M&A soars in Balkan “rising stars”

M&A soars in Balkan “rising stars”
Deal value and volume in Serbia reached record highs in 2018.
By Clare Nuttall in Bucharest January 30, 2019

The volume and value of M&A deals both soared in some of the EU accession candidate countries in the Western Balkans, a report from law firm CMS and information service EMIS. 

Across the emerging Europe region, Albania saw the highest year-on-year growth in deal value — a staggering 1,054.5% — and a 300% increase in deal volume, albeit from a low base in 2017. More deals are expected in 2019, as OTE’s sale of Telekom Albania has yet to be finalised. 

Serbia, alongside Slovakia and Slovenia, is dubbed a “rising star” in the “Emerging Europe M&A Report 2018/19”. It experienced an all-time record in both deal count, up 40% compared to 2017, and deal value, up 737%.

Major deals during the year included the sale of a stake in RTB Bor to China’s Zijin Mining for €1.3bn, the concession of Nikola Tesla airport, and several telecoms deals. Looking forward to 2019, the state has started preparations to sell off Komercijalna Banka this year. 

Meanwhile, activity in Bosnia and Herzegovina was also relatively subdued, aside from the local United Group assets changing hands, with the next largest deals around the €30mn mark. And the largest deal in Montenegro was the €31.4mn takeover of coal miner Rudnik Uglja Pljevlja by Elektroprivreda Crne Gore (EPCG). 

Summing up why investors targeted the Western Balkans with increasing volumes of money in 2018, the report picks out the region’s solid economic growth and political stability, “particularly in the countries of the former Yugoslavia, which are becoming a magnet for investments”. 

“Stability remains the key to future of the Balkans and although there are some tensions in Kosovo and Bosnia, we are optimistic about the broader outlook. There is plenty of room for development and unless there is a major international shock, activity in the region should hold steady or even increase,” says the report. 

Even the recent mass anti-government protests in Serbia don’t appear to have dented investor confidence, as — like fellow emerging European states such as Poland and Romania — investors look to the economic story rather than the politics. 

And the economic fundamentals in the Western Balkans appear strong, as growth continues to outstrip most West European economies. On top of this, says the report, “investors have been paying increasing attention to those [countries] that aspire to join [the EU]. At a time when investors may feel nervous about the prospect of a less business friendly political climate in Poland and Hungary, countries to the south offer an appealing alternative.”

The exceptions are Bosnia and Kosovo, which both saw lower levels of investment in 2018. Bosnia has still not managed to form a state-level government since the October 2018 elections, while Kosovo is at the centre of a regional political storm over the 100% tariffs it imposed on imports from Serbia and Bosnia in November.

But it has been a more positive story in Macedonia, which in mid 2018 signed the landmark Prespa agreement with neighbouring Greece, putting an end to the decades long conflict between the two states that had stymied Macedonian progress towards the EU and Nato. In the opening weeks of 2019 the deal, under which Macedonia will change its name to North Macedonia, has been passed by the parliaments of both countries. 

The election of a new government in 2017 that prioritised EU and Nato accession and rebuilding relations with neighbouring states had already encouraged investment after a couple of years of instability. Together with the skilled workforce this "helped [Macedonia] attract foreign investors including Johnson Matthey of the UK, Deutsche Telecom, Mittal Steel of the Netherlands and Van Hool of Belgium.

“Foreign direct investment has been on the rise, with automotive components, information technology, agribusiness, clothing and tourism among the sectors regarded as having strong prospects,” adds the report. 

Another change in recent years has been the diversification of investors in terms of geography in recent years. While traditionally international investors in the Balkans have been from Germany, Austria and the Netherlands, countries such as Turkey and China are now important sources of investment too. 

“Turkish investors in particular have turned their sights on the region, partly in response to political tensions at home,” says the report. 

In addition, “For several years now Chinese investors have been looking at opportunities and at last deals are starting to come through. Although the number of transactions has been relatively small, some of the projects are of a significant size, and we expect volumes and values to increase over time … In light of the One Belt One Road initiative, the prospects are that China’s presence on the emerging Europe investment scene will be long-lasting.”

Among the major Chinese deals in the region were Zijin Mining Group’s takeover of Serbian copper smelting and mining complex RTB Bor, which followed the acquisition of Zelezara Smederevo steel mill the previous year by HBIS. Zelezara Smederevo, renamed Hesteel Serbia Iron & Steel, has just overtaken carmaker Fiat to become Serbia’s top exporter. 

But can the pace of deal making continue? In a phenomenon most likely related to the size of countries especially in Southeast Europe, CMS/EMIS’ report says that despite the hike in deal value across the emerging Europe region in 2018, “Our expectations are modest”. 

“Regardless of 2018’s positive numbers, in many countries from the emerging Europe region and particularly in South East Europe, M&A is still driven by consolidation, privatisation and random, country-specific, factors,” says the report. “The former will not last forever, while the latter are not guaranteed in each year.”

Given the small size of the economies in the fragmented region, it’s perhaps not surprising that the biggest deals in the region were almost all multi-country deals, notably two in the telecoms sector: Telenor’s sale of assets in Bulgaria, Hungary, Montenegro and Serbia for €2.8bn, and the sale of Balkan cable and media company United Group for an estimated €1.9bn. 

“There is a lot of potential for growth and development in the Balkans which is why it is attracting interest from international investors. The challenge for them is the availability of targets,” summed up Radivoje Petrikić, partner, CMS Austria/SEE.