Silviu Stoica, Partner Popovici Nitu & Asociatii

According to the EY M&A barometer for 2013 the number of closed transactions in Romania is 147, with an estimated market size of abount 1.9 billion USD. This figure is about 39 percent higher than in 2012, but mainly due to the UniCredit Tiriac – RBS Bank transaction. 

Silviu Stoica, Partner with Popovici Nitu & Asociatii talked to Which Lawyer in Romania about the current trends in Romania's M&A market

Which are the directions that the M&A sector follows in Romania? Are these mainly domestic transactions? Who are the interested buyers - strategic or financial?

M&A sector is still dominated by domestic transactions. Even though the country has become more and more attractive abroad, foreign large direct investment here is still far from expectations.

We are expecting the market to receive a new boost if the currently failed privatizations of strategic companies such as Romanian Post Company, National Railway Freight Transportation Company CFR Marfa, Cuprumin (Romania’s largest copper mine) or Oltchim (petrochemical plant) will be successfully finalized. 

Financial investors are more active, given their higher adaptability to local conditions, but interest from strategic investors is also increasing. Recent political developments in the region may have helped consolidating the idea that Romania is stable and less risky. 

Can you identify the main drivers that lead to M&A transactions? 

Before the crisis hit, it was the owner that wanted to sell at a high price or to expand its business by attracting direct outside investment. The crisis reset the game. Investors become cautious in throwing-in generous offers and owners reluctant to sell for much lower margins. 

Financial investors are not willing to pay prices they were paying before the crisis. This leads to a higher focus on the first steps of the transaction aimed at convincing the owners to sell their business. This often means keeping the owner in the business, paying a lower price on entry and giving the owners higher upsides on exits.

Where do you see most of the interest coming and for which sectors? 

Most appealing sectors for new investors seem to be energy and natural resources, real estate and agribusiness, as well as certain sectorial privatizations. Local energy and natural resources, sectors already of well-known interest to investors, are expected to continue their trend in attracting new capital, despite the pressures and only remotely affected by the latest developments and ambiguity around the state assistance package scheme. 

One sector that it is expected to further generate in 2014 the strongest market experiences is real estate, the sector that perhaps suffered the most from the crisis. The agribusiness sector will continue to grow organically and new acquisitions are likely to happen, from PE leveraging of land to conglomerates involving chain food processors and manufactures, related logistics and distribution networks.

Is there still a significant difference between the expectancies of buyers and sellers?

Clearly there no longer exists the liquidity of the transactions that we were used to before the crisis and this gave rise to significant differences in expectations of the two parties. Despite the crisis, owners had trouble to lower their margins expectations. It took a while to adjust expectations, but the outlook is more optimistic than one or two years ago. 

Investors are still not willing to pay the prices at former levels, despite the prospects of certain business. The owners, even if aware that they will not obtain same deals as before the crisis, they are still reluctant to sell. Investors and sellers demands reach common ground in many cases with a hybrid structure in which the investor acquires the entire or part of the business, but allows the seller to stay in the company, betting on its future growth, and hopping for a higher exit price.

How is Romania perceived as a target market? Which are the strong points and weaknesses of the country in conjunction also with neighboring countries? 

M&A looks on the edge of recoveryif considering the macroeconomics and fundamental parameters, but forecasts for 2014 need to remain cautiously optimistic, especially given 2013 turbulent growth. Future increase of the M&A market in Romania depends on the European economy and on local ability to increase attractiveness, mainly when compared to the neighboring eastern European markets.

The country is becoming more and more attractive. It seems to project stability, particularly in light of current regional political developments. Also, the consolidation of domestic fiscal regime gives investors the sought predictability and necessary instruments to optimize transactions. By contrast, current property taxation, from infrastructure to agricultural land, significantly weakens Romania’s position compared to neighboring countries. And, of course, we see that regional investment funds are still more attracted towards Polish assets, for example, which are less risky or Balkan assets, riskier, but also less expensive than Romanian. 

Can you give some details about the reference projects and milestones for your law firm's activity in 2013 and 2014 in the M&A area? 

In 2013 we have continued to assist both local and consolidated private investors. Some of the reference projects in 2013 and 2014:

·        SIVECO Romania on a leverage management buy-out of a subsequent share acquisition from Intel Capital Corporation and Polish Enterprise Fund in a €15m transaction;

·        Cargill on the transfer of the oil production division to Expur, an affiliate of the French group Sofiproteol;

·        Innova Capital (Polish investment fund) on the acquisition of Supercard Solutions & Services (through Provus Service Provider, the main national supplier of card transactions processing, personalization and retail sector services), significant national manufacturer of non-bank cards (loyalty cards, gift), and Blue Coffee Service (through La Fantana, the largest domestic water coolers provider), de facto sole distributor of Lavazza coffee in Romania;

·        France Telecom on the purchase of shares held in Orange Romania by a minority shareholder;

·        EBS, a company founded by a local entrepreneur with 13 years’ outsourcing experience in the field of software engineering, testing, quality assurance and application management support, on its sale to NTT Data, a Japanese IT giant;

·        Farmexim SA, one of the largest Romanian Pharma retailers, in a €15m deal involving the sale of an approx. 30,000 sq. m area to Globalworth fund.