Call for calm as Telekom Slovenije deal is put on hold

Despite amending its original offer and gaining qualified approval to buy Telekom Slovenije from the government-owned Solvenian Sovereign Holding, Cinven pulled its bid to privatise the telecoms provider in mid-June.

The GP tabled an offer for 73% of Telekom in April, but the deal fell into limbo when regulatory approval of the company's merger with telecoms operator One in Macedonia and the acquisition of Debitel in Slovenia failed to materialise in time.

Cinven officially called off the acquisition on 16 June, but said it would consider re-evaluating the deal – rumoured to be worth €719-850m – once the outcome of the Macedonian merger had been settled.

The Telekom deal is not the first example of private equity feeling frustrated due to regulatory friction in the CEE region. In late 2014, CEE-based private equity firm Abris Capital Partners sued the Polish government over lost profits related to its investment in FM Bank PBP.

The GP is reportedly seeking $600m in compensation for losses it believes it sustained from the forced sale of the Polish bank by the country's regulator, KNF, which ordered Abris to sell the bank because the private equity firm had failed to meet investor commitments.

Although these examples of regulatory issues may worry firms looking at investing in government-owned assets across the CEE region, the potential returns could far outweigh the risks.

Looking purely at the telecoms sector in the region, many markets still feature one or two major players, usually a government-run or recently privatised service provider.

This would suggest potential for consolidation across the region, as well as building a pan-regional player with smaller market shares to avoid running afoul of competition regulations. Potential future trade sale exits could also become more likely as the region integrates further into the European Union and large western European telecoms giants look to establish themselves in the growing CEE markets.

Likewise, there is likely substantial value to be created through efficiencies and innovations that can be implemented at government-run telecoms operators of the former Soviet countries.

As a cherry on top, the European Bank for Reconstruction and Development (EBRD) has repeatedly shown its willingness to provide capital in the form of fund commitments, debt and co-investing as a means of supporting investment in the region by reducing cost and risk for investors.

More than anything, central and eastern Europe remains a growth region, with a large potential consumer base. This was illustrated by Delta Partners' backing of Virgin Mobile CEE in September last year, in which the potential market for mobile customers in the region was estimated to be in excess of 275 million people.

Meanwhile, on 7 July, CVC Capital Partners was invited to exclusive talks to acquire Polskie Koleje Panstwowe’s PKP Energetyka, the Polish state railway group’s power division, according to Bloomberg. Reports in Poland suggest CVC placed a $394m bid, trumping offers from three local utilities providers and further demonstrating the potential for privatisation deals in the region.

Under-funded
Fundraising for central and eastern Europe-focused vehicles was on the agenda at the Hungarian Private Equity and Venture Capital Association's (HVCA) 17th annual conference in Budapest on 11 June.

Despite strong fundraising across Europe in 2014, the CEE region saw very little capital committed, according to the industry body. Examples of the lagging demand include last year's largest CEE-focused fund, Mid Europa Fund IV, which closed 20% below its €1bn target after LPs had requested the vehicle's hard-cap be revised to €850m.

In April, the EBRD's Anne Fossemalle suggested the CEE region remained one of the more under-penetrated emerging markets, explaining: "One of the reasons for this is the global flow of money. LPs are getting nice returns from global US funds, which means there is less incentive to have this added complication of having to understand the emerging markets. And within the emerging markets, CEE does not seem to be at the top of many people's lists."

At the HVCA conference, X-Ventures CEO and HVCA chair Levente Zsembery said: "Hungarian and CEE/SEE companies need private equity more than ever," adding, "The fact that banks have less appetite for risk than before and CEE companies need new sources to finance their growth, creates an attractive environment for private equity investors."

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