State Still Plays Active Role on Hungary’s M&A Market

Hungary’s transactions market saw a relatively strong 2017; however, the role of the state has continued to dominate, causing some distortion in the structure of the market. While analysts agree that foreign interest is growing in Hungarian companies, the market was still driven by domestic transactions.

Ervin Apáthy.

The year 2017 has seen a further livening of the M&A market, with an increase in both the number and the value of transactions. According to an EY survey, there was a 3% increase in the number of deals in the first half of the year compared to the same period of 2016, and the estimated value of the market grew by 12%. The real estate sector has regained its foothold finally, having been the most active industry this year.  

“I expect the full year to be similar to what the first half of the year was, or even better, as M&A activity increased in H2, to the regular year end push to get deals done on the market,” Edward Keller, partner at Dentons tells the Budapest Business Journal.  

While the first six months of the year saw mainly domestic transactions, a number of cross-border deals have ramped up at the end of the year, Keller says. Some of these might be closed only next year. Keller mentions that his own deal activity in the last six months has focused on the FMCG, e-commerce and specialty manufacturing sectors.  

The second half of the year will basically be similar to the first half, based on the fact that several deals are yet to be closed by the end of December, so the number of transactions will also be high in H2, says Ervin Apáthy, director of Corporate Finance at PwC.  

“Without having the exact numbers at hand, we think that the number of transactions will be somewhat lower in the second half of the year than it was in the first half,” Margaret Dezse, partner at transaction advisory services of EY tells the BBJ. At the same time, we expect a slight increase in the number of the deals year on year. There are several ongoing deals on the market and it’s hard to estimate whether they will be closed this year or postponed for 2018,” she adds.  

According to the EY M&A Barometer, the average value of deals with a disclosed deal value below USD 100 million increased to USD 11.7 mln in Hungary in H1 2017, which represents more than 200% increase from USD 3.7 mln in H1 2016. This growth was due to the increased activity in the real estate market, where the largest transactions were closed.

Margaret Dezse.

Local-to-local

As in previous years, the market was dominated by domestic transactions in the first half of the year: their share was 59%.
An M&A market driven by domestic transactions is not an exclusively Hungarian characteristic; it is a typical phenomenon in the region, Dezse pointed out. One reason for this may be that foreign investors show less interest in smaller companies and smaller deals, therefore these deals will mainly attract domestic buyers. If the number of medium-sized (EUR 20-100 mln) transactions increased, this would inevitably attract the activity of foreign investors, she adds.  

While there was a high number of domestic transactions this year, the largest deals are still made by foreign investors. Interest from them, Apáthy of PwC says, is significant and strong, both from strategic and financial investors.  

“By now, Hungary is out of that ‘quarantine’ it was put in a few years ago. Today, the main problem is that there is a limited selection of targets in the adequate size and quality,” Apáthy explains.

That narrow circle of companies which could be interesting for the foreign investors are currently executing serious investments, and they are not up for sale at the moment. On the other hand, those who want to sell their firms often put their asking price too high, he adds.

Edward Keller.

International Players

Only four publicly disclosed outbound transactions were noted in H1 2017.  

“An acquisition is always a complex issue in a company’s life, and targeting it abroad makes it even more difficult. At the moment, we see a small number of Hungarian companies that have the necessary human resources and willingness to acquire abroad,” Dezse says.  

And it’s not only about buying a company but also integrating and operating it successfully after the acquisition, she emphasizes. However, the number of companies, in addition to the larger, already regional market players such as MOL, OTP and Richter Gedeon, is increasing; Dezse mentions Hungary’s Duna House buying Poland’s Metro group, and Waberer’s acquisition of its Polish peer Link.

In order to acquire abroad, a company needs to have a regional or global mentality and strategy, so it is little wonder that cross-border transactions are carried out by large companies usually listed on the stock exchange, PwC’s Apáthy notes.

OTP bought several banks in the region in 2017, but Richter, Egis and Waberer’s have also been active on the M&A market, Apáthy says. He believes that the driving force for the cross-border deals will still be this circle of companies. However, according to him, Hungarian enterprises are getting stronger and therefore will surely have a presence on the international market, as the Hungarian market is simply too small.  

The Hungarian state’s activity increased on the Hungarian M&A market in H1 2017 compared with the previous year. Transactions included, amongst others, the 100% takeover of DÉMÁSZ by the First National Public Utility company (ENKSZ) from France’s EDF; MVM, the state-owned Hungarian energy group, has become a 50% owner of ENKSZ via a capital raise.

Also noteworthy is the fact that, while in 2016 the state tended to be on the seller side, in H1 2017 it acted mainly as a buyer. During H1 2017, none of the transaction deal values involving the state were made public.

However, some say that the largest deals had already been closed. “The direct role of the state on the transactions market seems to have slightly decreased,” Apáthy reckons. Deals in certain strategic sectors had already been carried out in the past few years, so at the moment, massive state acquisitions are not in the foreground.

However, the big question now is what will happen to those assets owned by the Hungarian state, for example, the recently acquired service providers in the energy sectors, Apáthy notes.  

Future Prospects

As for the future of the M&A market in Hungary, Keller of Dentons is optimistic. “There is an increasing number of high quality local young entrepreneurs aged between 30 and 45 who focus on building long-term value in a traditional Western European business sense, rather than short-term gains (arbitrage),” he tells the BBJ.

The focus of this newer generation of entrepreneurs in seeking out targets is not just cheap pricing, but innovation and value in the great tradition of Silicon Valley, he explains. Hungary has strong fundamentals, he says, and this, paired with the growing value- and innovation-based entrepreneurial spirit of a new generation coming of age, give him great hope for Hungary.

Another interesting trend in the Hungarian M&A market is that Hungarian investors are increasingly interested in investing their money in Hungary (and not taking the money out of the country). This can be a great source of liquidity in the local market – and one that Czech Republic, Poland and Slovakia have benefited from for years. This has been a large part of the success story in the Czech market in particular, and Keller feels cautiously optimistic that this trend will continue to develop with respect to Hungary.

Many of the topics discussed in the international media regarding Hungary create a lot of “macro noise”, which can sometimes unfairly lead to a discount in valuation with respect to Hungarian targets, according to Keller. He argues that this can create a special opportunity in Hungary for smart investors who can discern between topics actually impacting valuation negatively, and those which are merely distractions under the circumstances, making Hungary an interesting investment destination for smart discerning investors looking for value.

The Most Important Transactions by Sectors

(For real estate, see pages 18-21)
Food and Beverages
•    The Belgium-based La Lorraine Bakery Group acquired a 24% stake in the Hungary-based bakeries producer Első Magyar Pékpont-rendszer Kft. Financial terms of the deal have not been disclosed.
•    The owner of Cerbona Élelmiszeripari Kft. purchased Agrimill-Food in June.
Services
•    U.S.-based private equity firm Providence Equity Partners bought a majority stake in Hungarian festival company Sziget Kulturális Menedzser Iroda Kft in January.
•    German vehicle inspection company Dekra SE bought Veiki-VNL Kft., which delivers laboratory services and product testing in the high voltage electricity industry.
Telecom and Media
•    Invitel Zrt. was sold to China CEE Investment Cooperation Fund for approximately USD 215 mln in January.
Manufacturing
•    KÉSZ Kft. has bought Ukrainian ferroconcrete producer company 3 Betony TzOV.
•    Industrial tubing manufacturer, Dynamic Technologies Kft. has been sold to the Luxembourg-based International Auto OEM Supplier Luxco S.a.r.l.
Source: EY

• M&A
• Hungarian market
• EY
• PwC
• Deals of the Year