Transaction trends: M&A rebounds as fightback against Covid-19 gets underway

Dealmakers were active across the region in 2021 as the rollout of vaccines led the fightback against the pandemic following the disruption in the previous year. The strong end to M&A activity in 2020 continued through the following nine months as consumers and businesses learned to adapt to extraordinary times, although uncertainty about the impact of new variants and the prospect of economic fallout from higher inflation led to a more cautious end to the year.

As the world prepared for mass vaccinations and the prospect of the pandemic being brought under control, M&A activity got off to a flying start at the beginning of 2021. Deal numbers recovered sharply in the first three months of the year and reached levels similar to 2019—a trend that continued through to the autumn.

Transaction volumes for the year were significantly higher than in 2020, up 18.2% to 2,015, although as winter took hold, so did uncertainty about new variants and the impact of rising inflation on economic growth in the coming year. In the face of renewed confidence among buyers and sellers, valuations held up robustly and total deal values enjoyed a 55.1% gain to EUR 94.27bn, the highest level since the EUR 111.7bn recorded in 2013. Quarterly deal values have now exceeded EUR 20bn for five quarters in a row. Megadeals were firmly back on the agenda and each of the top ten deals during the year was priced at more than EUR 1bn.

As a large global fund, Advent International has a broad pool of resources for use in varying situations, and the last deals we had in CEE included Addiko bank, InPost and Zentiva. These provided excellent value creation opportunities in very different ways, including turnaround, corporate carve out and growth acceleration. More recently, we have started to see more minority situations in high growth assets and expect more to come from the region in the future. We are optimistic about the breadth of opportunities CEE can offer and are committed to continuing investment in the region.
Milan Kulich, Director, Advent international

“New normal” for dealmakers

Whereas the early months of 2020 were marked by fear about the emergence of Covid-19 and its potential economic impact, reflected in massive swings on equity prices and subdued M&A activity, 2021 saw a bounce back in dealmaking, and equity markets enjoyed a year of rebound and recovery.

Consumers and companies learned to adapt to the “new normal”, helped by government support measures, such as furlough payments, loan moratoria and tax breaks, providing a lifeline for the most vulnerable businesses. For those in industries such as hospitality and travel, the road to recovery was slow and uneven, but for others such as e-commerce and logistics, the pace of change and the shift to digital continued to accelerate. In some cases, opportunistic deals arose to turn around distressed businesses, but the main drivers of deals, as in previous years, were long term underlying trends, such as digitalisation and value creation.

As working from home became the norm, M&A professionals spent less time in the office and rarely boarded airplanes as they became adept at conducting negotiations by video call and email. Confidence quickly returned and the combination of a pipeline of ready-to-go deals and the availability of cash fuelled private equity and strategic acquisitions and IPOs.

We’ve seen a good level of activity in Slovenia, Croatia and Serbia, with Serbia particularly active in IT and software. Technology is one of the hot sectors at the moment, but financial services continues to be active and although industrial deals may have decreased to a certain degree, one of the exceptions is packaging which is still an area of interest for private equity.
Alex Rakosi

Countries

In its World Economic Outlook in October 2021, the International Monetary Fund cautioned that “global recovery is continuing, but the moment has weakened and uncertainty has increased”. It trimmed its world growth forecast for 2021 to 5.9% and left its outlook for 2022 unchanged at 4.9%. Against that background, emerging Europe showed a broad spread, with the Czech Republic predicted to lag behind in 2022, Poland slightly ahead of the average, and Croatia strongly ahead.

Poland was once again a major regional market for M&A and although deal volumes were down 4.3% at 270, they were slightly ahead of 2019. This resilience was reflected in deal values, which, up 2.3% at EUR 11.93bn, were at the highest level in the past decade. Real estate was the busiest sector by volume, accounting for a quarter of deals, while telecoms and IT was the largest by value, including the EUR 1.56bn purchase of Polkomtel Infrastruktura by Cellnex of Spain and the EUR 1.52bn purchase of UPC Polska by Iliad of France. There were eight deals over EUR 300m and three above EUR 1bn, led by the EUR 2.5bn acquisition of insurer Aviva Poland by Allianz of Germany.

After a year of caution and a low predictability, in 2021 we saw investor interest in Romania rising mainly as a result of the availability of funds, particularly in sectors that have proven resilient or which serve new trends as tech, green energy, entertainment, healthcare and real estate. We see an increasing trend in digitalisation in order to facilitate the effective planning of production facilities or to recalibrate the logistic chain, and intra-group restructuring mostly to focus on core home markets that will generate a new M&A deal flow. For Romania, we see TMT, energy with a focus on renewables and the healthcare sector remaining as key sectors in M&A for 2022 as well.
Alexandra Popa, Head of Corporate Finance Advisory Romania, UniCredit

After a decline in deals in 2020, Russia saw M&A activity bounce back, with transactions up by 15.8% to 609 and deal values up by 51.2% to EUR 45.38bn. Values were the highest since 2013, lifted by megadeals including the EUR 6bn merger of petrochemical groups TAIF and Sibur.

Deal numbers recovered strongly in Ukraine, up 57.1% to 143, returning to the positive trend of 2016 to 2019, and deal values more than doubled to EUR 1.72bn, as four deals came in above EUR 100m.

Transaction numbers in Hungary rose 40.5% to 59, but remained well below pre-Covid levels, as did values, which increased 12.6% to EUR 1.08bn. The EUR 625m acquisition of DIGI and the acquisition of Invitech by 4iG of Hungary contributed to Telecoms and IT being the standout sector by value and volume.

Despite deal volumes easing back 7.6% to 110, the Czech Republic enjoyed values at an all-time high of EUR 13.37bn thanks to the EUR 7.3bn purchase of Avast Software by Norton Lifelock of the US and nine other deals between EUR 183m and EUR 2bn.

The EUR 450m purchase of the Aupark shopping centre in Bratislava pushed transaction values in Slovakia to EUR 560m, more than double the value of 2020, but activity remained weak with 28 deals, the lowest in a decade.

In Bulgaria, deal numbers were 11.1% ahead at 70 and values more than trebled to EUR 1.91bn, thanks to the EUR 1bn-plus purchase of Raiffeisenbank Bulgaria by the KBC Group of Belgium.

We have seen further growth in Private Equity deal activity in Central Europe and Eastern Europe. On the one hand, this is driven by a continuous development of CEE markets, which is generating more suitable opportunities for financial investors. On the other hand, international PE funds have also started to look further East because of the fierce competition for assets in Western Europe. In addition, the on-average higher growth in Central Europe and Eastern Europe is attractive. This leads to strategics being outbid by private equity. For example, this was the case in the sale of Pet Network by Rohatyn, which in the end was acquired by A&M Capital.
Hedde Draper, Head of Corporate Finance Advisory Central Europe and Eastern Europe, UniCredit

Deal flow in Romania hit a new record at 195, an increase of 43.4%. Meanwhile, lifted by the EUR 916m oil and gas deal that saw Neptun Deep Block bought by Romgaz, value was EUR 2.37bn, comparable to that of recent years.

M&A was back on track in Croatia as deal numbers and values hit new records at 69 and EUR 1.86bn respectively, rises of 60.5% and 387%, including four deals in excess of EUR 100m, led by the EUR 492m sale of Fortenova’s business in Croatia, part of a break-up that had repercussions across many parts of the region, as analysed in last year’s report [LINK].

Activity was steady in Serbia, where there were 39 deals, up from 36, including three EUR 100m-plus transactions that pushed total value of EUR 830m, 32.1% ahead of 2020 and equal to 2019.

Transactions in Bosnia and Herzegovina rose by 61.5% to 21 and values 470% to EUR 160.1m, lifted by a EUR 62m food deal and a EUR 43m mining deal, both involving overseas buyers.

Slovenia saw activity hold steady, with just one deal less at 30, as values more than doubled to EUR 1.57bn thanks to the EUR 1bn purchase of Nova KBM by OTP Bank of Hungary.

There were 10 deals in Montenegro, in the busiest year since 2018, including the purchase of Telenor Montenegro by 4iG of Hungary, while a quiet year for deals in Albania ended with a flourish in December when 4iG took a majority stake in ALBtelecom and acquired ONE Telecommunications.

Turkiye was again one of the region’s busiest M&A markets as volumes increased by 27.2% to 234 deals, in line with pre-Covid levels, while values dipped by 12.3% to EUR 6.89bn but remained above 2019 levels. There were nine deals of around EUR 250m or more, the largest of which was the EUR 1.28bn fundraising by e-commerce platform Trendyol.com from an international consortium including Softbank.

The Telcoms & IT sector has been one of the major drivers behind Ukraine’s recent uptick in M&A activity. The country’s companies in these sectors enjoy high EBITDA margins while growing top-line double-digit growth. Investment has gone into telco companies and also IT outsourcing and IT development. The industry is a beacon of transparency and is driven by a new generation of visionary entrepreneurs with global ambitions, growing the industry from around USD 110m in 2003 to about USD 6bn in 2021. The region’s tech scene is emerging as a magnet for global strategic investors, capitalising on abundant local engineering talent.
Dmytro Boroday, Partner, Horizon Capital

Sectors

Digitalisation has become an essential tool for all sectors, from old economy industries such as manufacturing that now rely on software and technology to drive efficiency, to new enterprises such as fintech that are built on new technologies. The growing role of technology across all areas of industry and all aspects of life have made it an important sector in its own right and a hot one for M&A activity, from healthcare start-ups to huge national and international telecoms operators.

The Telecoms and IT sector, which covers a wide range of businesses from software to telecoms infrastructure, once again topped the deal tables by volume as transaction numbers rose from 333 to 450, accounting for more than a fifth of all deals. The sector was also the largest by value at EUR 23.4bn and accounted for five of the ten largest deals that took place during the year. In Telco there was significant activity, such as the sales of Polkomtel Infrastruktura and UPC Polska in Poland, and the sales of České Radiokomunikace and a 30% stake in CETIN in the Czech Republic. Software deals included the EUR 7.3bn Avast Software sale in the Czech Republic and the EUR 1.6bn purchase of game developer Nexters Global by Kismet, both with roots in Russia.

The Russian M&A market made an impressive recovery in 2021. With Oil & Gas, Chemicals, Retail and Real Estate & Construction being the key drivers of M&A market growth, the aggregate deal value almost doubled year-on-year. However, unlike other emerging markets, the role of inbound investments in such growth remains relatively small. Key domestic players, including state-owned conglomerates, continue to hold the prevailing share in the overall deal volume. Due to the specific profile of the Russian economy, where the state plays a major role whether as financing party or a stakeholder, decreased business activity after the COVID-19 outbreak in 2020 and, hence, devaluation of assets in many segments of Russian economy, allowed major local investors who have access to financing from state-owned banks to capitalise on the market situation by acquiring competitors and consolidating market share in 2021.
Artashes Oganov Partner, CMS Moscow

Growing awareness of the threat from climate change has made renewable energy another hot sector, helping to drive up the overall number of energy and utility deals from 73 to 123. It accounted for more than 6% of all transactions, up from 4.3% in the previous year. The important role of renewables, particularly solar arrays and windfarms, is highlighted by figures from the sub-sector showing deal numbers up from 45 to 81 and values up fourfold. Prominent deals included the purchase of solar projects in Ukraine by Nebras Power of Qatar and the sale of windfarms in Poland to Masdar of UAE and Taaleri of Finland.

Despite the attention paid to the “new economy”, traditional sectors continue to underpin the M&A world. Real estate and construction was the second busiest, with 340 deals, up from 310, and as it continued to supply a steady flow of EUR 100m-plus transactions, values rose by 3.8% to EUR 9.83bn. Despite experiencing a 19% drop in deal numbers, offices remained the top real-estate sub-sector. Similarly, warehousing and logistics also maintained its sub-sector ranking, reflecting the ongoing shift to e-commerce.

Manufacturing was third busiest sector for deals at 253 transactions, up from 236, and second by value at EUR 18.26bn. Mining, oil and gas was the third largest sector by value at EUR 10.59bn, though deal numbers were down from 124 to 105. Activity in food and beverage saw 92 deals, up from 85. Among them was the EUR 615m purchase by Nomad Foods of the UK of Fortenova Group’s frozen food business, with operations in Croatia, Serbia and Bosnia & Herzegovina, and the Ledo and Frikom brands familiar in many neighbouring countries. The deal completed the sale of the non-core assets of Fortenova, which was created from the restructuring of the former Agrokor group in 2019, and raises the possibility that the company could be lined up for an IPO in 2023.

M&A activity has been strong and towards the end of 2021 we saw some of the highest levels of activity in recent years, including compared to before the pandemic. A pick-up in Ukraine’s economic growth and the prospect of further structural reforms continue to boost interest from multinational investors, including corporates and private equity funds. With a healthy pipeline for 2022, Ukraine offers exciting investment opportunities across a number of sectors including energy, manufacturing, agro, pharma and healthcare. At the same time, and consistently with the rest of the region, we expect telecoms and IT to attract most investors’ interest in 2022.
Tetyana Dovgan, Partner, CMS Kyiv

Private equity and IPOs

Private equity is now firmly embedded in the dealmaking culture of emerging Europe and saw deal numbers rise 25.1% to an all-time high of 399 in 2021, as values jumped 18% to EUR 23.75bn, including nine deals of EUR 600m or more. A mix of regional and international private equity firms were ready to go at the start of the year to use some of the dry powder left over from 2020. Their pent-up demand combined with a pipeline of deals from willing sellers, provided fertile conditions for dealmaking. You can read more about the current themes in private equity in a separate section in this report [LINK].

Actvity in 2021 confirmed that emerging Europe is on the radar not just for ambitious home-grown funds, but also for serious global players, and that business owners increasingly regard private equity as an attractive option when they decide to sell. In tandem with the renewed appetite for private equity deals, IPOs have become a more realistic alternative to a trade sale and enjoyed a bumper year as the number of listings surged from 26 to 116 and values almost trebled from EUR 4.79bn to EUR 13.47bn. The figures reflected the success of regional stock exchanges such as Warsaw, Bucharest and Istanbul in attracting new listings. Meanwhile, bourses in London, Amsterdam and New York continued to appeal to companies seeking international investors.

The year saw the blockbuster EUR 3.22bn listing of Poland’s parcel locker company InPost in Amsterdam, further proof that emerging Europe has a track record in growing technology unicorns that appeal to international investors. Romanian cybersecurity company Bitdefender is lining up to be the latest to ride the wave by appointing investment banks on a US IPO in 2022, expected to value the business at around USD 2bn. In a roundtable discussion published in this report, CMS capital market experts from across Europe discuss the differences between listing on domestic and global markets [LINK].

We are seeing a lot of cross-border deal activity between countries in emerging Europe; – Russian and Polish companies remain dominant in this respect. Hungarian companies are also making their mark and a company such as 4iG seems to be following in the footsteps of MOL and OTP in building a sector-driven regional powerhouse. I believe regional champions will continue to offer stiff competition to global corporates and private equity on some of the region’s most interesting deals.
Helen Rodwell, Partner, CMS CEE

Foreign vs regional

The pandemic did not act as a deterrent to US investors, who topped the tables of most active foreign origination market from outside the region. The number of US deals rose from 94 to a decade high of 154, while values also set a new record of EUR 9.17bn after more than doubling against the previous year.

European investors also developed an increased appetite for deals in emerging Europe, led by the UK (106), Germany (81) and France (54), the Netherlands (48) and Austria (39). By value, the largest European investors were Germany (EUR 3.13bn), the UK (EUR 2.09bn), France (EUR 1.91bn), Spain (EUR 1.75bn), and Austria (EUR 1.71bn). China remained a major foreign investor, but deal numbers and values were significantly lower than pre-Covid levels. UAE moved up to tenth position among foreign investors by deal numbers, the highest ranking outside the US and Europe. This development is discussed later in the report with a section dedicated to UAE.

Cross-border M&A remained buoyant, with deal numbers 28.9% higher at 985 and values up 60.2% to EUR 56bn. Meanwhile, domestic deal values were 48.1% higher at EUR 38.3bn on numbers 9.5% up at 1,030. Russia was the largest single investor country overall, with 564 deals worth a combined EUR 37.3bn, the majority of them domestic transactions in Russia. Turkiye, Poland and the Czech Republic were the next busiest by volume, with 444 deals between them, while Poland, Hungary and Turkye contributed more than EUR 9.2bn of transactions.

The trends that we are seeing on the private equity market today are a preference towards a quick transaction process and high valuations of assets which either operate in the pandemic-agnostic sectors or managed to transform their operations to adjust to the pandemic reality, such as digitalisation or increased automation. These companies are well positioned to achieve a competitive advantage in the post-covid economy, and it seems that in 2022 the PE industry will continue to keep its momentum. However, headwinds including inflation and the prospect of higher interest rates may have an adverse impact on the dynamics of the M&A market.
Slawomir Czerwinski, Partner, CMS Warsaw

Deal drivers

Once regarded as a gateway to western European markets, CEE still benefits from its proximity to large economic neighbours, but it is increasingly regarded as an attractive location in its own right thanks to robust economic growth and stability. Relatively low costs still provide an incentive to dealmakers, but they sit alongside favourable features such as a well-educated and skilled workforce, particularly in technology, and good infrastructure for transport, energy and communications.

The pandemic may have created some distressed sellers and openings for opportunistic acquisitions, but transaction activity has been growing over the past decade, built on buyers looking at long-term trends and value creation, whether through corporate carve outs, stakebuilding, or start-ups.

For business owners, succession, which has long been talked about as a motive for selling, is now cited more frequently, but sellers are increasingly aware that if family members are reluctant to take on the business, there is a range of buyers willing to take it to the next level. Emerging Europe’s M&A market has become more sophisticated, appealing to a wider range of buyers within and outside the region, while the options for sellers have also widened, from a trade sale, private equity deal or an IPO.

I believe that the M&A activity will continue, especially in the renewables area. This will cover not only the exits of incumbents who already have operational assets built under previous support schemes, but also new projects which are currently under development or at a ready-to-build phase. The availability of sustainable financing and emerging financing products such as green bonds will further accelerate investment and M&A activity across all energy sectors. We also expect to see more deals in the gas sector, with some deals in Romanian and Bulgarian parts of the Black Sea indicating significant interest in tapping into new offshore gas discoveries.
Horea Popescu, Partner, CMS Bucharest

Outlook

The region has proved to be much more resilient in the face of the pandemic than might have been the case as recently as a decade ago, thanks to more diverse and more digital economies. Government measures to stimulate economies and to support business helped steer countries in the region through the worst economic effects of Covid-19, but businesses themselves showed they were able to evolve.

All of this helped to rebuild the confidence that contributed to the rebound in M&A activity in 2021. The fundamentals for an active dealmaking market remain in place, tempered by uncertainty about the pandemic and the possibility of new waves of infection. And while central banks are expected to withdraw support carefully, they must do so in the shadow of inflation, which may pull policy in a different direction.

Over the last two years, dealmakers have shown themselves to be agile in the face of fast-changing conditions and if there are concerns about the fallout from the pandemic and inflation, M&A professionals have shown they are capable of adapting to whatever challenges 2022 might throw at them.