Hungarian M&A Market Struggling to Attract Foreign Interest
Zoltán Lengyel, partner of law firm Allen & Overy in Budapest, gave a presentation on global M&A trends to professionals on February 5. The Budapest Business Journal quizzed the Hungarian lawyer afterwards about the local and regional deal trends.
BBJ: In your presentation on global trends, the number of M&A deals were declining in 2019, but within that, some areas were doing well; you mentioned exceptions, like green energy. Does Hungary and CEE mirror these trends, or is it too small?
Zoltán Lengyel: Yes, the Hungarian market is too small. Yes, I was referring to the global phenomenon, where the private equity investors were really keen to get the assets, for example in green energy, healthcare and data-rich companies. I think it’s a question of numbers, because the number of potential targets in this country, you just can’t compare [to U.S. and global deals].
BBJ: The M&A business here, in your experience, is it mostly domestic or cross-border?
ZL: It’s a combination. Obviously, we do domestic in a sense. For instance, we acted for Aegon; they sold their building society type business to Erste, both of them international companies. In the deal, there is an involvement of headquarters’ representatives, but everything is happening here, between the buyer and seller, both local.
The other element is when we are part of a team of [say] German-Polish-English lawyers, when we are advising a client which has a company with assets in the U.K., Germany and Hungary, and we provide the input as far as Hungary is concerned.
BBJ: Vodafone Group’s CEE deal [acquisition of Liberty Global’s German, Czech, Hungarian and Romanian cable assets], for example?
ZL: We were not involved in the Vodafone deal, but that kind, yes, exactly. Or the Telenor [sale of regional assets in 2018] to the Czech PPF. We acted on the financing in that transaction, but it’s a multi-jurisdictional transaction requiring Hungarian and English lawyers. So this is a combination.
BBJ: What’s the trend, is it more domestic or more trans-border?
ZL: It’s subjective I know, but I would really love to see more cross-border deals.
BBJ: Because they carry a bigger fee?
ZL: It’s not just that. It’s the activity, the excitement of the relevance of the Hungarian market. I’ve seen a decline in how interesting Hungary is for foreign investors. Last year I saw a greater interest, especially from Asia, but generally, from Western Europe, it’s very limited.
BBJ: Because of what?
ZL: I don’t know. Other than the automotive manufacturers, probably Hungary is just like [any other] part of Europe, and not an exciting or exotic market, and when they look at foreign investment, they are looking for something which is really different.
And, as you see, the job market is not that interesting anymore, because there is a shortage of labor. And it’s not a new phenomenon, but what I’ve seen in the last several years is just a declining interest in Hungary.
BBJ: In your presentation of global trends, you mentioned regulatory uncertainty holding back deals, especially in sectors like green energy and healthcare. How much does that apply to Hungary and CEE?
ZL: Exactly: [both are] very much subject to government regulations in order to operate profitably. For green energy, you need government support like mandatory off-take arrangements.
BBJ: And of course, you invest for the long-term?
ZL: Yes. In the past, not only in Hungary, but in the Czech Republic and other countries, people really burned their fingers because of changing legislation in solar energy, wind parks and so on. And healthcare is subject to government intervention in Hungary.
BBJ: Another global observation was that deals are taking longer because of regulatory barriers. Is it similar in Central Europe, or is it not so marked?
ZL: When you talk about anti-trust, I think it’s pretty much global. Anti-trust is very much driven by EU law, so the local anti-trust authority follows the same principles and practice as the European authority.
They are definitely active, and definitely not easy-going when you ask for approval.
You really need good advisers when you want an approval from the anti-trust authority, somebody who really understands the market, and can prove to the regulator that when you buy that company it will not distort the market and badly effect customers.
I once worked on a transaction where somebody else who did the filing completely screwed up. They brought up things which they shouldn’t have, and pushed the whole process into a direction [from where] we had to sort of dig it out and save the deal by re-writing the whole filing. So, it’s very important how you approach the regulatory restrictions.
BBJ: A number of Hungarian companies are talking about expanding in the region. How do you see this?
ZL: Logic dictates that if they generate more cash, and many Hungarian companies are doing really well, then what do you do with your money? [If] you can’t expand more in Hungary then, obviously, you will try your muscles somewhere else, where you see opportunities.
For many years it has been just OTP, Mol, sometimes Richter, Magyar Telekom expanding, but, a big part of the Hungarian economy just didn’t move. They had representative offices perhaps, but not operating businesses. I think this will change.
BBJ: Which sectors do you see taking part?
ZL: For example, real estate. Whoever is big enough. There are specialist construction companies that could do business outside Hungary as well.
BBJ: Looking at the CEE deal table compiled by Thomson Reuters, Allen & Overy scored fewer deals last year than in 2018, but 2019’s were worth about 50% more in average value. How significant is this? Were your A&O teams lucky, is it likely to be a one-off, or a trend? Are you only taking on higher-value transactions?
ZL: In our business model we, of course, have to focus on the larger deals and, yes, the average deal size we worked on increased in 2019. However, CEE is not a very deep market for high value acquisitions, so you cannot conclude that this is a trend.
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