At the beginning of the year, experts predicted that 2018 would see a livening deals market, both globally and in Hungary. Time has proved them right, at least for the first half of the year. For the yearend, however, geopolitical uncertainties and the dubious outcome of trade disputes and Brexit saw M&A appetite dipping to four-year low at a global level, which naturally also had an effect on the deals market in Hungary as well.
Although a recent EY survey describes 2018 as being on track to become a near-record year for the number of global M&A, it is quick to point out that corporate acquisition appetite is at a four-year low. Deal plans are subdued in part due to increasing geopolitical concerns, says the 19th EY Global Capital Confidence Barometer (CCB).
With rising regulatory uncertainty, and ongoing trade and tariff negotiations — including Brexit talks and the on-going on-off U.S.-China trade disputes — weighing-in on M&A sentiment, 46% of the 2,600 respondents cite regulation and political uncertainty as the biggest potential risk to deal making in the next 12 months. Only 46% are now planning to acquire in the next 12 months —down from 56% a year ago.
“Geopolitical, trade and tariff uncertainties have made many dealmakers to suspend deals, therefore, despite the stronger-than-expected first-half year we can expect this year to finish with much weaker M&A than how it started,” EY country managing partner for Hungary Botond Rencz commented on the survey in a press release.
“Companies are now focusing on integrating the large number of deals they overtook in the past year. This pause is likely to be temporary, and the deal-making appetite is expected to return in the second half of 2019.”
According to the EY survey, despite ongoing global trade and tariff uncertainty, many companies are still planning cross-border deals to mitigate the potential impact, with 20% of executives focusing more on international opportunities, including those within the United Kingdom, which is the number two destination of M&A choice for executives globally, up from the fifth position in the April 2018 survey. Overall, the top five investment destinations for executives surveyed are the United States, Britain, Canada, Germany and France.
“Uncertainty is giving some executives pause for M&A thought, and that will likely result in a fall from current deal highs in the next 12 months. However, we can expect higher M&A activity into next year. Portfolio reviews today will yield asset sales in due course,” Steve Krouskos, EY global vice chair at the transaction advisory services of the firm, says in the survey.
“Getting ahead of technological disruption and navigating geopolitical shifts will require M&A. And with growing competition for assets among private equity and other private capital, those corporate executives who are opting to wait on the sidelines will likely find they are compelled to return to the deal table in 12–18 months’ time,” he adds .
The study also highlights that M&A imperatives and macroeconomic fundamentals remain robust. According to 90% of respondents, the global M&A market is likely to improve, while 9% expects it to remain stable in the next 12 months. The majority of executives believe global economic growth prospects are improving, with only 2% predicting short-term market stability to decline and 2% predicting equity valuations to deteriorate.
As for deals activity in Hungary, the first six months of the year saw a stable M&A market. For the full year, expectations vary; some say that investors are taking a wait-and-see attitude, while others expect the increased activity to remain thorough the year.
According to the EY M&A barometer for the first half of 2018, 66 deals were disclosed and published in Hungary in the given time period. This is on a par with the number of transactions in H1 2017. But look back over a few more years and we can see that the first six months of 2018 were the fourth most active period (together with H1 2017) since H1 2010, in terms of the number of publicly disclosed transactions.
Translating this to numbers, it shows that based on the publicly available information, the estimated value of the Hungarian M&A market was USD $2.31 billion. This represents a 136% increase from USD $0.98 bln in H1 2017, but a 24% decrease from USD $3.04 bln in H2 2017. It is important to note, however, that transaction values were disclosed and published in just 18% (12) of the deals, although that is still somewhat more than the 15% total in H1 2017.
In the first half of the year, the average value of deals with a disclosed deal value below USD $100 million increased to USD $14.7 mln, which represents a 25% increase from USD $11.7 mln in H1 2017. The increase was due to the large deal size in the real estate market and IT area.
Similarly to the previous years, the Hungarian transactions market was dominated by domestic deals. The share of domestic transactions, where both the target and buyer were Hungarian entities, decreased by nine percentage points to 50%.
The most frequent origin of inbound investments includes the United Kingdom, Germany, France, Austria and Switzerland. As for outbound transactions, only four publicly disclosed deals were registered in H1 2018, one of them being the acquisition of the U.S.-based Jive Communications, which provides enterprise-grade hosted VoIP (Voice over IP) and unified communications to businesses and institutions worldwide, by the Hungarian cloud-based communication and collaboration solution provider LogMeIn.
In line with the previous year, strategic investors were in the majority in Hungary in the first half of 2018. Approximately 68% of the deals were carried out by strategic investors.
The most active sector was the real estate (see separate story “Strong Demand in Development and Investment Continues” on pages 17-19), followed by IT and technology. The food and beverages and the pharmaceutical and services sectors were also present with six major transactions each.
“Deals closed this year show that the TMT [technology, media and telecommunications] sector, manufacturing companies and real estate firms were the most active in the Hungarian transactions market,” Csaba Polacsek, director of the financial and transactions division of PwC Hungary told the Budapest Business Journal.
“About half of the buyers were foreign investors, investing mainly into real estate, and companies successful on the global market. The vast majority of the buyers were strategic, while those financial investors that are active in the region showed a modest activity on the Hungarian market,” he added.
Ferenc Nagy, M&A transaction advisor at EY says that, based on H1 data, the real estate sector is the most active on the M&A market both in Hungary and in the region. This tendency continued thorough the second half of the year. “Interestingly, both in Hungary and in the region, food companies have also showed increased activity,” Nagy said.
According to Balázs Bíró, managing partner leading the Financial Advisory Services at Deloitte Central Europe, traditional sectors, such as industry and consumer sector dominated the deals market in 2018, but financial, services and IT sectors have also been active.
“Hungary fits in the regional trends, however, due to the digital transformation, technology sector is on the rise. Therefore this area will see an increasing number of deals in the coming years,” Bíró said.
While global uncertainties certainly have a slowing effect on investors’ appetite, this cannot be felt on the Hungarian M&A market, according to Deloitte’s Bíró.
EY’s Nagy, on the other hand, says that he expects that the number of deals in the second half of the year will be less than it was in the first six months. “We still have a month to go, but a sort of wait-and-see attitude can be detected on the market,” he opined.
As for the coming years, the fact that many Hungarian companies are about to carry out a generation-shift, as a large number of firms that were established at the beginning of the ’90s are about to change ownership, could give a boost to the deals market.
“The market has been waiting for such deals for a while now, but it is still uncertain when such transactions will happen in a large number,” says Nagy. “The tendency has started, but we haven’t seen a notable boom yet. Interestingly, the earlier generation of Hungarian company leaders tend to think that selling their firm is a failure, and that the market will evaluate it accordingly,” he said.
Deloitte’s Bíró agrees that many family enterprises face a change in ownership in the foreseeable future.
“Many families have entered the stage when the first generation that founded the enterprise is about to give up position to the next generation. There are several good examples; however, in some cases, the family decides to sell the family firm, and this can be experienced in the Hungarian market as well,” he says. There is a third option, though: if a family enterprise has reached a certain size, owners will often decide to join a global company in order to step up to the next level.
Succession will continue at firms that started operating at around the change of regime, says Polacsek from PwC. According to him, the weight of Hungarian buyers could grow in the future.
“We also expect increased activity among investors offering alternative financing, such as mezzanine investors,” he concluded.
The most significant transaction of this year was undoubtedly the acquisition of pet food manufacturer Partner in Pet Food by U.S.-based private equity fund Cinven. The seller was Pamplona Capital Management, with the estimated value of the transaction put at HUF 170 bln. Also among the big deals is the sale of Hungarian IT security company Balabit IT to the U.S.-based One Identity, for USD 100 mln (HUF 28 bln). Another IT deal, where the buyer was Hungarian, was LogMeIn’s acquisition of the U.S.-based Jive Communication. The estimated value of that deal is USD 342 mln (HUF 97 bln). Deals where both the buyer and the seller were Hungarian include the sale of 18 Spar supermarkets to Appeninn Nyrt. for HUF 4.5 bln.