CONFERENCE CALL: Private equity firms eye new opportunities in ex-Yugoslavia

CONFERENCE CALL: Private equity firms eye new opportunities in ex-Yugoslavia
By Ivana Jovanovic in Belgrade October 7, 2016

A series of successful large-scale investments in the consumer sector have raised interest in Southeast Europe among international private equity firms. However, potentially attractive privatisation deals within the region have so far proved elusive. 

The former Yugoslav countries are now full of investment opportunities attractive for foreign capital, participants of the ninth “Southeast Europe Private Equity and Mergers & Acquisitions Forum” in Belgrade concluded on October 6. After decades of communist rule followed by the wars of the 1990s, the region is now much more open to foreign investment, delegates commented. 

It has already seen several major private equity success stories including Croatian food and beverage group Atlantic Grupa, and alternative telecommunications provider United Group (formerly SBB Telemach), which has had two private equity owners – first regional player Mid Europa Partners, then US fund Kohlberg Kravis Roberts (KKR). 

Both deals were in the consumer sector and, according to Rob Irving, co-chair of the global private equity group at law firm Dentons, the region is attractive for funds because of its “Mediterranean mentality” and its people’s “enjoyment of the little things in life”. 

“People here enjoy their cigarettes, food, coffee – not just a coffee but a good coffee. Look at all those coffee shops in Belgrade that are full all the time. Even when people do not have money, they’ll find it to go for a good coffee,” Irving told bne IntelliNews on the sidelines of the conference.

“If someone is in an investment business and can touch the consumer here, this is a very positive area,” he explained. “Maybe regional consumers are not the wealthiest, but they will spend their money for sure, definitely will not leave it sitting in their pockets.” 

This contributed to the success of Atlantic Grupa, in which the European Bank for Reconstruction and Development (EBRD) took an equity stake in July 2010. “Atlantic Grupa has expanded its original distribution business in the region to a food and beverage production business with the 2010 landmark acquisition of Slovenian Droga Kolinska and Western European distribution as well, diversifying its risk away from SEE and at the same time becoming a more attractive platform for its distribution clients,” Irving said.

A similar buy-and-build strategy was employed with SBB Telemach/United Group, which was acquired by KKR for €1bn in March 2014. The EBRD co-invested €50mn alongside KKR in the transaction. The company was previously owned by regional investor Mid Europa Partners, which acquired a controlling stake in SBB in 2007, merging it with regional triple-play company Telemach five years later. 

Success stories like these are acting as a pull for new investors. Those who have already invested and had success “certainly have been treating this part of the region as their backyard and they are only increasing their investments in this part of the world,” Irving told bne IntelliNews. “Other people follow because of them. When they hear them get up on the stage and speak about success of their investment, that makes others who are in the room looking at this region more optimistic and willing to spend more time looking for opportunities in the region.” 

This has resulted in the arrival of a number of major US investment funds in the last two years, forum participants agreed. 

In addition to the SBB deal, US equity fund Apollo Global Management and the EBRD acquired one of Slovenia’s largest lenders, Nova Kreditna Banka Maribor (Nova KBM), in June 2015. In December, Apollo expanded its presence in the Slovenian banking sector as Raiffeisen Bank International (RBI) sold its Slovenian operations to Biser Bidco, which is managed by an affiliate of Apollo.

“Slovenia aims to attract US investments and has a system for that, and its delegation goes [to the US] several times a year. It is long term play. Particularly, they try to attract some in the IT sector,” Irving said.

Meanwhile, US funds have shown an interest in new investments in Serbia. In late 2015, US investment fund Colbeck Capital Management, and Apollo in partnership with Telekom Slovenije were among the firms interested in purchasing Telekom Srbija, the country’s state-owned telecoms giant. However, in December Serbian officials decided not to sell the stake because the best price offered – by an unnamed US investment fund – was deemed unsatisfactory.

Meanwhile, Daily Blic reported on May 10, quoting an unnamed government source, that KKR is interested in buying the non-performing loans (NPLs) of Serbia's state-owned copper smelting and mining complex RTB Bor, gas monopoly Srbijagas and national power utility Elektroprivreda Srbije (EPS), guaranteed by the government and worth approximately €1bn. The news broke the day after Serbian Prime Minister Aleksandar Vucic met a KKR delegation headed by partner David Petraeus to discuss ways to resolve the issue of NPLs in Serbia.

“US funds have been much more active in the last year or two. The interest is diminishing and they are trying to expand the market,” head of transactions within Prague-based debt recovery firm APS Holding SE, Jozef Martinak, told bne IntelliNews.

Failed privatisations

However, aside from the Nova KBM deal there has been little recent private equity involvement in privatisations in the region recently, despite a high level of interest. This is partly because the region’s communist history has resulted in a popular resistance to private capital that has remained strong, and contributed to a series of failed privatisations. 

Irving believes that governments in the region should recognise investment funds as key players in ongoing privatisations, especially in fast growing industries such as telecoms. He said the biggest obstacle to bigger privatisation deals is governments having unrealistic expectations in terms of prices and other conditions. “Prices shouldn’t be the priority criteria but long-term investment, which will create new jobs. Ultimately, that is way more important than to get millions for the budget. Whether it is a bank or a telco that needs to be privatised, they need to be pushed into the private sector,” he underlined.

Two major telecoms privatisations – Telekom Slovenije and Telekom Srbija – failed in 2015 and in both cases there was interest from private equity investors. Irving claims that it is not good for a country’s reputation to launch a privatisation then pull away, and warns that governments need to have more realistic expectations. “If you are selling Telekom Srbija, the days of attracting Orange and Deutsche Telekom are over, because they are focused on their existing markets, they are no longer looking at this region… All the new technologies require bigger expenditures on their home markets and it has to be accepted that an investor can be somebody else - that it can be a private equity fund,” Irving said. 

The next attempt to sell Telekom Srbija is expected in 2020, but Irving believes this is too late. “Telekom Srbija needs to be sold right away because in the meantime the value goes downwards because of the inefficiency of being in state hands and not having strong shareholder with the resources to back that investment.” 

He also warned of the damage to Slovenia’s reputation from the failed Telekom Slovenije sale. “Slovenia wanted to sell his telco several times and pulled backed and the last time the investor pulled back. This can create really bad perception. Thus, it is very important the government to set up expectations in advance.”