Furthermore, after a busy few years for dealmaking in CEE, the market may be reaching a natural peak, with fewer targets on the market and investors focusing on developing their existing businesses. Privatisation processes have also slowed in those countries which still have significant assets under state ownership.
While overall dealmaking slowed, there were a number of high-profile transactions – particularly in the TMT sector. The biggest deal of the year in the region was the acquisition of Norwegian telco Telenor’s Hungarian subsidiary by PPF – a Czech-owned, Netherlands-based investment group – for €2.8bn, as part of PPF’s acquisition of Telenor’s CEE assets. PPF has been increasingly active on the regional market in recent years, and its takeover of Telenor is indicative of growing cross-border activity by CEE business groups. Meanwhile, in June, Advent Partners purchased General Electric’s industrial gas engine business for US$3.25 billion – this deal included the Jenbacher brand, which is based in Austria.

The third-biggest deal saw Czech pharmaceutical company Zentiva acquired by US-based PE fund Advent International for €1.9bn. Zentiva is an example of the sort of big-ticket target that global PE funds are looking for in CEE. Another major buyout between international PE firms saw BC Partners take a majority stake in Serbia’s largest cable company United Group, from US firm KKR. However, with relatively few such sizeable assets, the PE segment has seen more activity from regionally focused funds in recent years, while EU-funded venture capital has played a central role in supporting start-ups.
CEE sectors by deal value and volume, 2018
The leading hotspot for M&A activity over the past two years was Austria’s real estate and construction sector, which saw deals worth a total of €6.2bn in 2017-18. This included US investment firm Starwood Capital’s 20% stake in CA Immobilien Anlagen for €758m.

The Austrian business and financial services industry ranks second, with transactions totalling €4.7bn, followed by business and financial services in Poland (€3.8bn), and TMT in Hungary (€3.1bn).

Austria’s position as the wealthiest (and second-largest) economy in CEE, and home to regional financial institutions, accounts for its ongoing strengths as a dealmaking locus. Poland is the largest economy in the region, with a consumer base of 38 million people, and the consumer sector has also been shaped by changing government policy over the past few years.
The TMT sector accounted for 18% of deal activity by value, boosted by the Telenor deal in particular, but also reflecting the continuing strength of the region’s tech businesses and consolidation in the media segment. Industrials and chemicals and pharma, medical and biotech accounted for 29% and 10% of value, respectively.

In terms of volume, industrials and chemicals accounted for 21% of activity, followed by business and financial services (19%) and consumer and leisure (18%). The region’s manufacturing industries continue to benefit from cost advantages, access to the 500m-strong EU market, and the support of governments that are keen to boost employment and export earnings.

The financial services sector has seen a wave of consolidation driven by factors including government policy and the withdrawal of some foreign banking groups – notably from Greece and Russia – from regional markets. The largest banking deal of the year saw French giant BNP Paribas buy Poland’s Raiffeisen Bank for €775m.
M&A by sector and target country 2017–2018 (€ million)
M&A may be down across the region but executives are upbeat about the prospects for 2019 and beyond. Austria, Poland and the Czech Republic lead the way in terms of deals done, while TMT has taken the lion's share of deal value. The key challenges to deals were different working cultures and the availability of financing.
Merger and acquisition activity in CEE fell in 2018, with overall values down 18% to 21.3bn and volumes falling 13% to 445 deals. This was despite good levels of economic growth across the region. The consensus is that most countries have put the global recession behind them – and more recent domestic shocks in some economies. However, there are headwinds from the global economy, with uncertainty over trade disputes between the US and China, the UK’s departure from the EU, and the political and economic direction of major European countries, including Italy.
Overall M&A, 2012-2017
Several years of respectable growth across most of CEE, combined with general political stability and a general benign financing environment, have strengthened investors’ perceptions of the region. Nearly all our survey respondents – 99% – say that their experience of investing in CEE would encourage them to invest again.

“CEE is a unique market which can provide high growth similar to emerging markets. At the same time, it is an advanced and sophisticated market with spending potential similar to Western European levels,” says the CFO of an Austrian TMT company. “We have seen how the CEE markets have evolved and been shielded somewhat from the economic crises that hit Europe, and now as the stability is returning, we see significant potential for us to grow in new markets.”

Meanwhile, more than half all respondents – 56% – expect the CEE region to see the highest growth of M&A activity across Europe as a whole in the next two years. Some 33% expect Eastern Europe to grow most strongly (the same proportion as expect the highest growth to be in Western Europe), and 23% expect Central Europe to perform best.
When asked about specific M&A process challenges in CEE, preparing transitional service agreements was reported as the biggest single challenge facing investors in CEE, cited by 65% of respondents, followed by agreeing on warranties and indemnities (64%), compliance challenges (63%) and regulatory/legal obstacles (63%). “Markets in CEE are regulated and there is significant control by the government. The markets are not as free compared to Western Europe,” says a partner in a UK-based TMT company. “The existing regulations restrict foreign companies and we have to get numerous approvals and follow procedures which are often not necessary.”

Navigating the varying jurisdictions in the region and complex M&A negotiation requires expert advice and consultancy services: when foreign businesses have the necessary support, they often find the environment less challenging than they expected. Most countries are either inside the EU or are working on reforms and harmonisation with EU legislation with a view to future membership, with benefits for consistency and transparency. "You just need to come into our markets with your eyes open," observes Akos Eros, partner at Wolf Theiss Hungary, "and as long as you do, you should find the environment quite manageable indeed."

When asked to choose the single most significant challenge to deal completion in CEE, the leading factor was different working cultures. Again, the differences should not be over-exaggerated – many Western investors find CEE a straightforward place to do business. However, the various differences from country to country within the region can throw up challenges.
Despite the fact that all the economies in the region grew in 2017-18, 62% of respondents say that the level of economic growth and GDP per capita negatively affected their most recent deal in CEE, though only 29% say it was a significantly negative impact. Headwinds from the global economy, including rising oil prices, uncertainty over US-China trade and concerns over the eurozone and Brexit, may all have been factors cooling regional growth. Furthermore, in some parts of the region, incomes remain low: the average wage in several Balkan countries, for example, is little over €400 a month.

The political environment had a negative impact for 59% of respondents, with 30% saying it had a significantly negative impact. Often, these challenges are more associated with perception than day-to-day political challenges. Several countries had elections in 2018, including Hungary, the Czech Republic, Bosnia, Slovenia and Poland (at local level), and there are European Parliament elections looming in 2019. The continuity of economic policy-making is fairly consistent in the region even when governments change. But populist trends across Europe are certainly having an impact on the perception of CEE, and in some cases on legislation that affects investors, from nationalisation to the rule of law.

“Questions are being raised as to how much politics can interfere in larger investments that come from abroad and to what extent those investments can rely on safety and not being bothered by political noise,” says Erik Steger, partner at Wolf Theiss Austria and Slovakia. “It’s partly because of mounting nationalism across Europe.” While acknowledging the distraction of the political environment, Dariusz Harbaty, counsel at Wolf Theiss Poland, adds: "The fact remains that business and growth have not been negatively affected in any demonstrable way. The forward momentum continues unabated."
Investors in Hungary were the most likely to say that they would invest in the same country again (91% of respondents), followed by Austria (78%) and the Czech Republic (70%). While Hungary has clashed with EU institutions over policies seen by critics as economically nationalist, it has benefitted from political stability, its location at the heart of Europe and relatively low costs. "The investment community has now had a number of years of experience with the new reality in Hungary and the entire CEE," says Janos Toth, partner at Wolf Theiss Hungary, "and on the whole has become comfortable with Hungary as a preferred place to do business."

Austria and the Czech Republic also benefit from their location, stability, relative affluence and excellent infrastructure. Across the region, costs tend to be lower than in Western Europe, while many countries still enjoy the political and economic benefits of EU membership.

“I still feel investing in the Czech Republic is much easier compared to many other markets, including Western European markets, and considering the investment opportunities we have and the returns we could generate, we will certainly be investing more in this country,” says the managing director of a US TMT company.
How did the following factors impact your most recent deal in the CEE/SEE region?
Which region of Europe do you believe will see the most growth in M&A activity in the next two years?
How has your overall M&A experience in the region impacted your CEE/SEE strategy?
How has your M&A experience in the country of your most recent deal in the CEE/SEE region impacted upon your CEE/SEE strategy?
What were the challenges in completing your most recent M&A deal in the CEE/SEE region?
Antitrust compliance was the most commonly raised regulatory challenge by respondents (75%), followed by intellectual property law (62%) and tax compliance (61%). The EU has taken a tougher stance on competition law over the past few years, with huge fines handed to several global companies. However, in some cases this has actually led to an uptick in dealmaking activity as companies have been forced to divest assets in the process of acquisitions in order to meet competition requirements.

“There’s a growing number of cases with an obligation to divest in order to get deals cleared by the competition authorities and everybody expects additional consolidation, for example in the telecoms, financial and energy sectors,” says Horst Ebhardt, partner at Wolf Theiss Austria and head of the firm’s corporate/M&A team. “Similar to the Siemens/Alstom situation, it's quite possible that those deals get approved by the EU commission, but that they will request companies to sell other divisions to third parties.”

While the legal environment in CEE is more reliable than in many parts of the world, 74% of respondents say that it was somewhat or very difficult to enforce contract claims in the country of their most recent CEE deal. This rises to 82% for those investing in Hungary, with Romania seen as having the least-unfavourable environment for contract enforcement – though even there, 54% of respondents say that the issue was a challenge. Legal processes in the region can be slow, particularly in South-Eastern Europe, with courts facing backlogs of cases and limited administrative capacity.

“One possible way to mitigate this risk is to agree on arbitration wherever possible,” says Miroslav Stojanovic, partner at Wolf Theiss Serbia. “So in many M&A transactions, you can agree on domestic or foreign arbitration, which works well.”

Respondents looking to do deals in the most affluent economy in the region, Austria, cited a competitive bidding environment as the main challenge – cited by 92% of those surveyed, and seen as the single biggest hurdle by 41%. Some 57% say that a lack of suitable targets was likely to be a challenge. The issues are not unrelated, with a range of investors from corporates to funds eyeing acquisitions in CEE, where there are few companies of global scale. In Poland, the region’s largest economy, the competitive bidding environment was raised by 75% of respondents, but the same proportion say that challenging compliance management was also a significant issue.
At the time of writing, the outcome of the UK’s process of leaving the UK was still uncertain, with a “hard Brexit” and even a reversal of the decision both possibilities. Meanwhile, less pressing but serious concerns about the future of the eurozone continue – including the position of Italy and the outlook for fiscal integration. A striking 84% of respondents cited the uncertainty surrounding Brexit and the eurozone as one of the biggest challenges in implementing their CEE strategy. Other major challenges faced by investors include a buyer/seller valuation gap (cited by 77% of respondents) and the difficult economic environment (75%).
“More than anywhere else business in CEE depends significantly on the eurozone and the uncertainty has a direct impact on the business environment here,” says a partner at a Polish PE fund, warning that investors were already holding back from allocating capital given the situation. “We’ve already witnessed decreasing M&A activity because of Brexit.”
A new eurozone crisis would have a big impact on CEE, where several countries are members of the single currency (Austria, Slovenia, Slovakia), others have their currency pegged to the euro (Bosnia, Bulgaria) and almost all have the eurozone as the major trading and investment partner.

Economic ties with the UK are less extensive, but a significant European shock from a hard Brexit would have an impact. An October 2018 report by regional bank Erste states that a hard Brexit would have more impact through acting as a drag on eurozone growth and could trim 1% from the Czech Republic’s output, a little less for Hungary and around 0.5% for Poland.

On the other hand, some CEE countries are already looking to benefit from the UK leaving the EU single market by attracting businesses, including financial services and manufacturing, to relocate.

“We see quite a few companies with production operations in the UK looking into Bulgaria and considering opening operations here as part of the EU,” says Radoslav Mikov, partner at Wolf Theiss Bulgaria. “Otherwise, we don't expect much of a shock from Brexit on Bulgaria itself.” Generally, Brexit is not seen as a direct risk to most of the region: “I haven't seen a lot of concern in Albania regarding Brexit,” says Sokol Nako, partner at Wolf Theiss Albania. “People are more concerned about Italy.”
In your experience, how difficult is it to enforce contract claims in the country of your most recent deal in the CEE/SEE region?
What do you expect will be the biggest challenges to investing in your country of choice for your next deal in the CEE/SEE region (Austria and Poland)
What do you perceive to be the biggest challenges to implementing your CEE/SEE strategy in general in the country of your last completed deal?
How did the following factors impact your most recent deal in the CEE/SEE region?
The overwhelmingly positive experience of investors in CEE is striking. Businesses in the region capitalise on location, political stability, relatively low costs, a skilled workforce and access to large markets.

EU membership has proved a boon for the region, and the accession process is bringing benefits to the Western Balkan nonmembers through economic and judicial reform. Nonetheless, there are potential headwinds from global trade disagreements, a volatile eurozone and Brexit that could cool dealmaking activity, with some countries already seeing a slowdown.

The TMT industry continues to attract the most attention, thanks to the strengths of CEE’s lively tech sector, from BPO to software developer start-ups, as well as acquisitions of major telcos. Consolidation in the media sector, and the growth of leading regional players, is another factor supporting dealmaking in the sector.

Other strong sectors include consumer and leisure; industrials and chemicals; and pharma, medical, and biotech. The consumer sector has been buoyed by income growth and recovering domestic consumption, while export-oriented businesses leverage access to markets in the EU and beyond, a legacy of higher-value manufacturing and low costs.

Steady GDP growth has brought a more benign financing environment, though some banks remain cautious after the experience of the global economic crisis. However, shallow regional capital markets present a challenge both to financing and to exits for PE players.

The PE market as a whole is seeing a levelling-off of activity, as a natural part of a cycle, and as targets have become less abundant and valuations have grown. However, a drop-off in valuations and a wave of exits after 2020 may restore momentum. Smaller regionally focused funds are increasingly dynamic.

Challenges come from bureaucratic hurdles and slow judicial processes; in some cases, judiciaries are not independent of political control. Investors say that enforcement of contracts is an issue across the region. However, planning and structuring deals judiciously, with expert advice and robust due diligence, can help reduce risk for businesses. There are also challenges from the political situation, with populist governments in some countries pushing policies that put pressure on businesses and strain fiscal sustainability. However, these issues can be exaggerated: all governments in the region are keen to attract investment, and the positive overall experience of established investors indicates that political risk is not as serious a threat as headlines may suggest.

Opportunities for distressed asset sales are expected to rise in 2019. While some countries have largely unwound NPL portfolios built up over the past decade, others are in the process of accelerating divestments, with real estate a particularly attractive sector.
Private equity (PE) activity as a whole dropped in 2018, with 47 buyouts down from 65 in 2017. However, overall value edged up to €6.03bn, with deals including Advent International Corporation’s €1.9bn buyout of Czech pharma company Zentiva and its takeover of Jenbacher as part its deal with GE; and BC Partners' purchase of Serbia’s United Group, all adding a considerable boost.

Although buyout firms are still active and competitive bidders in most sales, a slowdown in activity reflects a cooling in the PE cycle after a period of lively dealmaking. Several major PE players are focusing on their existing portfolios in the region, while targets have thinned out somewhat. Nonetheless, there has been healthy growth among smaller regionally focused players and, in some cases, new entrants who see opportunities in the CEE PE space.

“There are small domestic funds, especially focusing on Austrian SMEs,” says Mikosch. “But what we see now is an influx of German private equity houses which smartly see Austria as uncharted territory for private equity companies still.”

Just over half of PE fund respondents included in the survey expect to hold on to their latest investment for four to five years, with just over a third planning to hold it for six to seven years, and the remainder less than three years.

Given the number of PE acquisitions in the region over the past few years, this points to a potential wave of exits in the first half of the next decade. The question is what form these future transactions will take: some 36% of respondents say that limited exit opportunities were the biggest obstacle to PE in the region. Most regional stock exchanges are rather illiquid, limiting IPO potential, and indeed underdeveloped capital markets are seen as the single biggest challenge by PE players, cited by 46% of respondents. Red tape and administrative challenges were cited by 34%, reflecting the top-heavy bureaucracies that still operate in many of the region’s countries.
As in 2018, the TMT industry is expected to be the most attractive sector for dealmaking over the coming 12 months, cited by more than two-thirds of respondents as one of the top two areas for activity. It was followed by consumer and leisure (52%), and pharmaceuticals, medical and biotech (34%).

TMT has been a leading sector in CEE for many years. While business process outsourcing (BPO) and other forms of outsourcing remain strong, the region has developed a healthy ecosystem for innovative start-ups, with cities like Warsaw, Prague, and Cluj in Romania becoming hubs for companies developing apps, fintech products and other software.

The past few years have also seen the development of blockchain in CEE, with the Czech Republic in particular taking the lead. Momentum has also been sustained by large telcos changing hands, sometimes as part of regional deals, and buyouts of media companies by local businesses, sometimes with a political element.

Growing consumer spending has been a key factor driving growth in CEE in recent years, with countries including Romania and Hungary seeing rapid income growth. In some areas, modern retail is still relatively underdeveloped, with scope for the expansion of supermarkets, hypermarkets and malls.

With this in mind, it is not surprising that respondents looking to do another deal in CEE are most likely to be considering TMT (cited by 33%), followed by industrials and chemicals (31%), and consumer and leisure (25%).
Manufacturing in CEE leverages relatively low costs, an experienced industrial workforce and access to the huge EU market. Nonetheless, nearly half of all respondents find assets in the industrials and chemicals sector overvalued.

Some 64% of respondents say that targets in agriculture were overvalued, more than any other sector, followed by transportation (62%). The valuation gap is regularly cited as a challenge for investors in the region, and can be particularly acute for PE players looking to buy family companies.

“Valuations are high right now for companies,” says Christian Mikosch, partner at Wolf Theiss Austria. “It's just a reflection of sellers' high expectations of the potential and certainly has some justification, but it also makes business hard sometimes.”
CEE private equity buyouts, 2012-2018
PE firms: How long do you plan to hold your investment in this asset (from purchase to exit)?
PE firms: How long do you plan to hold your investment in this asset (from purchase to exit)?
Which sectors do you think will be the most attractive in the CEE/SEE region over the next 12 months? (Select the top two)
Which sectors do you think will be the most attractive in the CEE/SEE region over the next 12 months? (Select the top two)
On average, how would you describe the current valuations on targets in the CEE/SEE region in the following sectors?
One challenge is persuading financiers that capital will be appropriately allocated. Overvaluation of targets and the resulting buyer-seller pricing gap is a challenge region-wide, but is seen as particularly acute in Ukraine, where 80% of respondents say that assets were overpriced. This may be partly due to different perceptions of risk in the country, which has been affected by conflict and political turbulence but, outside of a small number of hotspots, remains largely peaceful. It also reflects the nature of targets: there has been a wave of recent sales by Russian institutions and individuals reluctant to make large losses on their initial investments. "We are clearly in a period where valuation issues are at play," says Taras Dumych, partner at Wolf Theiss Ukraine, "but already with some of the deals that occurred in 2018 we sense the solid foundation of a longer-term trend towards reaching a balance that will unlock many true opportunities. It won't be easy, for reasons that include upcoming 2019 presidential and parliamentary elections, but with effort and reasoned diligence, real potential is here."

Albania and Serbia also have a challenging valuation environment, with 61% and 58% of respondents, respectively, saying that targets across all sectors are overvalued. Conversely, only 33% of investors say that targets in Austria were overvalued, with 41% saying that they were undervalued – indicating opportunities for players looking for bargains.

“Quite a few deals in the region do not happen because the valuations are very high and it's very hard to sell companies at such high prices,” says Horst Ebhardt, partner at Wolf Theiss Austria and head of the firm’s corporate/M&A team. “The expected moderate downturn might actually mean more deals.”
Economic growth has been fairly steady in CEE in recent years, and this relatively benign climate should continue into 2019, though downside risks do exist. As a result, the fundraising environment in 2018 remained on a par with the previous year, according to 70% of our respondents, though a significant 21% say that it became harder. Nearly two-fifths expect the environment to remain much the same in 2019, though a similar proportion expect an improvement.
Across most of the region, banks have largely unwound from their positions around the turn of the decade, when non-performing loans (NPLs) rose as a period of over-ambitious lending was followed by the global crisis. The European Central Bank’s benchmark interest rate has remained at 0% since early 2016. Several major regional central banks, including those in Poland and Hungary, have maintained historically low rates through 2017-18, though others – including Romania’s and the Czech Republic’s – have moved to raise borrowing costs. While the environment is favourable, banks in many jurisdictions remain cautious, given the experiences of the late 2000s. While most regional stock exchanges remain relatively illiquid, corporates have taken to debt markets to raise capital in recent years. There is also a healthy flow of private financing, supporting local VC and PE.
“At the moment, fundraising is really booming and that's similar for most Eastern European funds,” says Anna Rizova, partner at Wolf Theiss Bulgaria. “I think there's a lot of capital available, and private equity is certainly raising it at the moment.”
Cash reserves and debt markets are seen as the leading means of financing upcoming deals. More than three quarters of respondents (77%) say that cash would be one of the two most important sources, while the proportions citing debt markets was 69%. Many bigger corporates in the region have built up cash reserves over recent years, buoyed by economic growth.

Outside the eurozone, and in smaller markets, investors still often turn to foreign banks for financing, due to lower costs and greater capacity.

“Traditional financing comes from bank loans, and we don't see this changing any time soon,” says Naida Custovic, partner at Wolf Theiss Bosnia. “However, we do see that M&A financing is usually secured through foreign banks, usually in Western Europe, as the cost of capital is lower than in Bosnia.”
On the whole, how would you describe the current valuations on targets across all sectors in the following CEE/SEE countries?
In your last CEE/SEE M&A deal, was the seller in the transaction selling distressed assets?
What do you think will happen to distressed debt opportunities in the CEE/SEE region in 2019?
How did you perceive the fundraising environment to be for dealmaking in 2018 within the CEE/SEE region compared to the previous year?
How do you think the fundraising environment for dealmaking in the CEE/SEE region will change over the next 12 months?
How are you planning to finance your next acquisition in the CEE/SEE region?
While NPL ratios have fallen across most of the region in the past few years, distress sales remain an important driver of M&A in the region, with 44% of respondents saying that their last transaction involved a seller selling distressed assets.

Some 70% of respondents think that the number of distressed debt opportunities in the CEE region will increase in 2019, with 15% of respondents expecting a significant increase. Opportunities will come from a range of processes across the region: the accelerating sale of Albanian banks’ NPL portfolios; the restructuring of Bulgarian distressed real estate investments; and the divestment of assets by Heta Asset Resolution, the “bad bank” created for the non-performing part of Austrian bank Hypo Alpe Adria’s portfolio in countries including Bosnia.

Poland is seen as the market with the most opportunities for restructuring over the next 12 months, with 47% of respondents citing it as one of the top two economies in the region, followed by Austria (37%) and the Czech Republic (28%).

The industrials and chemicals sector is expected to be a locus for restructuring – cited by nearly two-thirds of respondents – followed by energy, mining and utilities (47%) and real estate and construction (29%).

“We feel that real estate is the sector where there is potential for restructuring,” says Katarina Kraeva, partner at Wolf Theiss Bulgaria. “For the first time in many years, we have seen big private equity investing in real estate NPLs, and we expect this to continue at least for the next year.” Tomasz Stasiak, partner at Wolf Theiss Poland, holds the same view: "These are heady times for real estate in Poland at the moment and for the near-term, but we all must be ready for the next phase and we certainly are."
In which country do you expect to find the most opportunities for restructuring over the next 12 months? (Select the top two)
In which sectors do you expect to find the most opportunities for restructuring over the next 12 months? (Select the top two)