Bolt-on activity flourishes in CEE region

Following an unusually busy year in 2017, CEE mid-market investors continue to ride the tail winds driving regional economies and consumer spending. In particular opportunities for consolidation and strengthening platform investments has been a notable feature in the private equity landscape.

Most recently, Warsaw-based Enterprise Investors (EI) acquired Studenac, a network of neighbourhood grocery stores operating in Croatia's Dalmatia region. The CEE-focused GP told Unquote at the time that it was attracted to the business due to a favourable macroeconomic environment. In addition, EI said it expected the country's grocery retail landscape to evolve towards modern trade formats making it a target for developing Studenac's regional store network through market consolidation.

Earlier this year, EI acquired a 65% stake in Croatian bakery products manufacturer Pan-Pek in a bid to strengthen the company's market position by expanding retail operations in the region. But rather than identifying Croatia as a country-specific champion amid a consolidation wave engulfing the consumer market, EI perceives bolt-on opportunities to be pan-regional and driven by succession situations.

"Many deals are succession-led buyouts where the founder's family finally agreed to the sale," says Jacek Siwicki, president of EI. "It's difficult to find trends when it often depends on a specific situation. The founder's children may change their mind about taking over, or they decide it's not the time to sell yet – a lot of activity relates to personal decisions. The Studenac deal for example could have happened three years later."

Many deals are succession-led buyouts where the founder's family finally agreed to the sale" – Jacek Siwicki, Enterprise Investors

European buy-and-build activity in 2017 reached its highest level on record with a total disclosed deal value of £7.8bn, according to the latest European buy-and-build monitor by Silverfleet Capital. According to data by Unquote sister publication Mergermarket, the CEE region alone saw 18 buyout deals in 2018 for a value of €719m, while five bolt-on transactions were inked for a value of €9m.

Looking at 2016 and 2017, total buyout activity increased from 58 to 71 deals in the region respectively. By contrast, bolt-ons decreased from 23 recorded deals in 2016 to 19 the following year. However, the aggregate value of buyouts dropped by nearly 57% while the aggregate bolt-on value in those years increased by 138%.

Indeed, bolt-on transactions in the region have seen deal value increase since 2014, while the overall value for buyouts has been decreasing since 2015. In fact, 2017 was the lowest in terms of overall deal value for buyouts since 2014, while 2015 was the highest on record since 1998, according to Mergermarket data, with a decline thereafter as bolt-on value picked up.

A growing interest from big private equity firms could be contributing to the value increase for bolt-on-related activity across central and eastern Europe. As the region converges with the west, country risk is decreasing, making it more attractive for pan-European private equity players. Additionally, these large-cap players are coming down into the mid-market in buy-and-build situations, says CMS partner James Grimwood.

Looming large-cap
The large-cap space is dominating recent bolt-on activity. Deals this year included KKR's Webhelp, which acquired Runway BPO in May from BaltCap, and Equistone-backed Gala Kerzen, which bought Poland-based Korona Candles in April. Earlier in February, Triton's Flokk bought Poland-based Profim and DPE-backed Euro-Druckservice acquired Mega Press Holdings. Prior to that, PPF-backed Ligatne bought Covi Construct.

But while pan-European firms may be entering the market more aggressively, local GPs say creating dealflow in the region is still time- and resource-intensive. The bulk of deals depends on nurturing relationships with owners – including the owners of those companies seen as buy-and-build opportunies for large-cap investors.

"Most pan-European funds don't have a local office and team, so you see activity from players like us," says Abris partner George Siwicki. "It requires patience, local language skills and building relationships with founders, and these are barriers to entry." Companies in healthcare, manufacturing and outsourcing labour are particularly interesting, he adds; the latter becoming more prominent as labour costs are increasing in maturing markets like Poland.

With one eye on consolidating markets, mid-cap players are also mindful of the buying potential from large-cap GPs. For example, Abris selects assets in countries in the European Union – or those such as Serbia, on the basis that the country is negotiating an entry into the EU – to attract those international GPs seeking to make a deal in the region. With local PE firms developing and investing in CEE succession-led firms, pan-European large-caps could find opportunities for secondary buyouts as the region matures along the risk curve.

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• CEE
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• Croatia
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• Abris Capital Partners