Exits and smaller JEREMIE transactions are the main drivers of deal making.
In 2012, the state dominated Hungary’s transaction market in a wide range of sectors. Deal making was propelled only by the exit of major players in several sectors and by JEREMIE funds under pressure to invest. Another tendency was the exit of MNCs from the region.
“Central South East European (CSE) M&A activity decreased in 2012 compared to 2011, and Hungary was slightly below the regional average both in terms of number and value of deals,” says Margaret Dezse, partner of Ernst & Young Transaction Advisory Services. Hungary’s 2012 transactional activity was flat, at the same level since the middle of 2011, when the transactions market significantly dropped. According to Invescom managing director Zoltán Siklósi, the crisis alone does not justify such a huge drop in the number of transactions. The main problems in Hungary are the lack of financing in the market and deterioration in investor confidence.
Most experts asked by the Budapest Business Journal have experienced a total lack of confidence in Hungary, too. One advisor pointed out that, even if a potential target company is attractive, investors – especially from Germany – will say no just because it is in Hungary. However, there are some happy endings, too. PwC director Ervin Apáthy cited the example of a Hungarian tool wholesaler, which was sold in the wake of the crisis because, besides being an attractive target, it perfectly fitted the investor’s business model.
The transaction process for M&A deals today typically lasts for approximately nine to twelve months, compared to only six months before the crisis, Siklósi said, although he noted that there are some extreme cases. For instance, the sale of aerosol can maker Szenna Pack took a mere eight months, as there was huge pressure to reach an agreement as soon as possible due to the ongoing bankruptcy procedure.
Transactions where the state is involved are sometimes in accordance with market rules, but more often they are not, said Deloitte partner Béla Seres. The latest example of the latter, if it goes through, is the sale of the gas assets of E.ON. Prime Minister Viktor Orbán and E.ON Chairman and CEO Johannes Teyssen signed a Memorandum of Understanding on November 30 on the transfer of the E.ON group’s natural gas assets in Hungary to state-owned power group MVM. The statement says that as Hungary strives to create long-term supply security in its energy policy, it seeks to increase its natural gas trading activity and expand into natural gas storage through MVM. The initiated share purchase/sale agreement is to be signed by no later than January 31, 2013.
“The is a perfect example of the government using non-market and regulatory pressure, such as the 10% cut in household gas and electricity prices as of 2013, to improve its negotiation position and ultimately nationalize a strategic industry,” said Seres. This is a worrying tendency, which represents such a high level of moral hazard and undermines business confidence that will be detrimental to the country for years to come, he warns. We did not include the E.ON transaction in this year’s Deals of the Year, as it had not been closed before the BBJ went to press.
“It is also known that some European banking groups are ready to sell their Hungarian subsidiaries, however, it is not that easy on the current market,” said Seres. This is what enables the Hungarian government to take funds from a sector struggling with losses without caring about the long-tern consequences. This is essentially a form of covert nationalization, the Deloitte partner says.
When operating repurchased companies, the state has to take into consideration the European Union’s state aid control mechanism, said DLA Piper country managing partner András Posztl. In addition, according to a new Supreme Court decision, the state as an owner can end up having full responsibility for the liabilities of the companies if it is keeping a loss making company alive instead of winding it up or letting it go bankrupt because of “strategic considerations”.
Good deals are rare
“We continue to see a buyers market with many companies looking for new owners; however, we have seen some good deals, not only domestic but also with foreign investors on the market,” notes Dezse. The impetuses for many transactions are mature domestic SMEs and the redirection of the investment strategy of some multinationals in CEE, including Hungary, to other parts of the world.
Dezse pointed out that financial investors were represented only by JEREMIE transactions in 2012. However, according to experts, as the EU funds are under high pressure to invest, sometimes they pumped money into companies that had previously been rejected. Only about 25-30% of JEREMIE transactions look promising, Siklósi noted.
The private equity market dried out in 2012 due to a global slowdown in PE activity and the lack of financing. In addition, Hungary is currently the least promising country in the region, noted Siklósi. “We see several companies suitable for acquisition, although most of them need to get their finances righted first, which makes deal-making more difficult,” Siklósi said, adding that this requires a more active investor attitude. The problem is that without making any greater effort, much better potential targets can be found in Poland, for instance.
What to expect in 2013?
Most experts expect the current tendencies to continue and do not foresee significant change, neither in terms of deal numbers nor in the average deal size, in 2013. The problems hampering deal- making now will prevail in the New Year, with increased governmental activity in several sectors.
Seres foresees little or no growth in the transaction market, with smaller JEREMIE transactions only, mainly in niche markets, and maybe a couple of private equity deals, which will prove the exception more than the rule. While he does not expect the entry of many new strategic investors into this country, further consolidation in every sector is likely, together with the exit of some market players.
Apáthy expects an increase in transactions, with troubled companies striking deals to avoid bankruptcy. He cited the example of grain-based food product maker Cerbona and French DIY chain Bricostore. Naponta Kft signed an agreement in September with Agro Alba Zrt, the liquidator of Cerbona, to buy the Székesfehérvár-based factory. Thus, Cerbona’s whole extrusion business, the brand itself and 84 jobs were saved from liquidation. Bricostore made a “strategic decision” to withdraw from the Hungarian market in November, due to poor sales and negative forecasts. Siklósi pointed out that the owners of many firms in Hungary had finally had enough of struggling with their endless liquidity problems, and are looking for investors who are willing to solve their financial troubles, and then buy their businesses.
More regional deals are expected in the CSE region and also between the CSE region and the more developed Poland. As there is still a huge gap in the cost levels of Eastern and Western Europe, production bases and service centers of Western companies might be moved into Eastern Europe.