Lukas Hrubon: What was the deal-making experience of the Czech Mazars Transaction advisory team in 2020? First views
Let me share with you a few prima facie comments on the 2020 Czech M&A market developments with some thoughts that might presumably go beyond the main topic. I would be more than happy to discuss through the comments feature below the article.
On the 2019 New Year's Eve day, I was referring here to the following possible external shocks to the Czech economy: (i) dwindling global demand in the automotive industry, (ii) trade wars of world hegemons and (iii) Brexit related uncertainties. While all three points have proven to be valid, one major issue, that perhaps no one could imagine that time, was left aside. Indeed, we are speaking about the COVID healthcare crisis as accompanied by adverse social and economic consequences. A few general remarks on the situation:
- Taking into account last 100 years, the current worldwide pandemic is an unprecedented one. As such, the following bullet points shall not be considered critique but rather stating the facts;
- Most of „Western" (in this worldwide context including also CEE countries) governments have proven insufficient competencies, processes and general flexibility for this type of situation (e.g. inexistent enforceable pandemic plans, distant education readiness, speed of crisis liquidity funding packages provision, lack of very basic medical equipment such as face masks on stock, sometimes confusing communication and lack of international coordination);
- Pressure on public budgets is immense increasing public indebtedness (public debt / GDP) by dozens percentage points p.a. easily. In my opinion, the only “acceptable technical mid-term solution” is some combination of gradual public debts monetization / haircuts / solidarity with de facto already bankrupt countries;
- Some industries can be on average considered “pure winners” (e.g. on-line, healthcare and life sciences), while some “pure losers” (e.g. leisure and related), for the others it depends on their revenues / cost structures, general access to workforce in quarantine situations and impact of government restrictions and/or support, respectively;
- Likely, not only governments, but also landlords and banks will inevitably take their share in economic activity declines.
- Consequently, wealth transfers might substantially affect current owners, workforce and other business stakeholders. This will lead to relocations of both labor and capital among territories and industries;
- A marginal risk of social unrests by workforce most affected remains, but let me hope will not be significant.
- New business and public administration modus operandi models have been developed and/or changed putting more emphasis on flexibility, on-line communication and administration (e.g. home office, electronic certified signatures).
- Assuming the vaccine and herd immunization will contribute to smoothing the mortality trend lines, this shall be rather an external shock and most industries (excluding “pure losers”) shall get back on track swiftly.
How have all of these translated into the Czech M&A market developments? Mergermarket reports roughly*) 70 successfully closed reported transactions in 2020 (as compared to ca. 90 in 2018 and 2019, i.e. -22%).
*) i.e. without any further detailed analysis of the deals data and without including Jan / Feb next year follow-up data submissions on the "last minute" concluded deals. Yet, data presented above were retrieved from the same database, in the same manner within no more than three days before the New Year’s Eve, so shall be acceptable to provide the basic comparison. A separate CEE Mazars study covering all aspects of this topic will be published soon.
From the Mazars TAS perspective, no particular deal has been cancelled due to the COVID impacts, yet, some of them have been postponed in time, namely in spring and summer. This translated to enormous workload at the 2020 year end and our pipeline for 1Q 2021 remains more than healthy. As such, at least in the short run we do not foresee any M&A activity declines as far as our business is concerned. In 2020, we performed ca. 20 due diligence projects. The most important industries we served were the following: (i) real estate (ii) IT / technologies, (iii) business process outsourcing, (iv) industrial production. Other sectors covered included also healthcare, aerospace, energy and construction. In addition, we concluded one local sell-side in the metal processing industry, contributed to the international deal for Fraikin owners (car fleet outsourcing) and have initiated another local sell-side in the energy sector.
If I shall list the key features of 2020 as related to the COVID impacts on M&A, I would highlight the following:
- Deal-making in the Czech Republic did not stop at all in 2H 2020.
- Industry consolidations and takeovers might be expected in sectors most affected by the COVID shock.
- Strategic investors seem to be more cautious than the financial ones. Some “ideal-fit” potential strategic investors have admitted that it is not the right time for acquisitions now as they first need to restructure their own business.
- Financial sponsors with enough liquidity might benefit from the current situation if able to agree on reasonable valuations and deal structures with the sellers.
- Valuations dropped in “pure losers” and other affected businesses, generally.
- Deal structures pursued currently contain more frequently continued shareholding of the current owners and/or clauses stipulating earn-out schemes and/or a price adjustment based on full year 2020 audited data (i.e. “closing accounts” exercise based on the final statutory audited accounts).
- As far as the Material Adverse Change (MAD) deal cancellation clause in the Shareholding Purchase Agreement (SPA) is concerned, we experienced that for the Czech individuals acting as sellers, this construction constitutes a deal-breaking paragraph.
- A lot of deal team work and negotiations switched to platforms such as Teams, Skype, Zoom etc. Even final SPAs might have been signed per rollam or in some electronic secured way, when there was no possibility to meet in person at one place. The same challenge might step-in in the post-merger integration phase.
- And also one interesting trend namely from abroad: Some major international financial sponsors that were supposed to close the maturing fund not able to sell or float the portfolio companies due to COVID difficulties have adopted inter alia the following strategies: (i) inception of secondary buy-out funds with potentially new investors structure and adjusted valuations, (ii) package sales where the “star” is accompanied by the “dog”.
And last but not least, let me wish you a successful year 2021, full of HEALTH, peace and ability to flexibly embrace the change.
Lukas Hrubon, Head of M&A, Mazars in the Czech Republic
P.S. For those interested, please find the proprietary Mazars Tax aspects / traps of investing in CEE study here: https://www.mazars.com/Home/Services/Financial-advisory/Deals/M-A-in-CEE-Tax-traps-and-structuring-opportunities¨