Poland topped the table in terms of the number of transactions, with 143 deals worth a total of €7.1bn announced in 2017. The €1.3bn acquisition of retailer Zabka Polska by Luxembourg-based private equity (PE) firm CVC Capital Partners from Mid Europa Partners topped the charts, followed by the €1.1bn takeover of electricity company EDF Polska by state-owned power company PGE Polska Grupa Energetyczna. These high-cap deals are a result of part-renationalisation of utilities across the region, as governments look to exert more control over pricing and international companies.
Yet it was Austria which attracted the highest deal value of the year following some big-ticket announcements: Vonovia acquired real estate rival BUWOG in a €5bn deal, while T-Mobile Austria purchased cable provider UPC Austria from Liberty Global for €1.9bn. As a result, deal value targeting Austrian firms closed the year at €12.1bn.
Business and financial services generated the highest value in 2017, accounting for 24% of total market share, with financial sector consolidation driving dealmaking. The consumer sector was one of the liveliest in terms of volume, accounting for 21% of total activity, though only one deal – the Zabka Polska acquisition – featured in the top ten transactions of the year.
The consumer and leisure sector has benefitted from rising incomes driven both by economic growth and the moves of several governments in the region to raise minimum wages and public sector salaries. Meanwhile, competition in the low-margin retail sector has led some players to look for the exit. The leisure industry has benefitted from both domestic demand and the growth of tourism in hotspots ranging from the Croatian coast to city break destinations such as Budapest.
A heatmap of activity by sector and geography over the past two years shows that the single biggest hotspot of dealmaking by value was the Austrian real estate and construction sector. This was largely a result of the previously mentioned €5bn Vonovia/BUWOG transaction. This was followed by the Czech consumer and leisure sector, with transactions totalling €7.5bn. However, this was almost entirely accounted for by the acquisition of Anheuser-Busch InBev's CEE beer business by Japan's Asahi Group Holdings, part of the realignment of portfolios following ABI's takeover of SABMiller, and Asahi's moves to diversify away from the shrinking Japanese beer market.
Poland's TMT sector has generated deals totalling €4.8bn over the past two years. The €2.9bn acquisition of online marketplace operator Allegro Group by a consortium of PE funds including Cinven and Mid Europa Partners, and the €695m takeover of cable operator Multimedia Polska by US-owned UPC Polska, were among the most significant.
Full steam ahead
CEE sectors by deal value and volume, 2017
A number of factors are expected to drive transactions over the coming year. First, the generally benign economic climate, with most countries in the region growing steadily, and some (for example, Romania) returning to growth rates not seen since the mid-2000s.
Second, a trend towards consolidation in several sectors, including retailing and banking. Many countries in the region are overbanked, and tightening regulations at the national and international level (Basel III in particular) will make the going tougher for less-healthy players. Third, start-ups, particularly in tech, are expected to continue to flourish as efforts to boost private-sector and early-stage financing are strengthened.
And finally, the region's location, low labour costs, and generally stable political outlook will continue to draw investors in manufacturing. Added to these are local factors, such as Romania's offshore hydrocarbons, the divestment of Ukrainian assets by Russian investors, and the sale of Greek banking subsidiaries in the Balkans.
Austria, the Czech Republic and Poland continue to lead the pack in terms of regional dealmaking. Emerging markets Romania and Bulgaria are increasing in attractiveness due to sharp GDP growth and a rise in the ease of doing business. Competition for assets poses the single greatest challenge for dealmakers.
While M&A activity in CEE slowed in 2017, the outlook for dealmaking is strengthening as economic growth continues and the financing climate improves. A total of 474 announced deals in the region with a total value of €25.5bn represents a 35% drop in value compared to the same period last year, with 55 fewer deals.
Overall M&A, 2012-2017
For some years, the technology sector has been one of the most dynamic areas of the regional economy, with both local entrepreneurs and multinationals capitalising on a talented labour pool that builds on a long tradition of excellent technical education.
Some start-ups have cited growth of up to 200% a year, while the big players have been moving to outsource operations up the value chain in recent years. The region's diaspora has also contributed both funding and knowledge transfer.
Therefore, it is little surprise that the technology, media and telecommunications (TMT) sector is seen as the most attractive by our respondents – cited by 62% as one of the top two industries to watch out for in 2018. Sub-sectors seen as particularly promising are e-commerce, fintech, and data and analytics, each cited by 31% of respondents as among the top two most-appealing areas for investment. Cloud technology was not far behind, acknowledged by 30% of respondents.
"Data will be the deciding factor in the technology space over the coming years," says the CFO of a Swedish corporate investor. "Also, the e-commerce space is in its initial phase for the CEE region and has huge growth prospects."
Poland has established a reputation as one of the leading fintech centres in Europe, leveraging its rapidly evolving and sophisticated banking sector as well as a large domestic market, and government and EU support. Deals in recent years include the acquisition of Kontomierz, which produces B2C and B2B financial information, by German consumer finance group Kreditech. Partnerships between banks and start-ups have helped catalyse growth. The dynamism of emerging companies in the CEE tech sector is one reason that investors are increasingly turning their attention to start-ups. Some 53% of respondents said that they were interested in acquiring or investing in a start-up in the region over the coming year.
Which sectors do you think will be the most attractive in the CEE region over the next 12 months? (Please select the top two)
Within the technology sector, which sub-sectors will be most appealing to acquirers of companies in the region in 2018? (Please select the top two)
Are you considering acquiring or investing in a start-up company in the region? (Defined as a business which was created within the previous three years)
Austria was rated as the most favourable market for investment in CEE, followed by the Czech Republic. Both countries have the advantage of positive growth rates, as well as lower regulations, which make expanding and engaging in business activities easier than other regional markets.

Poland ranked third; the second-largest market in the region by population, the country has enjoyed steady growth for many years, even avoiding recession in 2009 when most of the rest of Europe saw economic contraction. Years of judicious use of EU funding appear to be taking effect, with the country pulling in some high-profile deals in 2017. "We regard governmental support in investments as one of the most important factors to choose an investment location and Poland is one such region," says the CFO of a Belgian corporate. "Further reforms in the tax and legislative procedures are also expected in the years to come, so setting up a strong base now would be ideal for us."
Bulgaria and Romania ranked fourth and fifth, respectively. Bulgaria benefits from its 'light-touch' regulation and low tax regime, which has attracted investors from elsewhere in Europe. "Low minimum wages and low social insurance costs are benefits that we are considering as we are active in the manufacturing sector and need a strong employee base," says the CEO of a Czech corporation.
Meanwhile, Romania's relatively diversified economy is one of Europe's fastest-growing, racking up 8.8% GDP growth in the third quarter of 2017, despite political tensions and concerns about governance. Particularly promising sectors include technology and tourism, though investors continue to wait for a long-awaited wave of privatisations.
Please rate the countries in the CEE region according to the following factors. (Please rate 1 to 10, where 1=most favourable, 10= least favourable)
How has your previous M&A experience in your most recent country impacted upon your CEE strategy?
Countries from elsewhere in Europe are expected to continue to take the lead in inbound dealmaking in CEE in 2018, with 54% of respondents saying that the rest of Europe would undertake the majority of non-domestic M&A. North American investors are expected to generate a substantial share of deals with 30% anticipating that the region will be the biggest inbound contributor to activity. While attention continues to focus on Chinese investment in the region, particularly in terms of infrastructure and manufacturing, and although Japan's Asahi made a splash with multi-billion acquisitions in 2016, only 15% of respondents expect the Asia-Pacific region to bring the most deals.
The US is expected to account for the largest proportion of inbound deals over the coming year, cited by 29% of respondents, followed by Germany (22%) and the UK (17%). According to the CFO of a US-based corporate: "In the US, there is a lot of consolidation taking place restricting growth and profits. Companies will look to markets such as the CEE where they can expect higher returns."
From which region do you think the majority of inbound deals into the CEE region will come in 2018? (Please select the most important)
Please specify which country will be the most active inbound acquirer
However, this growing interest in the region has a downside – namely the increasing competition for assets. Our survey reveals that this is the biggest challenge to investment in the region, identified by 79% of respondents.
"The sudden increase in the cost of assets has pushed up the cost of investing," says the managing partner of a Polish PE firm. "With competition growing and costs rising, getting access to companies has become expensive, in turn affecting the efficiency of our business plans."
Challenging compliance management and administrative burdens continue to be obstacles for many investors, though competition for investment in the region between countries has pushed many, such as Serbia and Slovenia, to accelerate reform.
While the economic outlook in 2018 for individual CEE countries ranges from good to excellent, investors are aware of downside risks. Perhaps the biggest of these is looming uncertainty over the European economy, particularly from the UK's impending departure from the EU, and unresolved issues in the eurozone. Our survey reflects this trepidation, with 75% of respondents identifying this as a challenge to implementing their CEE strategy.

London's role as a base for financial investors has led to considerable PE activity in CEE from British-based firms, while some major corporates such as retailer Tesco have a presence in the region. But more significant is the potential shock of a 'hard' Brexit to the European economy, and prior to the exit itself, the uncertainty over what the outcome of negotiations may be.
What do you perceive as the biggest challenges to investing in your specific country of choice? (Please select all that apply and the most important)
What do you perceive as the biggest challenges to implementing your CEE strategy in general? (Please select all that apply and the most important)
With interest rates remaining low across Europe, and funds in some countries having completed major funding rounds recently, the outlook for fundraising in CEE is positive. Indeed, 56% of respondents expect the fundraising environment to improve 'somewhat' over the next year, while only 2% expect it to become slightly harder to raise funds.

"The overall dealmaking situation is going to improve, because raising capital is going to become easier," says the MD of an American PE fund. A relatively low inflation environment has also given central banks in CEE the space to keep interest rates low, and in some countries such as Hungary to even consider further cuts. In Poland, a number of PE funds completed financing rounds towards the second half of 2017, and are now keenly eyeing targets. The increased availability of funds from a range of sources also allows investors to pursue a mixed strategy for raising capital.
How do you think the 2% fundraising environment for dealmaking in the CEE region will change over the next 12 months?
What do you think will happen to distressed debt opportunities in the region in 2018?
Restructuring activity continues to drive M&A in the region as risk appetite among investors hunting yield is sharpening. On the supply side, several years of slower growth and the likelihood that interests will rise in the medium term will put a squeeze on struggling companies. Meanwhile, time is finally running out for 'zombie companies' that exist in a number of markets.
The sector seen as most likely to see restructuring activity is energy, mining and utilities, cited by 63% of respondents, after a period of lower commodity prices inflicted casualties on the industry. A tighter regulatory and taxation environment under both EU legislation and international treaties such as the Paris climate agreement is also having an impact on the costs of fossil fuel-driven utilities and related extractive industries. Large institutional investors are becoming wary of financing fossil fuel-based industries such as coal-fired power station development.
These trends are also affecting the industrials and chemicals sector, which was cited by 45% of respondents as likely to be among the top two for restructuring activities. "Industrials are facing growth challenges especially with stricter rules and regulations. With the signing of treaties such as the Paris agreement, countries need to turn to green alternatives. This increases overall costs and makes it difficult to achieve growth," says the CFO of a Czech corporate.
Ukraine is seen by some margin as the most target-rich market for restructuring opportunities, cited by 69% of respondents when asked to name the top two. Conflict and economic instability in Ukraine have caused serious difficulties for companies in a range of sectors, and not only those with exposure in the war-torn east of the country. However, the market's size, resources, and pool of skilled labour mean that many investors are willing to stomach downsize risks in order to make acquisitions.
"I think Ukraine will offer the most restructuring opportunities for companies, as the Ukrainian market was very badly affected by the Russian crisis," says a partner at a Polish PE firm. "This has forced the government to open the market to help companies affected. Major businesses were left in need of help to get the capital required to pay back shareholders and debt."
Poland, meanwhile, ranked second, cited by 37% of respondents. Changes to the regulation of renewable energy following a collapse in the price of 'green certificates' paid to producers may put operators in the sector under further pressure, leading to potential restructuring opportunities.
What do you perceive as the biggest challenges to investing in your specific country of choice? (Please select all that apply and the most important)
What do you perceive as the biggest challenges to implementing your CEE strategy in general? (Please select all that apply and the most important)
Investors generally see a stable or improving outlook for distressed debt opportunities in CEE, with 32% expecting an increase in targets, and 42% saying that the environment will stay much the same. The process of dealing with distressed assets and non-performing loans (NPLs) in the region in the years since the crisis has been a slow one. Some countries, such as Serbia and Hungary, do not have fully developed legal mechanisms for repackaging and selling NPLs, while in other jurisdictions sales of distressed assets have been held back by concerns that they will further depress asset values. Furthermore, several respondents state that recovering economic growth would ease the levels of distress and lower opportunities for distressed debt-driven acquisitions.
Despite a slower year for dealmaking in 2017, the outlook for M&A in CEE is brightening thanks to sustained growth, greater political stability, and an improving fundraising environment. Indeed, 85% of our survey respondents say they are more likely to invest in the same country again, given their recent experience. The region offers investors greater stability and security than many emerging markets elsewhere in the world, while often providing higher returns than highly developed markets in North America and Western Europe.
EU membership has brought the significant benefit of regulatory harmonisation as well as access to the world's largest single market for most of the countries in our survey. This has promoted the modernisation, expansion, and diversification of industries including automotive manufacturing and pharmaceuticals, both of which continue to develop despite rising competition. While Serbia and Albania face a long path to accession, their gradual integration with the Union is supporting judicial and economic reform that strengthens the investment environment. Energy reform and privatisation in Albania, and the sale of a major state-owned bank and pharmaceutical company in Serbia are both on the horizon for 2018.
Region-wide, TMT continues to go from strength to strength thanks to a tech sector built on high standards of education and generous EU financing. The energy, mining and utilities sector has gone through a tougher period due to regulation and rising costs, but is seeing activity driven by diversification and growing interest from financial investors in cash-generating businesses, as well as ownership changes as companies reassess their portfolios. Tightening regulation will create opportunities in the financial sector, driving consolidation in banking as smaller and less efficient players are affected by capital and liquidity requirements.
Inbound activity looks set to continue apace. Dealmakers are drawn to CEE from around the world, with the US and Germany expected to continue to take the lead in 2018. Chinese investment will continue to flow into the region. This is largely due to its '16+1' approach – an initiative by the Chinese government to intensify co-operation with 11 EU members and five Balkan countries – which will lead to greater investment, particularly in the infrastructure and manufacturing sectors.
One downside of the resurgence of CEE economies is the growing competition for targets within relatively small and often fragmented markets. This has pushed up valuations and stalled some transactions, including privatisations.
There are also looming downside risks from uncertainty surrounding the UK's impending exit from the EU. Meanwhile, the Eurozone's challenges from Greece and Italy have not been entirely resolved. Domestic politics also play a role, though in many cases investors have now come to an accommodation with populist governments increasing state interventions in certain industries.
Tightening environmental regulations on heavy industry and energy will raise costs, though they may also catalyse investments in renewable energy after a period in which the sector has stalled in several countries thanks to regulatory uncertainty.
In H2 2017, Mergermarket surveyed 150 senior-level executives about their experiences and outlook on M&A in the Central Eastern European region. Half of the respondents were based in the CEE region, while the other half was drawn from outside of the region. One third of the respondents are part of private equity firms, while the remainder is comprised of corporate respondents.

All participants in the survey have made at least one acquisition in the CEE region over the past 12 months or were considering making one in the next two years.
The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analysed and collated by Mergermarket and all responses are anonymised and presented in aggregate.