Czech capital in regional deals

The recently announced multibillion-dollar purchase of a Slovak gas group by the Czech investment fund Energetický a průmyslový holding (EPH) was, reports noted, the largest-ever foreign acquisition by a Czech company.

The $3.5 billion deal, which saw Prague-based EPH secure a 49 percent stake in Slovenský plynárenský priemysel, while notable for its scale, was not an isolated case: Analysts say it appears to reflect a trend in which local capital is increasingly used in major regional acquisitions.

EPH's mega-purchase comes in the face of a severe downturn in mergers and acquisitions (M&A) activity in many countries in Central and Eastern Europe, including the Czech Republic, as the effects of the eurozone debt crisis spill over into neighboring countries.

A study released this month by CMS Legal Services, "Emerging Europe: M&A Report 2012," noted that the Czech M&A market has contracted for the third successive year, a similar picture to that seen in many neighboring countries, including Slovakia. The number of deals in the Czech Republic in 2012 was almost 40 percent lower than in 2009, and their value was just a third of that achieved three years earlier.

Czech investors have been looking further afield for at least a decade, said Ian Parker, a corporate partner at CMS, with the focus on foreign investments growing as opportunities at home decreased after the initial wave of post-communist privatizations.

What is notable now, he indicated, is that some investors have greater funds at their disposal as a result of successful operations in the past.

"The groups like [EPH co-owner] PPF, [Czech and Slovak investment fund] Penta and [the Czech and Slovak investment fund] J&T, if you include the Slovaks, have made money, and there's more money to invest," he said. "These players like J&T and Penta increasingly see the whole of Europe as their potential investment."

EPH has been seen as keen to expand its portfolio in Central Europe and is bidding to purchase Net4Gas, the Czech gas distribution company owned by Germany's RWE, in a deal thought likely to be worth as much as 2 billion euros.

PPF, which owns a 40 percent controlling stake in EPH, was co-founded by Petr Kellner who, with his wealth estimated by Forbes as $8.2 billion last year, is the richest Czech citizen and the 110th-wealthiest person in the world. The company has its headquarters in Amsterdam, but its origins are in the Czech Republic, and it now manages, according to the company, 17.6 billion euros' worth of investments in Central and Eastern Europe, Russia and Asia. It is especially active in sectors such as real estate, banking and mining, with Kellner owning, for example, one-fifth of St. Petersburg-based Polymetal, Russia's largest silver mining company.

Penta, which dates to 1994 and is active in private equity and real estate, had assets valued at 4.7 billion euros in 2011. Its investments stretch across 10 countries, and one of its mission statements is to "transform our company from local to European."

The apparent growing investment clout of Czech entities at home, regionally and beyond is to be expected, believes David Marek, an analyst at Patria Finance, in an economy that is "catching up with the other developed markets."

"As the economy is more rich from a long-term perspective, it's natural you can observe the investment opportunities," he said.

"It's natural that some local companies can expand to have not only their business in the Czech Republic, but also abroad in countries like Slovakia [and] even in West European countries."

Czech investors made an impact in Hungary last year, accounting for 2012's fifth-largest acquisition in that country, with Czech Property Investments taking a 30 percent stake in the construction company Ablon Group for 30 million euros.

The biggest acquisition in Slovenia last year, the 69 million euros purchase of the manufacturer Savatech, was by a Czech investor, CGS.

Within the Czech Republic, the investors in five of the 10 largest deals were Czech, with the biggest deal in the country coming from investment group KKCG with its purchase of lottery company Sazka for 139 million euros.

Yet Russia retains, by a wide margin, the dominant position in terms of investments in the region, with Russian buyers responsible for 12 of the top 20 deals in emerging European countries last year, with many of these acquisitions taking place in the energy sector.

Petr Sklenář, the chief economist at J&T Banka, said it was likely, however, the impact of Czech investors would grow as the country ultimately becomes wealthier, despite difficulties in recent years.

"We are close to the time when successful and wealthy entrepreneurs from the Czech economy make big transactions, not just in the Czech Republic but across the region," he said.

However, he cautioned against reading too much into recent deals, saying they could be isolated events rather than part of a trend.

"We are … not the smallest economy in Europe, but there's a kind of limit [rather than] a huge number of wealthy Czech people buying multinational companies," he added.

Even the recent purchase by EPH was not an entirely Czech-financed deal. Although EPH is headquartered in Prague, more than a third of the company is owned by J&T, the investment group with its roots in Slovakia, so the acquisition of Slovenský plynárenský priemysel could be considered as much a Slovak as a Czech purchase.

Parker noted that most regional Czech acquisitions involve private equity funds rather than strategic investments by companies, and many are regionwide acquisitions involving companies with operations in several countries in Central or Eastern Europe.

"There's not a huge number of what I would call strategic investments, where a company involved in a particular business buys another business of the same sort … [There is] very, very little of that. It's mainly private equity," he said.

There are exceptions: Parker cites Kit Digital, the Prague-based software company.

"They have done purchases in the United States, Italy, United Kingdom, France, Albania and Singapore," he said.

He said the overall downturn seen locally in mergers and acquisitions in recent years largely stemmed from the impact of the eurozone crisis on the Czech economy, which depends heavily on eurozone countries as export markets. The crisis has, according to Parker, impacted the confidence of investors, especially those from outside Europe, in making investments in the region. A reluctance of banks to finance deals has also been partly blamed for the slump in activity.

Daniel Bardsley can be reached at
business@praguepost.com