M&A transactions in Eastern Europe are rising

M&A transactions in Eastern Europe are rising, but investors may have to bite the bullet to reap the financial benefits of the region.

While much of the global business community focuses its expansion and investment activity on China and India<, another regional success story continues to unfold closer to home.

Eastern European economic growth rates of around six-seven per cent may not be as remarkable as the double-digit achievements of the Asian giants, but when considered alongside the further growth potential stemming from accession to the European Union, former Soviet bloc countries are attractive targets for foreign investment.

M&A activity in the region by UK companies is growing, with total disclosed value more than doubling to almost £500 million from 2004 to 2006. The number of transactions tripled during the same period.

A flurry of activity was seen in 2005, with 25 transactions and deal values ballooning at £3.9 billion. This spike was attributable to BAA’s purchase of a 75 per cent stake (minus one share) in Budapest Airport and a 75-year asset management contract and associated moveable assets. The purchase pushed deal values to a new high to £1.225 billion

The telecoms sector also attracted a mega deal as Vodafone upped its 20 per cent stake in leading Romanian operator Mobifon to 99 percent. Vodafone continued its spending spree in the Czech Republic, picking up the fastest growing operator Oscar Mobil (Connex). The two deals were worth £1.8 billion.

Grant Thornton partner and head of M&A David Brookes says: “Eastern Europe came on to the agenda about two years ago. Once the European community was enlarged and had settled, more companies began to look at the region as an opportunity.”

The region’s energy sector along with financial services and telecoms are proving popular with global investors as they consistently top transaction tables. Energy deals heated up in 2006, totalling £2.4 billion. Meanwhile in 2005, the value of telecoms deals increased 15 per cent from £822 million to £946 million. Financial services deal values for 2006 soared 1467 per cent from £63 million in the previous year to £1 billion

“I believe Eastern Europe will mirror China. Initially, companies will look at low-cost manufacturing, but in time – in two to four years – these countries will become wealthier and try to improve their standard of living by purchasing more consumer products,” says Brookes.

The Czech Republic, Hungary, Poland, Bulgaria and Romania< have seen most of the action from UK investors with deals totalling £219 million in Poland and £137 million in Romania last year.

But despite growing interest in the region and increased demand from what Brookes sees as a “burgeoning middle class” lusting after more consumer products, the region does present major challenges for lenders and their legal advisers in securing facilities on assets located in the region.

Security regimes

Security regimes can vary across the region, so lenders must be prepared to take heightened security risks that would be less acceptable in more developed jurisdictions.

Leading law firm Reed Smith Richards Butler’s Leon Stephenson says: “In Bulgaria, one of the strongest forms of security is the Going Concern Pledge (GCP), which is broadly akin to an English law debenture in that it creates a security interest over all the assets of the company granting security.

“While a lender might take comfort from obtaining such security, this is compromised by two issues; one practical the other procedural. The practical issue is that for the GCP to be effective, a schedule of all the assets to be pledged must be attached to the pledge document. If deal completion deadlines are short, this can mean that there isn’t enough time to compile a schedule pre-completion and the security will not be effective immediately. The procedural issue is that there is an unavoidable delay of up to six weeks between execution of security documents and their perfection by registration.”


Although all Eastern European jurisdictions have security registers, some have only been established recently. The Serbian registration system was set up in 2005, so its reliability and the legal consequences of registration may not yet have been fully determined by the relevant courts.

“There are certain jurisdictions, such as Montenegro and Kosovo where legal advice dictates that a security taker cannot rely on the absence of registration as indicating that no opposable charge exists. Other security systems may be more developed and reliable, but they are often expensive and complicated and may even require court applications before entries on the register can be made,” said Stephenson.

As for Bulgaria, the GCP covers different types of assets. Therefore it must be registered in several different registers, each covering a different class of assets. This adds scope for delay and expense.


A major consideration for lenders is how easily they will be able to enforce the security they have taken if it becomes necessary. A recent study by the European Bank for Reconstruction and Development (EBRD) found a positive picture of enforcement in the EBRD countries of operations.

Results of the study suggested that in at least nine countries, including the Czech Republic and Hungary, it is possible to recover more than 80 per cent of the market value of assets over which security has been taken within six months of commencement of enforcement proceedings.

Some CEE jurisdictions have specific local law documentation to accelerate the enforcement of security. Bulgaria’s GCP and other Bulgarian security should be accompanied by promissory notes granted in favour of the lender. These notes give the lender an additional cause of action, which allows direct recourse to the secured assets without the need to go to court first and are an essential part of a Bulgarian security package.

Something to think about

Another issue that frequently arises are exchange control restrictions. Whilst this is no longer an issue in OECD countries (Poland, CzechRepublic, Slovakia and Hungary) they do remain relevant in Russia and former Soviet states. Where exchange control restrictions are an issue, local passport banks may have to be appointed and delays can be inevitable.

Withholding tax can be another issue. These countries have generally entered into fewer double taxation treaties than countries with more developed economies. As such, lenders and borrowers alike will often be keen for lenders to lend through entities located in favourable tax jurisdictions.

Stephenson said: “Security regimes in these jurisdictions will continue to develop over the coming decade and beyond. As a result, lenders will become more accustomed to taking security there. In the meantime, lenders should be prepared to experience some increased risk, inconvenience and delay if they are to reap the benefits of continued economic growth in the area.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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