Romania's M&A market faces stagnation

With the banking sector more restrictive in granting acquisition loans and the local market still dependant on rare mega-transactions – of over EUR 100 million – the Romanian mergers & acquisition (M&A) market is set to remain below EUR 1 billion this year.

Radu Stoicoviciu, advisory and deals leader at the professional services firm PwC Romania, said the market had shrunk as it lacked big transactions. “If we look at the dynamics over the past few years, we will see that the drop has been pronounced since the M&A peaks of 2007-2008: in the past few years the market has been at around a seventh or maybe a tenth of the value of the boom-time market, and is relatively stagnant,” Stoicoviciu told BR. He estimates the Romanian M&A market stands between EUR 500 million and EUR 1 billion.

The PwC leader said that fragmented sectors may prove to be more active in deal-making. He cited the private healthcare sector and the services sector in general as young markets with growth potential.

“For investment funds, things have moved from chasing certain sectors to looking for an attractive and robust firm that can be in any sector; this trend excludes specialized investment funds,” said Stoicoviciu. He added that the economic fundamentals of a company are paramount for an investment fund that is seeking an acquisition.

Stoicoviciu said there are strong Romanian firms, but no transactions because an owner “may not be inclined to sell at prices that are sometimes lower than in the past”. However, some deals carried out during the crisis saw companies obtain even higher prices than they could have expected in the pre-crisis period.

IMF deal could influence privatizations

The IMF’s presence locally will not impact private deal-making significantly, but it should influence the manner in which privatizations are carried out, reckons Stoicoviciu.

The country’s privatization record remains poor, but the Ponta government has pledged to list energy companies on the local stock exchange this year and to sell other state-owned firms to strategic investors. Similar ambitious announcements were made last year, however, with lackluster results.

In 2012, the government raised over EUR 37 million from the secondary public offering in the grid operator Transelectrica. Failure to sell Cuprumin, a copper mining firm, and Oltchim, a petrochemical plant that has entered insolvency, cast doubt on the government’s capacity to attract bidders with strong financial backing.

Stoicoviciu commented that Romania could achieve more in terms of privatizations, as the political outlook is more stable.

However, he warned that the structural issues facing the state-owned companies, some of the biggest generators of arrears, remain a tough nut to crack.

“The economic fundamentals of companies up for privatization can’t change overnight and it is debatable whether they have become more attractive from this perspective,” said the PwC leader.

He predicts hydro-electricity producer Hidroelectrica will exit insolvency and should be able to attract investors by selling a minority stake on the stock exchange.

“Hidroelectrica has some better economic fundamentals from the perspective of its economic substance,” said Stoicoviciu, adding that Oltchim’s fundamentals are different. Investment funds may be interested in Hidroelectrica, but it depends on the type of privatization.

The state plans to sell a 10 percent stake in the power producer on the local stock exchange.

Romania has been able to extend a EUR 3.5 billion IMF stand-by agreement through to June.

The international lender gave this lifeline to the local government, which needs to reduce arrears in the public administration and appoint private managers in state-controlled companies.

ovidiu.posirca@business-review.ro

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