M&A activity in emerging Europe dampened in 2020, but was far from snuffed out, while an increased interest in exits via stock exchanges points to a better 2021.
Mergers and acquisitions (M&A) activity in emerging Europe took a hit in 2020 as a result of the Covid-19 pandemic, with the volume of deals reaching its lowest levels in the past 10 years. However, while cross-border deals fell, the number of domestic deals jumped, as local investors increased their interest in the region’s markets.
There were 1,705 deals in the region (including Russia and Turkey), with a combined value of 60.80 billion euros: down by 12.9 per cent and 16 per cent respectively from 2019. However, in spite of the ongoing Covid-19 restrictions, the market showed signs of recovery towards the end of the year, producing the highest fourth-quarter deal value (24.28 billion euros) since 2016, according to a new report from law firm CMS, published in cooperation with EMIS, a data research group.
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“Overall, the region responded quickly and firmly, and the economic effects were not as severe as they might have been,” says Horea Popescu, CEE corporate practice, CMS. “Many deals did not happen, but since the autumn we have seen a pipeline of activity that is a good sign for 2021.”
Echoing similar sentiment, Stefan Stoyanov, head of M&A database at EMIS, says: “Despite Covid-19’s devastating impact on 2020, the emerging Europe region proved to be very resilient and outperformed other places similarly affected by the pandemic. There were key strategic deals featuring foreign investors in many of the region’s countries we reviewed, and private equity activity remained robust.”
Capital markets bounce back, PE holds steady
In what mirrored a global trend, there was a revival of investor confidence in the capital markets with 26 companies from the emerging Europe region listing for the first time, reaching a total value of 4.79 billion euros. This was almost double the 14 IPOs in 2019 and represents the highest number of IPOs since 2015.
The second largest IPO anywhere in Europe was in Poland, where e-commerce platform Allegro floated on the Warsaw Stock Exchange. Not only was the IPO the most successful in the bourse’s history, the firm immediately became Poland’s biggest listed company.
Private equity deal flow seemed to have withstood the difficult market conditions of 2020, and while cautious at times, held steady with 319 transactions (318 in 2019) and a decrease in value by 11.1 per cent from 2019. The financial services sector saw the biggest jump in the number of private equity deals, up from 15 in 2019 to 33 in 2020. Since CMS first published the report, private equity funds have consistently grown their share of M&A in the region: in 2011, it accounted for six per cent of the total volume of deals, rising to nearly one-fifth (18.7 per cent) in 2020.
Graham Conlon, head of private equity for CEE/CIS at CMS, says: “We haven’t seen any change in the appetite of private equity funds and anecdotally they were busier than ever in the second half of 2020. They have a life cycle and are committed to spending a certain amount from their funds over a period of time.”
Foreign investors cautious, regional investors defy the odds
Foreign investors were more cautious as reflected by cross-border M&A deal numbers decreasing by 34.3 per cent to 764 and values falling by 31.5 per cent to 35 billion euros. The US remained the largest foreign investor by volume, despite a 23 per cent drop to 94 deals, while UK investors were the second most active with 72 deals, followed by Germany with 61.
The opposite was true of domestic deal activity within countries in emerging Europe. Domestic deal numbers jumped 18.4 per cent to 941 and 21.2 per cent by value to 25.8 billion euros.
Companies from Russia, Poland, Turkey and Czechia were the busiest dealmakers from within the region both in their own markets and abroad.
Leading sectors
Telecoms and IT was the most active sector by volume with 333 deals (up from 300 in 2019) and second by value at 12.97 billion euros, driven by the rapid acceleration of digitisation and adoption of digital communications caused by the Covid-19 pandemic. The sector accounted for six of the 20 largest deals in region, including the third largest of all, the 3.7 billion euros purchase of Poland’s Play Communications by France’s Iliad.
Mining (including oil and gas) was the top sector by value at 14.1 billion euros despite falling deal volumes. While real estate and construction dropped to second place by deal volume and third by deal value, the logistics and warehousing sub-sector saw a 38.5 per cent increase in deals (from 39 to 54) in 2020, a trend demonstrating the need to support the growth in e-commerce.
The financial sector enjoyed 12 additional deals and a 39 per cent rise in values, lifted by some of the region’s largest transactions including the purchase of the regional businesses of AXA by Uniqa Insurance of Austria and those of Aegon by Vienna Insurance Group.
The CMS report highlights that while the impact of the economic slowdown was relatively evenly spread across the region, a number of countries bucked the trend. Poland was the only country where both deal volume and value rose in 2020 – 9.3 per cent to 282 deals and 6.6 per cent to 11.7 billion euros, respectively. The country saw two landmark deals: the 3.7 billion euros purchase of Poland’s mobile operator Play Communications by France’s Iliad which was the largest telecoms and IT deal, alongside Allegro’s IPO.
Outlook for 2021
“Towards the end of 2020, we saw people rushing to sign deals that they had been unable to complete earlier in the year. We saw this trend pick up in the autumn and there is a decent pipeline of activity in most countries which is a good sign for 2021,” says Horea Popescu.
Radivoje Petrikić meanwhile, CEE corporate practice, CMS, says: “The last quarter of 2020 has shown the first signs of recovery of M&A deals in the SEE region. I expect this trend to continue in 2021, most notably in the advance of M&A deals in new technology and telecoms, followed by investments into real estate and construction projects, healthcare industry, renewable and clean energy, and sustainable projects.
“Market leaders will look to strengthen their position, while M&A targets will come from among distressed businesses, turnaround opportunities, private investors exiting the market or selling temporarily held assets, and companies reassessing strategies to part with non-core assets. Privatisation trends will accelerate in transition economies as they are moving along the EU accession path. Financial markets will face greater concentration, particularly in the banking sector, due to capital market fluctuations and an increase in non-performing loans and bad debts.”
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