In a struggling crisis-hit economy, investors have shifted focus to small-scale deals. M&A specialists interviewed by Wall-Street explained the premises of this downscaling and prospects of an ever-changing market.
If the giga-deals that involved economic mammoths took the spotlight in the past, the repositioning of investors and reorientation of interests have steered their attention to niche businesses, small and midsize deals with development potential.
According to Raiffeisen Investment, M&A market dropped to five-year low. Of the 61 deals announced this year, only 10 topped the 6-mln euro threshold, without any mega-deal in the pipeline (the largest one amounted to 44 million euros, between EBRD and Renault Tehnologie).
As Marius Stancescu (photo), chairman of Riff Holding International, commented, deals below 5 million euros are the ones to make the M&A market go ’round in Romania.
“This phenomenon will be roughly permanent, long after the crisis is over. In Romania, there will be no opportunities for the development of mega-deals”, Stancescu told Wall-Street.
Given the shaky economic ground, almost 90% of the companies will book annual profits below 1 million euros, which means that at an EBITDA multiplier of 4.5 up to 6, the market values will stand below 5 million lei.
As he noted, a new “main street” of deals below 1 million euros is underway. “This is unquestionably one of the most important signs of economic revival”.
Urzica, Consilium Advisors: This reorientation is normal
The total deal size suffered a 93% year-on-year drop in first five months, from 2.659 billion euros to 199 million euros, according to Ioana Filipescu, managing director of Raiffeisen Investment Romania, at M&A Outlook Conferences.
Marian Urzica, partner at Consilium Advisors says this orientation to small-scale deals is normal, as the fund’s cash were raised and need to be spent, “but only with a thorough risk assessment beforehand”.
He said he expected a consolidation of the market players and deals between strategic investors who had already assessed target companies in Romania.
Furthermore, it is likely to see distressed M&A escalating to 5 million euros.
“The M&A activity in the western countries may lift the value of local M&A up to 10 milion euros, but these are atypical cases”, said Marian Urzica, the former head of Alpha Bank’s Treasury between 1996 and 2007.
The difference between the valuation multiples in Eastern and Western European countries is high. In addition, the grey market in Romania has a major weight in Gross Domestic Product. Under these conditions, few buyers will be willing to pay a premium.
Considering the social pressures, political and currency risks attached, large-size investors will be steered to US market, where EBITDA multipliers have fallen and crisis appears to be ending soon.
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