Nicholas Watson in Prague -

The crisis in the Eurozone has cast a pall over Europe's M&A market this year, but a combination of valuations coming down and private equity with cash to burn means the Emerging European market at least is showing signs of life.

According to data from ISI Emerging Markets' M&A service DealWatch, the number of deals in the Emerging Europe region during the first half of 2012 fell by over 22% versus the same period in 2011, while total deal value dropped by almost 45%. However, the data provider also noted the number of anticipated deals has soared over 82% in the first half to 940 expressed intents. "This signals a greater determination of potential sellers to dispose of their holdings in Emerging Europe, which might forecast generally lower valuations on the horizon," DealWatch said in an accompanying report.

Such a view is backed up by industry insiders. Vaclav Jirku, investment director at the Emerging Europe-focused evergreen fund Penta Group, describes an "awakening" of the M&A market, involving not only deals to buy companies in Central and Eastern Europe, but also CEE companies and funds looking to buy struggling Western European companies, particularly Germany's vaunted Mittelstand.

"There are companies that have been struggling for the last few years, many in Germany, so there's restructuring cases available," Jirku told a September 19 private equity conference in Prague organised by CMS and Pedersen & Partners. He added that Penta is close to signing its first deal in Germany, without elaborating.

Some of those German family-owned businesses will also be subject to what the private equity industry refers to as succession-related buyouts, when the founder finally retires and the children are not interested in taking over the business. This is also occurring in Emerging Europe, though here the succession is not within a family business, but one that was privatised by a group of entrepreneurs in the 1990s after the collapse of communism. Many of these founders are now in their 50s and approaching retirement age, with some wanting to stay connected to the company, others wanting to leave entirely, and others wanting to take some money off the table and remain minority shareholders. For regional private equity firms, these companies, worth about €50m, provide a rich source of deals where a deal is structured to buy out some partners, leaving others involved.

"Every one of our deals in the last five years has had a succession element to it," says Brian Wardrop, managing partner of Arx Equity Partners in Prague. "There's a large number of companies that are going through this, so we are on the cusp of a 10-year boom in succession-related deals."

By Arx's calculations, in 2003 the number of Czech companies with annual revenues of over CZK200m (£6.64m) and at least one owner older than 50 years old was 323; in 2008, this number had grown to 1,080, a compound average growth rate of 27%.

What has traditionally held back M&A in the region has been valuations of companies have remained stubbornly high. "Sellers are inherently more bullish in their outlook for their business," says Nicholas Kabcenell, managing director of Darby Overseas Investments.

However, the European crisis, global slowdown and general pessimism that pervades the markets these days is clearly starting to have an effect on company owners. "In the last few months, there's been a couple of interesting deals come my way where had I met the owners five to seven years ago there'd be no chance of moving closer to their expectations, so this could be an interesting source of deals over the next couple of months," says Penta's Jirku.

On the flip side, as valuations come down and due diligence starts, this is starting to expose some uncomfortable truths of what has happened to many companies in the region since the 2008 crisis struck. Libor Nemecek, director of M&A for the Czech food giant Agrofert, says that he's seeing more and more companies coming onto the market, but that after due diligence he finds they are in a worst state than previously thought.

What this has led to is a situation in which many deals are more or less frozen - not closed but still for sale. "This is an unusual situation showing the uncertainties about the asset, the future and the industry itself," says Penta's Jirku.

Perhaps surprisingly given today's economic climate, few report any problems raising finance for deals, except that banks have become more cautious on pricing and liquidity risks. This means that senior bankers attend meetings for even the smallest deals that need financing. "Our leveraged finance business has doubled this year, so the bank is open for financing," says Ian Meloun, director of acquisition and leveraged finance at Czech bank CSOB, owned by Belgium's KBC. "Local funding is about 100 basis points cheaper than in London, so this benefits private equity players here.

The two countries that are expected to see most transactions are the two biggest economies in the region, Russia and Turkey, which also saw the biggest deal flow in the first half of the year.

According to DealWatch, Russia was the most active market in the region in the first half of the year, with 574 deals that accounted for 56% of the total deal value at €30.3bn, though that represented a 32% drop in the number of transactions from the year before. Turkey saw €8.7bn of M&A in the first half, up 26% from the year before, though the number of transactions was down by 19%.

"Turkey is the main focus of our fund. There's a lot of faith in consumer growth in Turkey despite a slight bubble appearing - you can still make some aggressive assumptions on the growth and buying power of the Turkish consumer," says Kabcenell, whose Darby Overseas Investments raised another €150m fund this year in what he describes as a "challenging environment."