic buyers adapt to the new economic paradigm, companies focus on their core activities and businesses adjust to higher financing costs.

Emerging Europe will continue to benefit from sustained growth over time underpinned by a robust financial ecosystem, as well as a skilled, well-educated and low-cost workforce that remains competitive. These factors have made the region attractive for M&A activity over the past two decades, during which time cross-border deals have consistently outnumbered domestic deals.

New global trends such as renewable and green technology, as well as digital and technological competencies, are embedded in the growth plans of the region. These will inevitably play a part as drivers of future deals.

Long term, the traditional trends underpinning many deals will also drive activity, including consolidation of SMEs and succession of large family businesses. The positive momentum in M&A will persist as the CEE economies continue to grow, and new investment opportunities arise.

Outlook

The region’s resilience has shown that M&A remains an attractive option for international investors, even in hard times. Despite the present uncertainty, some countries and several sectors saw much higher activity levels last year. Banks, businesses, customers and dealmakers adapt—cautious in the short term perhaps, but often more adventurous in the long term, too.

Last year’s cross-border M&A transactions show a remarkable diversity with no one sector dominating the deal landscape and fluctuating interest from buyers based in different countries across different sectors: telecoms and IT, manufacturing, energy, transport and logistics, financial services, automotive, industrials, and retail. Whatever the economic backdrop may produce in 2024, this diversity is a real strength that will continue to attract buyers.