How Geopolitical Change Is Affecting M&A Activity in Europe
The market in central and Eastern Europe has been growing for the past 30 years since the collapse of the USSR, becoming an ever-more attractive area for investment for Western European countries, including the U.K.
The geographical proximity, less costly salaries and membership of the single market of many central and Eastern Europe countries, altogether with a talented workforce make for an excellent investment opportunity. This is evidenced by high levels of M&A activity in the region in recent years, and a jump in the levels of private equity with a total deal value of over €10 billion ($10.7 billion).
However, following Russia’s invasion of Ukraine in February last year, the landscape has changed. Russia faces heavy sanctions from European countries and likewise European countries face sanctions from Russia.
In keeping with trends in Western Europe, central and Eastern European countries have seen rising levels of inflation and increasing interest rates from central banks to curb inflation, in part caused by these sanctions, which have had an impact on M&A activity in the central and Eastern Europe market.
Overview of the U.K. M&A Market
The U.K. is the leading destination in Europe for international deal making. In recent years, this has been as a result of a strong COVID-19 vaccination program.
However, going forward, this trend is predicted to continue for different reasons; there is likely to be an increase in distressed M&A deals, with inflation on the rise and consumer confidence falling. Coupled with the U.K.’s weak currency, international buyers will look to take advantage of lower valuations of companies struggling in the current climate.
Key Sectors for U.K. Investment in Eastern Europe
We see that the following sectors are attractive to U.K. companies for investment in central and Eastern Europe:
IT and tech: There are well-qualified workers in central and Eastern European countries and the technology sector is on the rise.
Agriculture: Although Ukraine’s grain export has been disrupted due to the war with Russia, with land in surrounding countries having similar yield potential, exports from these countries will begin to increase.
Renewable energies: There is a general interest in green energy, with EU member states setting net zero targets and countries in south-Eastern Europe offering opportunities for energy projects.
Poland remains a popular market for U.K. companies’ investments, due to its resilient economy and cost-effective workforce, despite increasing geopolitical tensions as a result of the conflict in Ukraine.
Over the past 10 years, U.K. companies have accounted for 124 deals in Poland, the second highest number of inbound acquisitions in Poland. The main target sectors are software, telecoms and financial services.
As with Poland, software companies and telecommunications remain attractive sectors for investment in the Czech Republic.
In September 2022, Zenitech, a U.K.-based transformational technology company, acquired AutSoft, a Hungarian software company. The CEO of Zenitech cited the reason for the transaction as having access to some of the best technology talent in the region.
In June 2022, U.K.-based Lucy Group Ltd. acquired an 80% shareholding in Flashnet, a Romanian internet of things tech company. The purpose of the deal was to invest in smart city technologies, another example of the growth of the tech sector in central and Eastern Europe.
Investment by Eastern European Companies in the U.K.
The U.K. remains one of Europe’s largest economies and the British market is cited by central and Eastern Europe company leaders as a key part of their international expansion strategy, as is evidenced by recent M&A activity:
In August 2022, Wielton SA, founded in Poland, completed its acquisition of Lawrence David, a British manufacturer of parts for lorries. The CEO of Wielton stated that the U.K. is a strong market for trailers and semi-trailers. He outlined the company’s presence in the U.K. as crucial to their overall strength in Europe.
In November 2022, Czech betting company Allwyn acquired U.K.-based Camelot Group, which runs the National Lottery.
In December 2022, as part of their extension into Western Europe, Latvian logistics group Kreiss, SIA acquired U.K. company C Neil Dowson Ltd. with the view to delivering first-class haulage solutions to U.K. customers.
Therefore, despite Brexit, inflation, high interest rates and the weakening pound, the U.K. remains an important economy for investment and influence in the rest of Europe.
M&A Trends in 2022/2023
As a result of recent market volatility caused by Russia’s invasion of Ukraine and associated sanctions, raising fuel prices, high inflation and interest rates, we are seeing the following trends in M&A transactional activity between the U.K. and Eastern European countries:
- Wider use of noncash consideration, paid on deferred terms, due to rising interest rates and the higher cost of borrowing;
- Increased use of completion accounts, which allow buyers to verify company valuations;
- With tech deals on the rise, in central and Eastern Europe and across Europe, earnouts are becoming more popular due to the challenges of valuing assets in a volatile market;
- Wider use of material adverse change clauses referring to COVID-19 and the war in Ukraine. E.g., since Polish law provides uncertain levels of contract relief from force majeure events, and in order to be enforceable, material adverse change clauses are included in the acquisition agreement and refer specifically to such events;
- Greater use of warranties and indemnities insurance, including in smaller and midmarket deals; and
- Inflationary pressures, meaning heavy price negotiation and comprehensive due diligence with a view to anticipating risks, which may lead to deals taking longer to complete or potentially abort.
Outlook for 2023
As a result of Russia’s invasion of Ukraine and consequent sanctions, more and more companies are expected to divest from Russia, likely leading to Western European companies relocating their businesses to nearby central and Eastern European countries that are EU members, such as Poland, the Czech Republic or Hungary. These are lucrative targets due to their cost-effective labor and membership of the single market.
Furthermore, technology startups in central and Eastern European countries are predicted to be attractive for U.K. investment.
Due to its reputational value and transparency, the U.K. market is likely to remain attractive to central and Eastern European investors and to companies wishing to expand their business operations abroad, wanting to be seen as serious business players in the Western European market.
In addition, due to market volatility caused by high inflation, increased fuel prices, the weakening pound and the geopolitical situation, an increase in distressed M&A activity is also anticipated.
Oksana Howard is a Partner at Colman Coyle Ltd.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.