M&A activity in SME sector in Romania: 1 bln euro in 2008, 25% growth potential in 2009

The size of M&A deals in Romania that involved small and medium-sized enterprises amounted to roughly 1 billion euro in 2008, micro businesses drawing nearly 25% of the investments, small enterprises, 40% and large enterprises, 35%, according to advisory firm Sequoia.

SMEs lack the absence of transparency

The SME sector is closely monitored in the M&A market, and many of the deals are gauged. Direct investors expect to conclude deals by summer, in case no big opportunity emerges, and the size of the deals in M&A market will be at least at the level of 2008, with an increased likelihood of actually growing by 25%, Sequoia representatives said.

Therefore, SMEs accounted for 16% of total M&A deals in Romania, market valuated at 6 bln euros, according to Riff International.

More than half of the deals started last year have been put off for this year, with the utmost deals being expected to return at the negotiation table, to be reexamined and some of them to be canceled.

“SMEs lack the absence of transparency, there are few corresponding elements, and the emotional and human factor has a major impact on the conclusion of a deal. Most of the times, the company valuation is related at a higher degree to the accounting or real estate value than the valuation of the company potential”, said Igor Jitta, founder and executive director of Sequoia advisory firm.

Distressed-asset deals

If Sequoia’s strategy launched in 2007 was focused so far on financing developing companies, drawing strategic investors, as of 2009, the mandates will converge on “buy-side”, as many of the company’s clients shifted from direct investors into distressed-asset deal investors. “We have reorganization projects under management, involving economic agents that face a severe financial lockdown who now seek for financial support in the capital market. For 2009, I expect a growth in this array of projects”, Jitta added.

The vendors, he says, lost their leverage in buyer-seller relation since October last year, after the collapse of Lehman Brothers that sparked panic and mistrust in the financial sector.

The reduction of the risk for investors is the major concern of Sequoia advisory board, company specialized in M&A advisory services for SMEs.

“Most of the investors we are working with are strategists, however, we are running investment funds as well, especially Dutch. We prefer to stimulate associations between strategic investors and investment funds. This formula assures growth, by the reduction of inefficiency and by the know-how exchange. The volume of investors has risen once the valuation of Romanian companies became more realistic”, said Igor Jitta.

Bet on waste management

The reasons why Romania still brings opportunities to investors are, as Jitta notes, the small barriers for tapping the market, co-financing investments from European funds, cheaper workforce and strategic geographic positioning.

The M&A market opportunities will emerge this year in agriculture, food industry, alternative energy, health, pharmaceutical sector, logistics and transport, real estate. “In certain sectors, there are inefficiency-related problems that can be solved through know-how exchange thus, we see opportunities for strategic investors”, Jitta added.

Currently, Sequoia is running six selling orders in sectors such as food, agriculture, transport, IT and is negotiating for two purchase mandates.

The local private equity funds will, Sequoia head says, either give the go-ahead for a smaller internal rate of return, due to a lower leverage, as the adjusted risk will shrink, or they will choose opportunist investment solutions or solutions involving developing companies, and in this case, the IRR will spring out from the market opportunities.

Waste management is, Sequoia says, a field with huge potential for local M&A market, as long as Romania meets the quotes set forth by the European Union on recycling. “If in Romania the share of municipal waste is 2%, in EU is 50-60%, and the waste recovery from production stands at 30% in Romania, as opposed to 70-80% in EU. “For the M&A market, we see start-up opportunities in production waste management, as well as acquisitions of active companies in collection and recycling of municipal waste”, said Jitta.