Dealmaking in Central Europe is set to rebound, Helen Rodwell, head of the CEE corporate practice for CMS, the leading M&A legal firm in the region, told bne IntelliNews in an interview.
“I am very optimistic about this part of the world,” says Rodwell, who is also the Prague and Bratislava managing partner. “The outlook is actually very encouraging.”
Mergers and acquisitions in Central and South-Eastern Europe fell by 20% to €32.93bn in 2022, according to the Emerging Europe M&A Report published by CMS and information platform EMIS on January 30.
However, Rodwell says that Russia’s invasion of Ukraine had a bigger effect on investment sentiment in Central Europe than in other regions, overshadowing other positive trends that are already beginning to draw investors to CEE.
One such trend is nearshoring or ‘friendshoring’ of foreign investment in reaction to the disruption of supply chains in China during the COVID-19 pandemic, which has dispelled fears that FDI would shift eastwards from the region.
“Maybe there is a retreat back to Eastern Europe,” Rodwell says. “We saw quite a few greenfield investments being planned last year.”
Another significant trend is new kinds of financial investors hunting around the region. “The profile of foreign investors is changing quite a lot,” says Rodwell, pointing to growing interest from Asia, notably South Korea, as well as Middle Eastern sovereign wealth funds, which have shown “very limited” interest in the region so far.
“These investors are starting to appear in the last few years,” she says, pointing at the acquisition of a 30% stake in Czech telecom network operator CETIN Group by Singapore-based investment fund GIC in 2021, a deal estimated to be worth around €1.5bn-2bn.
CMS is going to focus more on meeting sovereign wealth funds from the UAE, which the firm expects to look for investment opportunities especially in South-Eastern Europe.
Rodwell also pointed to big global financial investors that are looking to make large investments in green projects in the region as the market develops, listing Actus Capital Management, Low Carbon, Brookfield and Macquarie.
“In green energy the market is underdeveloped compared to Western Europe. There is a lot of investment opportunity available and that is attracting a larger type of investor.”
At the same time, there is still a lot of interest from venture capital funds in the region’s startups and especially digital opportunities, says Rodwell.
“There has been a lot more venture capital investment in the region for the last couple of years,” says Rodwell. “I’ve not seen so many venture capital funds sniffing around since I arrived here [in 1999].”
Some of these funds have scored spectacular successes with startups. The CMS report estimates that there are now an estimated 34 unicorns in the region, up from just six in 2015.
Exits for investors via initial public offerings (IPOs) were all but ruled out last year by market turbulence. According to the CMS M&A report, the number of listings in the region plunged from 60 to just 13, and IPO values fell from €8.6bn to €40mn. The largest listing – Telematic Interactive Bulgaria on the Bulgarian Stock Exchange – was only €8.2mn.
But Rodwell tips dual listings on the Warsaw and Dutch Euronext exchanges as a potential exit route for investors in the next few years.
“If [European stock exchanges] recover a lot of their losses, I would expect that Warsaw is an option for exits,” Rodwell says.
“Warsaw is the exchange of choice in the region,” she adds, especially when combined with a dual listing on Euronext Amsterdam, which “has a good profile in the region”.
Another growing trend is Western companies rethinking their strategy and selling their operations to local players, who themselves are starting to expand across the region.
“I expect that, similar to the financial crisis, there will be a number of divestments in the region as large corporates or strategic investors re-consider whether CEE is a core region for their global strategy,” says Rodwell. “My sense is that there will be divestments in banking, telcos and perhaps even healthcare assets.”
This presents significant opportunities for big local financial groups, such as Czechia’s PPF, as well as for family offices, which have been successful in smaller-scale deals.
“We have had that aspect of the market in the Czech Republic and in Slovakia for 15 years,” says Rodwell, pointing out that these local players “are now very sophisticated and very good at what they do”.
“They are now some of the most sought-after clients for professional service firms like ourselves,” she adds. “They can’t be ignored in many markets as they are competitive in a whole range of sectors.”
Czech and Slovak financial groups are already expanding across the region and Rodwell anticipates that local players from Poland will soon follow suit. “Poland doesn’t have so many big local groups going abroad,” she says, adding: “I expect the same thing to happen in Poland”.