Nicholas Watson in Prague -

A deal announced in December to buy out Invitel Holdings enabled emerging Europe-focused private equity house Mid Europa Partners to notch up two transactions in 2009 - a good performance during a time characterised by a lack of funding, wide gaps in valuations between buyers and sellers, and surprisingly few distressed deals.

"We were pleased we did two new deals last year," Craig Butcher, Budapest-based senior partner for Mid Europa, tells bne. "Central Europe punched well above its weight in terms of deal flow in 2009 in a European context."

Butcher remains surprised at the lack of distressed deals at a time of major financial and economic upheaval, which had basically cut off funding for a huge number of companies, many highly leveraged from a headlong expansion made during the good times. "There hasn't been many distressed deals and that's been a huge surprise to me. If we had spoken a year ago, I would have said that a lot of guys would be forced to sell out, but we didn't really see that, as people have been able to service their debts, unlike in the early 2000s with telcos that had stretched balance sheets," he says.

While valuations for assets may have fallen, there were few deals to confirm those lower levels. And with the market picking up again as funding becomes more available, some deals are being done at what industry insiders regard as relatively high valuations, and not at the bargain rates downturns are supposed to offer. KKR's recent £955m (€1.136m) purchase of British pet-shop chain Pets at Home was done at almost 12 times the firm's current ebitda; Siemens is looking for €2bn-plus for its hearing-aid business, while Germany's Kabel Deutschland could go for more than €5bn. "Banks are no longer pricing deals according to liquidity and the amount of financing available," Butcher says, adding that the bond markets are "white hot" again. By way of example, he cites that Mid Europa was able to refinance all the bank finance of Invitel in the bond market.

Butcher says the private equity market feeds on confidence, and with such major deals as Pets at Home in play, this points to a gradual improvement in the market throughout this year, barring any major macroeconomic shock. Other possible "headwinds" include the EU's proposed Alternative Investment Fund Management directive, which includes among other things limits on how much leverage a fund can have, though this is unlikely to have any impact on this year.

Macro risk

Mid Europa's other deal in 2009 was the acquisition of 100% of the Slovenian cable and broadband operator UPC Slovenia from Liberty Global, which was the first leveraged buyout transaction in Central and Eastern Europe since the fourth quarter of 2008. UPC is the leading cable and broadband operator in Slovenia, servicing approximately 40% of the pay-TV households in the country. At the time of completion in July, Mid Europa cited the fact the deal involved one of the two CEE countries that uses the euro, something Butcher says has become increasingly important since the global crisis wreaked havoc on the region's economies. "The crisis has made people much more sensitive to country macro risk. Poland and Czech Republic everyone recognises have pulled ahead of the pack, while Slovenia and Slovakia are in the euro so they don't have that currency risk," he says. "I think we are still looking at deals in all the countries, but in the Baltics, Hungary, Romania and Bulgaria it must be a much more robust investment that can withstand currency moves."

Mid Europa has three funds with assets worth approximately €3.2bn. The most recent fund closed in October 2007 at $1.5bn, making it largest dedicated fund for Central Europe. The majority of its 20 investments done in 14 countries have been in the broader telecom, media and technology (TMT) sector, something that arose out of the telecom buyouts made shortly after the company established itself in 1999. "We developed the expertise in that space because that was the deal flow that existed," says Butcher, adding that since then the firm has moved into other areas like healthcare and basic industries where companies have a strong market position and recurring revenues.

In terms of deal size, the firm typically looks at transactions worth €50m-150m, though it has done a number of significantly larger than that. "We have been successful in tapping into our limited partner base to arrange co-investments, so we have done some in excess of €250m," says Butcher.