On the path to consolidation
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For many years Poland has recorded high M&A deal numbers. However, in 2012-2013, activity visibly slowed down, to 331 and 363 deals compared to 516 in 2011 and 581 in 2010, according to data provided by the M&A section of information service EMIS. Total values were also visibly lower (see graph page 25). We do not know what 2014 has brought as the year is not over yet. The first six months saw more deals than the corresponding period of 2013, according to preliminary EMIS data. This was also the case according to a recent report by EY, which put Poland in second place in Central and Southeastern Europe in terms of deal volume and third in terms of deal value.
“In terms of the number of deals, the M&A market seems to be less active than was expected at the beginning of this year,” said Marek Sawicki, partner at CMS law firm in Warsaw. “Different financial expectations of sellers and buyers may be the main obstacle. The parties often spend a lot of time discussing the price and sometimes decide to suspend talks, especially when a company’s financial results demonstrate changes compared to the initial valuation.” A slight increase year-on-year in the first six months may not be enough to predict trends for the whole year, but experts see a possible revival in the works. Activity in this field does not always result in transactions that are announced to the public.
[negative]"There is no problem with the quality of target companies." Andrzej Bartos, Innova Capital[/negative]
“There is a visible rebound on the M&A market, though there was no lack of projects in the previous year,” said Krzysztof W. Klamut, Partner, Corporate Finance Group at KPMG in Poland. “However, few of them ended in transactions, because of price discrepancies between sellers and potential buyers.” What is happening is part of a bigger trend. “Worldwide, the number of deals has increased and the same goes for both Europe and Poland,” Klamut said.
“There are several factors that contribute to that, including an improvement of investment sentiments, and the atmosphere and situation in the euro zone.” The cash is here It’s not a lack of financing that is stopping buyers. “Both corporations and private equity funds now have a lot of cash. Many funds are now conducting fund-raising,” Klamut explained. “There is even a tendency reappearing that was here before the crisis – M&A is getting trendy. I hope that this does not lead to hectic competition.”Sawicki also mentioned a positive signal for the market in the form of availability of acquisition financing. “Also, the cost of such financing is relatively low,” he said. “As far as the economy is concerned, there is no clear trend. There is no slowdown, but no euphoria either; it’s rather a period of wait-and-see.” “Provided that there is no market decline, and that the geopolitical situation does not interfere, the number of transactions will grow,” Klamut said. “The average deal takes about nine months to prepare and after the summer vacation a number of projects have appeared that will be concluded in mid-2015.” What will change compared to earlier years is the size of the biggest deals. “In the case of Poland, I would not expect mega-transactions. TVN might be sold, also PKP may sell its subsidiaries TK Telekom and PKP Energetyka – these might be large deals,” Klamut said.
Nevertheless, as Klamut stressed, “the Polish market is powered mostly by the so-called mid-market, with deal values from tens of millions of złotys to up to PLN 200 million. The targets are mostly privately-owned businesses that are successful in their development and have an interesting market position.”
Work behind the scenes In the private equity segment, the number of deals announced this year is very moderate, but this does not mean that nothing is happening on the market. Rafał Wiza, audit director, head of Private Equity Team, KPMG in Poland, explained that “2014 is a year of intense activity on the part of private equity funds, but this is not publicly visible. It is not a year that’s abundant in transactions.”
Andrzej Bartos, managing partner at Innova Capital and vice-president of the Polish Private Equity and Venture Capital Association, agrees. “This is true in the case of our fund and in the case of our peers or competitors. The number of deals concluded is perhaps more than 20 percent lower than last year,” he said. Funds that could exit their investments may be waiting for their portfolio companies to grow. “People say that portfolio company valuations are at a good level, so it is a good moment to sell. However, a significant number of company results are not yet good enough for an exit,” Wiza said. “Polish companies grow each year and so do their valuations.” Deals are scarce for other reasons too, which would not have had such a strong effect had these reasons not occurred simultaneously, as Bartos explained. “One of them is that a number of companies have been affected by the crisis in the east. Some investment processes have been derailed because of that,” he said. Another reason is that company owners have plenty of options to choose from if they need extra funds and they don’t always choose private equity. “We are experiencing a time of low interest rates, so there is a lot of access to debt capital,” Bartos said. “At the same time, stock exchange valuations are not low and international corporations have very large amounts of cash, so they act as competition for local private equity funds.”
Many Polish firms may soon be expected to make decisions that could result in PE deals. “Many local enterprises are at a stage where they are revising their business plans. Usually, such a phase precedes a decision on what to do next, for example to sell the business or to consolidate a market segment,” the fund partner added. “Funds’ activity should become more visible soon,” Wiza said. “Not in the next months, but in 2015 some exits should take place. Then the same funds could invest in new companies. The next two-three years will be a time of increased activity.”
Big fish, small fish, consolidation According to EMIS data for 2013, the majority of transactions on the broad market were recorded in the services (90) and manufacturing sectors (61), with significant numbers also in finance and insurance, and in telecommunications and IT. Experts share the view that there are still sectors in Poland that will see further consolidation, or a large number of acquisitions, both by sector peers and by financial investors building bigger capital groups. Sawicki points to the financial services sector as the most active currently. “The biggest deal last year [on that market] was the takeover of debt collection company Ultimo by B2 Holding,” he said.“There is also the recently announced initial agreement signed by Alior Bank to acquire Meritum Bank. Also, Abris Capital Partners will probably sell FM Bank in the near future. There is talk of GE considering a sale of Bank BPH and there will be changes in Alior Bank’s shareholder structure.” The Polish retail trade market, a highly fragmented sector with many small privately-owned networks and a few major players, is also expected to see continued consolidation.
“For example, after the takeover of Żabka by Mid Europa Partners, we continue to advise the fund on further acquisitions in this sector,” the CMS lawyer said. “I expect high competition on this market.” “The small players cannot win in the long term,” Klamut said. “This is a kind of war of attrition. In the retail trade and FMCG distribution sectors, the margins are low and the competition is high.” “There is also growing consolidation in the consumer goods market and in the construction materials sector. In the latter case, after a crisis phase, we now see which leaders have survived and can expand,” Bartos said.
The health care, telecommunications, media and technology sector, the food and drink market, the broader FMCG sector and a wide scope of business services companies may also be of interest to investors, both strategic and financial. Wind energy could also see more M&A activity in the near future. “The wind farm market is going through a revival,” Sawicki said. “This is a temporary situation fueled by the expectation of new and less favorable regulations regarding support for producers of renewable energy.” “The pharmaceuticals market is also very interesting,” he added. “However, in this case there is much more demand than supply. Particularly, in the dietary supplements segment there is a big appetite on the part of investors.” In the case of private equity, we may expect almost anything. “Funds are generally interested in any sector or segment, that can be consolidated, to create critical mass and value,” Wiza said. “They are still least interested in the construction sector. What is important is the scale, they are more inclined to buy at least medium-sized firms.”
“Lowered growth forecasts across Europe have prompted many players to look to domestic markets with an eye on consolidation,” Bartos said. “This trend is visible in the most recent deals announced by Innova Capital, with Bakalland taking over Delecta [in the food sector] and the merger between [internet portals] Grupa o2 and Wirtualna Polska.”
Factors of change The obvious factor that would make more deals happen would be if buyers and sellers could agree on the price. This is never an easy process but it has become even more difficult in the past years. “A number of situations were visible recently when business owners had high expectations as to the price and funds were more cautious. When the estimates meet, there will be more deals,” Bartos said. “On the other hand, there is no problem with the quality of target companies.” Both KPMG experts said that there may be more willingness to sell in a few years’ time as the issue of succession is becoming increasingly important to family businesses.
“If the children do not want to take over or the current owners do not want to simply transfer the business to their successors, then the sale of the company is highly likely,” Kla- mut said. More deals will also take place when private equity firms will have completed the process of raising funds from private investors. Many are talking to them now, but the negotiations are taking longer than they usually did in 2006-2008.
[caption id="attachment_69891" align="alignright" width="300"] Image: shutterstock[/caption]“What acts in their favor is that some of them, like Abris Capital Partners, Mid Europa Partners and Enterprise Investors, have succeeded on a difficult market,” Sawicki said. Next year should be abundant not only in fund entries, but also exits. These are usually a natural consequence of investment cycles. “We have seen some major exits recently, like Innova’s sale of its Meritum Bank stake to Alior Bank,” Bartos said. “This is a more natural process and funds will use stock exchange valuations.” Private equity would also be a bigger issue in Poland if Polish investors themselves contributed more to the fund. The financing now exceedingly comes from foreign investors.
While PE funds are one of the many forms of investing money for citizens of Western countries, this is not yet the norm in Poland. “We have rich people, but very few invest their money this way,” Wiza said. There is no certainty on how the situation on the Warsaw Stock Exchange will affect the M&A market. After Poland’s pension system reform was carried out early this year, “there were expectations that private pension funds (OFEs) would modify their portfolios to include assets with higher liquidity, like blue-chip companies,” Sawicki said. “However, this trend is not as visible as was expected.” At the same time, Polish companies are also carrying out takeovers abroad, often in countries such as Germany or other Western European markets. “Frequently, this is because they cannot break through on those markets with Polish brands,” Klamut said. “For them it is easier to consider acquiring a local player than creating a new premium brand. This is true both of privately-owned companies and companies acquired by private equity funds.” An emerged market For years, Poland was simply placed within the widely-understood CEE region, with its M&A deals making up the vast majority of total deal volumes. It continues to be a leading market and now tends to be seen as part of the “northern CEE” region, alongside the Czech Republic and Slovakia. “It is no longer an emerging market but an emerged one,” Sawicki said. “However, this can make things more difficult – it is more challenging for PE funds to convince investors that they will achieve high growth dynamics.” [negative]"As far as the economy is concerned, there is no clear trend. There is no slowdown, but no euphoria either; it's rather a period of wait-and-see," Marek Sawicki, CMS Warsaw[/negative]For now, there is high confidence in the Polish economy on the part of investors. “Poland has managed to get through the crisis in a much better shape than others in the region,” Bartos said. “Over the past two or three years, investors have been cautious regarding other CEE countries.” The situation is different when we compare Poland with Europe as a whole. “There is still a long way to go. Major PE funds usually buy big capital groups, with branches in several countries,” Wiza said.
“The majority of deals in Europe are secondary buy-outs, when one fund sells a company to another. In Poland, there are very few such cases, the majority are primary transactions,” Bartos added. “So activity in Poland is lower than in Europe.” “Compared to Europe, Poland has fewer cross-border deals, with foreign investors entering the Polish market,” Klamut said. “Those who are not present in Poland yet, do not necessarily want to enter. They risk entering a fragmented market and assuming a secondary position. For foreign investors, market leaders are the attractive targets.”
It is easier to conduct deals if the investor is based in Poland, regardless of whether the owners are Polish or foreign. The same goes for sector companies and capital investors. “If a fund tries to conduct a transaction, let’s say, from London, it usually does not work out,” Klamut said. This factor, along with the strength of the market, may be one of the reasons why Poland has already become a hub for private equity funds. Ten years ago, Prague played that role and housed their regional headquarters. “Now, it’s Warsaw that’s on the map thanks to the size of the market, but also thanks to the development of the financial market and the presence of the Warsaw Stock Exchange,” Sawicki said.
