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Tag: mazars

  • Undeterred by COVID-19, dealmaking in the CEE region remained steady

    Undeterred by COVID-19, dealmaking in the CEE region remained steady

    The disruption caused by COVID-19 to CEE’s M&A market was short-lived as dealmaking returned to the fore in the second half of the year, according to Mazars.

    Deal value in the CEE region rose by 11% to €49.2bn, compared to 2019, even as volume dropped by 16% to a total of 648 transactions.

    When not including Russia, the region’s largest economy, recorded deal value figures in 2020 saw a 28% year-on-year increase.

    International buyers continue to be attracted to the region, accounting for 49% of total deal value – investing €23.9bn – in line with previous years.

    Fabrice Demarigny, global head of financial advisory at Mazars, highlights how ”on a global level, the CEE picture is one of stability. The region continues to attract a strong and steady flow of inbound investment from around the world.”

    Private equity remained extremely active in 2020, with total disclosed buyouts in the region seeing a 40% year-on-year rise to €3.9bn.

    Private equity exits also fared well, with total disclosed value coming to €8.1bn, an 11% rise in 2019.

    Four countries continue to dominate the market

    The top four countries in deal value terms remained the same as in 2019 – Russia, Poland, the Czech Republic, and Austria.

    The region’s biggest market, Russia, accounted for four of the year’s ten largest transactions.

    Meanwhile, the biggest deal of the year took place in Austria, the most affluent of the CEE markets.

    This deal saw Austrian oil company OMV increase its stake in petrochemicals company Borealis from 36% to 75% for €5.712bn.

    The tech sector flourishes amidst the pandemic

    The highest number of inbound deals to the CEE region were technology-based, hitting a total of 57 deals worth €2.5bn – a year-on-year rise of 12% by volume, and 34% by value.

    In terms of inbound deal value, energy and utilities remained in the top spot, accounting for €9.1bn – a 20% rise year on year.

  • 90% of the global investors predict falling revenues

    90% of the global investors predict falling revenues

    COVID-19 pandemic shifted the M&A landscape with some declining statistics and tensed transactions. There has been a slowdown in the activity of numerous industries, the hardest hit being taken by hospitality & leisure and transport & logistics.

    On the other hand, food & beverages and pharmaceuticals registered a significant increase in sales.

    Mazars Global Financial Advisory Services team has surveyed leaders of Private Equity funds and investors from Europe, the Americas, and Asia to understand their challenges and concerns, gauge their level of optimism for the future and find out more about their crisis response strategy.

    74% of the participants come from Leveraged Buyout funds (38%) and Growth Capital funds (36%). 68% of all respondents are coming mostly from funds of a size of €51M – €200M, and the second share from the ones with €201M – €500M.

    Historic surge, but falling revenue forecasts for the next 12 months

    The study COVID-19 and the world of private equity, reveals that the funds’ leaders expect a drop in revenues for their portfolio companies in the next 12 months, as an immediate impact of COVID-19.

    50% of the respondents expect a drop of between 11% – 25% and this was consistent across all fund types, whilst nearly a quarter (22%) of the participants went for 26% – 50%. 

    When talking about the impact on funds’ exit strategy, 79% of the respondents said that the exit timing for their portfolio of companies will be delayed. This doesn’t come as a surprise at all, considering that ~90% of the funds expect a drop in revenues.

    There was a broad split of opinion regarding the focus over the next 12 months as a result of COVID-19. 24% of the respondents noted that managing downside in the existing portfolio will be a priority, whilst another 24% stated there will be no change in their strategy.

    45% of the participants stated that new platform opportunities and acquisitions, and ”bolt-ons” for their current portfolio will be their focus.   

    Buy, Sell, Hold while anticipating business as usual

    When asked: ”When do you think everything will return to business as usual?” only 1 in 5 respondents (21%) said Q3 2020, while 14% predicted Q4 2020, and 61% came out more cautious, saying 2021. Just 4% said normal business conditions will return in Q2 2020.

    With the majority (82%) of the respondents believes that we will have a U-shaped recovery, and 10% went for the V-shaped, there is natural caution as to the overall optimism on the market.

    When looking at new investments, only 6% of the respondents noted that they expect to cease to look for new investments for the foreseeable future.

    There is a strong consensus on what does “business as usual” mean for 74% of the participants saying that they will not only continue looking for opportunities, but they are very much open for business in the immediate term.

    The responses showed a general optimism regarding the appetite to invest and pursue new opportunities, but it’s hard to translate this into deal volume over the coming months.

    Global transition economy, but investors are still open for business

    88% of the investors and Private Equity firms surveyed say it is possible to complete deals in a ”working from home” environment, but 74% of them admit it is more challenging to do so.

    There is little correlation between the fund type or size and the expected impact on the ability to complete deals from home, suggesting that funds across the market have adapted well to the new working environment.

    Rescue deals and new market development within CEE

    The investment funds industry, at a global level, stands at the end of 2019 on a record level of liquidity, estimated by Bain & Co. consultants at ~$2,500B.

    This trend is confirmed by the regional Private Equity funds active in Romania, who have raised several fresh funds from investors in the last three years. Despite the pandemic and economic downturn, the same trend can be also observed on the strategic investors’ side.

    There are a lot of companies outside the CEE region that have enough liquidity to pump it in the development of their business abroad.

    Thus, their growth strategy could be focused on developing new markets by acquiring local existing businesses, and CEE has been and continue to be a “hot spot” for them, as a place where they could gain new clients and expand their activities.

    When analyzing the local market, some Romanian industries have been more affected by quarantine and social isolation, while others have managed to get off the momentum during this period.

    The first category includes tourism, HORECA, manufacturing, while technology, pharma, and FMCG have been able to adapt more easily to new conditions.

    Emerging Romania and its favorable geopolitical position

    From 2000 to 2019, year by year, Romania registered an average economic growth of 4.1%, reaching the highest increase within the European Union.

    The favorable position within Central and Eastern Europe, low tax levels, low-interest rates, and competitive wages have prompted potential buyers and investors to consider Romania an attractive market.

    According to the Inbound M&A Report 2019/2020 by Mazars and MergerMarket, the CEE region registered 726 M&A deals in 2019, the same number as in 2018, as the momentum continued despite global headwinds, and the total public deal value fell 12% to €42.3B.

    The Romanian M&A landscape registered a peak in 2019, with 50 deals (61% more than the 31 deals in 2018) and a total value of €815M, 45% higher than in the previous year. Most of the transactions were registered in manufacturing, wholesale & retail, and real estate & construction.

    At the end of 2019, the expectation was that the positive M&A market trend would continue in 2020. Three of the largest transactions signed in the first quarter of 2020 were:

    • The takeover by successive transactions (the largest worth of €280M) of a minority stake in Globalworth by the developer of the CPI Property Group SA;
    • The taking over of G4S’s cash operations by the Brink’s Company;
    • The transfer of OMV Petrom’s 40 onshore oil and gas Romanian deposits to Dacian Petroleum.
  • Forced transformation of automotive industry after Covid-19

    Forced transformation of automotive industry after Covid-19

    In Romania, the first wave of industries affected by COVID-19 was linked to the ones that required human mobility, such as transportation, hospitality, or tourism. The second wave is now taking place in automotive and manufacturing, that need to reinvent themselves and try to go back to something as close to normality as they can, show Mazars.

    The Romanian automotive industry, made of ~600 companies with approx. 230,000 employees, represents a significant part of the economy including both production of cars, the most important ones being Dacia and Ford, and the production of car components with important players like Faurecia, Valeo, and Continental.

    According to ACAROM (The Association of Romanian Automotive Manufacturers), the production of cars and car components reached in 2019 approx. 30 BEUR (+3% increase compared to 2018), generating 14% of PIB and 27% of the total export. The production of auto units reached 490,000 units from Dacia and Ford together during 2019, aiming in 2020 for almost 700,000 units.

    March 2020 – a milestone in the automotive’s history page

    The automotive industry advance stopped, and the production came to an almost complete standstill in March 2020 due to serious threats generated by the COVID-19 pandemic.

    Dacia shut down production starting with 19th March and 13,500 employees out of a total of 14,000 were sent into technical unemployment. Dacia began gradually restarting its production on 21st April, aiming to reopen the entire factory on 4th May. Similarly, 6,000 employees from Ford went into technical unemployment from 19th March until 4th May.

    Stopping the national and international car production led also to an almost full stop of the local car components production – being perceived for the moment as the most affected industry in Romania, due to COVID – 19 challenges.

    Resuming the production, but with great caution

    The particularity of the Romanian automotive industry is a high concentration of employees in a definite working place, often thousands of them are working together in an 8-hour shift. “The local automotive companies that resumed their production must go through great changes not to jeopardize the health of their employees. Investments are needed to be incurred to guarantee a high degree of personal hygiene, distancing within workplaces, the ability of fast identification of employees at risk, and isolate those who may be infected.”, mentioned Ionuţ Vintilă, Senior Manager, Audit & Assurance, Mazars Romania.

    Certain production processes will be affected and need to be re-designed to comply with the mandatory distancing between employees. Other regulations must be considered when talking about the transport of employees to/from the factory, which are located in rural Romania, the dynamic within factory premises (from the gate to the workplace), as well as the behavior of the employees during breaks. In addition, special

    measures must be taken when securing the supply chain to cope with local and European travel restrictions for imports of raw materials and exports of finished goods. One particularity of this industry, such as the high degree of automation in production, will certainly help to maintain the desired safety distances.

    The automotive companies must be aware that if an outbreak of COVID-19 infection is identified in a plant, then there is a high possibility that the plant will be closed down by health authorities for a long period.

    Next steps and the forced transformation of the automotive industry

    It may take years for the global automotive industry to return to pre-crisis volumes. While a smaller decline in sales compared to the previous year is expected in the second half of 2020, the industry could undergo far-reaching changes.

    According to Dr. Christian Back, Global Head of Automotive at Mazars, “COVID-19 could have a diverse and long-term impact on the global automotive industry”.

    For decades, the automotive industry has focused on optimizing working capital. What was considered optimal in terms of financing and lean management is now being reconsidered by many automotive companies in terms of production capability. Supply chains are strongly controlled by the OEMs and it remains to be seen to what extent the OEMs will now push for greater regionalization of supply chains to reduce dependency on international partners.

    “However, the consequences of global crises and worldwide production lockdowns cannot be solved in this way”, adds Dr. Back. Some OEMs are currently rethinking their procurement strategies: potentially switching from one supplier per component to two or even more. This would make OEMs be better prepared in the case of further production lockdowns and individual supplier shortages.

    The COVID-19 experience could offer new opportunities to the automotive industry. Travelers could again prefer individual travel options, as the use of public transport is associated with a higher risk of infection. Or they could ask for the introduction of new in-car products, such as anti-virus functions as part of the air conditioning system, for instance.

    According to the epidemiologist’s community, it is now more and more clear that we are at the beginning of the COVID-19 pandemic, that could last for years to come. Second and even third waves are expected in Autumn 2020 and Spring 2021.

    Fiscal measures with impact on cash optimization

    If we take a look at the fiscal area, we notice that the evolution of the pandemic has determined governments around the world to take quick measures to support the business environment. The European Commission considers the COVID-19 pandemic to be „an unusual event that is out of the government control”.

    In turn, the Organisation for Economic Co-operation and Development – OECD has proposed to governments and tax administrations packages of measures to mitigate the negative impact of the virus: deadlines postponement for filing tax returns and obligations, suspension of penalties/ default interest, suspension of tax controls or enforcement measures, accelerating VAT refunds.

    „The measures taken by Romania are similar to those implemented by other states affected by COVID-19 and are certainly beneficial to the automotive industry. We can mention here the technical unemployment indemnity, the possibility of postponing the payment of fiscal obligations during the state of emergency when most factories in the automotive sector have closed their doors or the bonus granted for the payment of profit tax for the first quarter of 2020, as well as VAT refunds without control.”, mentioned Alexandru Stanciu, Manager, Tax Advisory, Mazars Romania.

    „Companies must also consider the extent to which they can benefit from the tax facilities already provided by law, such as the additional deduction of research and development expenses when calculating the profit tax, the tax exemption of the reinvested profit or the tax credit related to sponsorships. This is also a good time to identify ways to optimize cash flow. Thus, companies with import operations can apply for a certificate of deferral of VAT payment at customs or for the certificate of the authorized economic operator (AEO), the latter having both an impact on cash optimization (guarantee exemption) and in relation to the customs authorities, offering a privileged status.”, mentioned Bianca Vlad, Partner, Tax Advisory, Mazars Romania.

    We expect an acceleration of the digitization process, including at the level of tax authorities, the implementation of technology proving to be essential within the tax administration at a time when the interaction between authorities and taxpayers is limited by the restrictions imposed by the state of emergency.