Nicholas Watson in Prague -
Every crisis creates opportunities, and for Benson Oak, a Prague-based investment bank, that opening is private equity. "If you have cash and a five-year time horizon, then now and over the next 12 months is a fantastic opportunity," says Robert Cohen, a partner with the firm.
On November 27, the firm's private equity arm, Benson Oak Capital, announced its latest foray into the buyout space, which is rapidly becoming the firm's primary focus, with the acquisition of 100% of BTV plast, a Czech producer of plastic parts for automobiles made by Skoda, amongst others. The BTV deal is in keeping with Cohen's prediction that many firms in Central Europe will struggle in the current economic climate to exist on a standalone basis and will have to rely on private equity firms like his to recapitalise their businesses.
The deal also follows the firm's practice of finding add-on acquisitions. In this case, BTV will be merged with the two automotive supply companies already in Benson Oak's investment portfolio: Liberec-based Plastkov MR and Hlinsko-based Plastkov Automotive, both of which also produce plastic parts for automobiles made in the Czech Republic. Together, the three companies had combined revenues of more than €72m in 2007 and employ about 1,600 people.
Benson Oak began its private equity business in 2001, when it bought a stake in the Czech anti-virus software developer AVG Technologies. Benson Oak was originally set up in 1991 by two Americans as a financial advisory firm, offering large corporates like CEZ and Czech Railways advice, particularly on how to access the international debt markets. But its move into advising on mergers and acquisitions for mid-cap companies at the start of decade ultimately led the firm into the private equity market, because, as Cohen says, "especially in 2001 and 2002, there was a total gap in the market."
Benson Oak took full control of AVG in 2004 before Enterprise Investors (EI), the largest private equity firm in Central and Eastern Europe, and Intel Capital, Intel Corporation's venture investment fund, invested $52m in AVG in return for a 65% stake. "AVG was the beginning of our focus in private equity," Cohen says. "When we bought the company, it had $5m of annual revenue with 80% of that in the Czech Republic. Today, it's a $150m revenue company with strong margins and a presence in 160 countries of the world."
In 2007, the firm followed up with the acquisition from the same owner of two companies - the Czech auto parts maker Plastkov and ETA, a well known maker of small domestic appliances in the former Eastern Bloc Then in September, it acquired 100% of Bochemie, a manufacturer of cleaning products in Central Europe, including the big-selling Savo brand. The firm has activities in Russia, Poland and the Czech Republic - a feature that Cohen says will help Benson Oak expand outside its home base of the Czech and Slovak Republics.
Benson Oak is close to making another acquisition, which the firm took another look at in light of the deepening financial crisis. This process of reappraising company valuations is crucial if the buyout business in the region is to continue ticking along, since it will take some more time for owners of businesses to bring their valuations down to more realistic levels where a deal can be done. "It will take a little bit of time for valuation expectations to come down."
Benson Oak feels its long presence in the region gives it an advantage in identifying potential targets and getting the deals done, as the market here differs from that further west in a variety of ways. For example, with companies in this part of the world not being set up and run with an exit in mind, they practice tax optimisation, which brings down their earnings. "In the US, you never reduce your earnings because you want to sell out at a high multiple of earnings, but people do here because they want to bring down their tax burden," he says. "It's very particular to this market and you have to be cognizant of that and other market-specific aspects."
Cohen also highlights the structure of the fund's investor base, which is made up of a group of high net worth individuals rather than relying on institutional money. In this way, when Benson Oak identifies an interesting target, it goes back to this group of investors for the money. "I don't necessarily want to raise an institutional fund because sometimes you can find yourself following the lowest common denominator of doing a deal, and often to contort a deal to fit investment criteria rather than looking at a deal on an individual basis to find its value."
"We feel we have a really good niche in terms of the space we play - €5m to €20m equity deals is the sweet spot - and we differentiate ourselves from others by being local, by being flexible out of the box to get deals done. There's not a lot of people in that space."
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