Small but steady steps to recovery 11 May 2011
Contents Page Worldwide M&A scene 3 Worldwide M&A outlook 5 M&A outlook in Romania 10 Appendices 11 Page 2
Worldwide M&A scene (1/2) The recovery in global M&A continued during Q1 2011, as dealmakers trust in the global economic improvement increases. a) By deal value b) By number of deals 26% (or US$ 208bn) of worldwide announced deals value accounts for European transactions Asia-Pacific 16% South-Central America 5% Africa/Middle East 2% 3 of deals were announced in Europe South-Central America 4% Africa/Middle East 2% North America 26% North America 51% Asia-Pacific 31% Europe 26% Source: EIU Europe 3 Source: EIU Page 3
Worldwide M&A scene (2/2) Global trends Short-term, M&A remains below pre-crisis levels. First three months of 2011 represented the strongest period of M&A activity since the second quarter of 2008, before the collapse of Lehman Brothers. However, the number of deals announced this last quarter was down compared to the volume recorded in Q1 2010. Despite this, the size of deals increased (with transactions above US$ 5bn representing 41% of the market). Energy and financial services continued to account for around a third of global M&A activity. The most important change in the M&A landscape during the last quarters was the increase in Private Equity activity (deals of US$ 50bn during the first quarter 2011). Preqinestimates that Private Equity is sitting on some US$ 412bn in dry powder, with half of the amount held by large PEs with global reach. Trends mirrored on Romanian market In general, Romania sees a delay in trends relative to M&A activity in more developed markets. Recovery of Romanian market has already become apparent during the last months; however, the signs of recovery are shy. If worldwide trends will translate on the Romanian market in half a year time, more optimistic expectations are in place. Correspondingly, energy and financial services appear to be two of the most active M&A sectors in Romania too. Romania is screened by regional PEs, which are expected to show more activity on the Romanian market this year, as economic recovery is on the spotlight. Page 4
Worldwide M&A outlook (1/3) How likely are you to execute acquisitions in the following time periods? Likelihood of undertaking acquisitions in the emerging and developed markets in the next six months 7 6 5 3 1 41% 24% 33% 4 6 5 54% 28% 41% 44% 38% 33% 3 1 21% 15% 31% 32% 2 21% 18% -1 0-6 months 6-12 months 1-2 years Emerging markets Developed markets Source: Ernst & Young regular survey, Capital Confidence Barometer, April 2011 Page 5
Worldwide M&A outlook (2/3) How likely are you to execute divestments in the following time periods? 7 6 What is your preferred route for divestments? Sale to corporate Joint venture 34% 31% 5 42% Sale to domestic acquirer 26% 2 3 21% 38% 18% 21% 19% 18% 1 1 16% Sale to PE Sale to foreign acquirer IPO SWF Other 5% 8% 22% 16% 0-6 months 6-12 months 1-2 years 1 3 5 6 Source: Ernst & Young regular survey, Capital Confidence Barometer, April 2011 Page 6
Worldwide M&A outlook (3/3) Mixed signs in expectations Possible impact on the local market Ernst & Young regular survey - Capital Confidence Barometer- shows that : In the short term, appetite for mergers and acquisitions is up, while in longer term the appetite declines. The decrease in M&A perspectives is due to uncertainties in economic recovery linked to rising inflation, political instability in the Middle East and natural disasters. The number one strategic priority for companies remains organic growth (49% of respondents). Emerging markets look more attractive for buyers than developed ones (32% vs. 18%). The most popular structure for an emerging market transaction is joint venturing, due to higher risks related to investments. Sectors targeted in emerging markets are automotive, consumer products, mining and pharmaceutical sectors. One in ten companies still remains focused only on survival. According to Ernst & Young s survey, expectations are positive for the next half of the year. If external factors shadowing long term perspectives stabilise, M&A activity in Romania could be maintained on the right track. Indeed, inflation began raising concerns during the last months in Romania. BNR changed last week its projections from 3.6% to 5.1% inflation in 2011 and fights to keep it contained. As an emerging market, Romania benefits from an increased focus of foreign investors. Regarding joint ventures/alliances, we observed raising interest for this type of investment in agriculture, industrial products, IT and renewables. Additionally, PPPs prospects have been circulated with increased emphasis during last months, as State is in need of infrastructure development but lacks the necessary funds. Merger Market intelligence confirms M&A talks especially in consumer products and mining. With few exceptions, Romanian companies are in a larger proportion concerned with survival than companies composing the population of our Survey, consequently are more interested in divestments. Page 7
M&A outlook in Romania (1/3) Good signs during the first quarter 2011 foster positive expectations for the remainder of the year, if macro-economic conditions stabilise or improve Ernst & Young counted 55 deals (15 announced and 40 completed) during the first quarter 2011, compared to 106 of the M&A market in Romania this year. completed transactions during the entire year 2010, encouraging us to believe in a positive development However, the value per transaction was small or very small, most all disclosed values being under EUR 20 mil each. Most active sectors in terms of M&A were Real Estate (10 announced or closed transactions), Oil & Energy (7 completed deals) and Services (5 closed deals), Financial Services (5 deals), followed by Telecom, IT and Manufacturing (4 transactions each). 9% Industry focus in deals, Q1 2011 18% 13% 5% 6% 2% 4% 2%2% Agriculture Chemicals Construction Consumer goods Financial services Healthcare IT Manufacturing Media Mining Pharma Real Estate Services Telecom Oil & Energy2 5% 9% 4% Source: EY, zf.ro, DealWatch, MergerMarket Page 8
M&A outlook in Romania (2/3) Sectors expected to be active in M&A during the following months: Medical services: Consolidation continued in the private medical services during the first months of 2011 with the acquisition by Medlifeof Genesys Medical Clinic (approximately deal value of EUR 3 mil). At cross-border level, Euromedic Dialysis Centers were bought by Fresenius Medical Care. The trend of consolidation in this sector is expected to continue during the next quarters, with large players looking to grab market share by acquiring small players. Agriculture: As worldwide prices for food reach record levels, we expect more transactions in this sector during the next quarters. During the first quarter of 2011, two worth mentioning acquisitions took place: Cargill bought a silo in DrobetaTurnu Severinin order to strengthen its cereal deposit capacities and CHS expanded its business in Eastern Europe through the acquisition of Agri Point. Real Estate: After a quarter with less than a dozen deals, as the gap between price expectations of demand and offer narrowed further, the real estate market shows timid signs of recovery. Real estate companies in insolvency procedures or even bankrupt are actively looking for acquirers or equity providers. Several attempts to sell various shopping malls in difficulty took place during the past months. Banking: European banking groups announced reorganisationmeasures whereby they intend to sell units in the CEE region in their attempt to increase financial performance. Assets up for sale as publicly announced are: MKB Romexterra, ATE Bank Romania, Volksbankand RBS. Telecom rumours in the market: announced IPO of Romtelecom, pre-ipo possible merger between Romtelecomand Cosmote, expansion plans of GTS (telecom and data storehouse company) and Telecom Italia in the region. Page 9
M&A outlook in Romania (3/3) Large transactions foreseeable in near future: State selling minority stakes in high-profile companies: The State, impelled also by IMF, is taking steps into selling minority stakes or privatization of state-owned companies. The most advanced process is that involving Petrom (the sell of 9.8 % of its shares) The State awarded the winner for investment bank services to support the intermediation of the sale. The State envisages selling other minority stakes in Transgazand Transelectrica(2011), and Romgaz (2012). All transactions will be made through public offerings. Oltchimis also eyed for a similar deal. The State is considering also the creation of the two energy giants during 2011, Electra and Hidroenergetica, after postponing the process in 2010. The President has declared that 2011 is the year of reform for state-owned companies (citing CE Turceni, CE Rovinari, National Company of Pit Coal, Termoelectrica, Oltchim, Posta Romana and many others as eyed for reform measures). We are curious about the adopted measures in these cases. M&A could entail. RCS & RDS plans to buy UPC : Since February 2011, media started talking about a possible acquisition of UPC by RCS & RDS, transaction that could reach EUR 200 mil. By the end of March, according to the same sources, RCS & RDS was asking for financing offers between USD 150 200 mil for the acquisition. However, there are serious barriers to this market movement, as the newly obtained company would hold more than 5 of the market share. Page 10
Appendices Page 11
About the barometer Ernst & Young s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). The respondent community, the Ernst & Young 1,000, is comprised of an independent EIU panel of senior executives and selected Ernst & Young clients and contacts. This snapshot of our findings gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their capital agenda. Respondent profile: EIU panel of more than 1,000 executives surveyed in February and March 2011 Companies from 62 countries Respondents from 40industry sectors 559CEO, CFO and other C-level respondents 248companies would qualify for the Fortune 500based on revenues Page 12
Mergers and acquisitions outlook Which of the following do you think have increased or decreased in the current environment? -1% -1 42% Percentage point increase vs. Oct 2010 8% 12% Buyer/seller price expectation gaps -1%- 42% 8% Valuation uncertainty/complexity -1%-5% 3 1 6% Regulatory pressures -1% -11% 3 9% 1% Board/audit committee scrutiny -1%-11% 39% 6% Investor/financier caution -1% -9% 41% 5% Competition for assets -1% -6% 39% 6% 6% Overall transaction risk -2% -15% 35% 6% Insufficient availability of financing -1% -6% 34% 5% 9% Business case thresholds/hurdle rates -2% -16% 3 6% 6% Shortage or lack of quality deal opportunities -1% -11% 23% 4% 4% Lack of quality information on targets -3-1 1 3 5 7 9 Increased Significantly increased Decreased Significantly decreased Page 13
Mergers and acquisitions outlook Which of the following activities are you likely to consider or undertake in the next 6 and 12 months? Full data Next 6 months Next 12 months Acquisition in developed markets Acquisition in emerging markets Acquisition of distressed assets Acquisitions of non-distressed 3 26% 25% 22% 22% 15% 21% 1 18% 31% 35% 32% 3 26% 31% 32% 21% 2 1 3 32% 22% 14% 13% 1 16% 12% 15% 35% 3 23% 18% 21% 14% 1 12% 19% Full merger JV/Alliance IPO Rights issue or other share offering 3 16% 1 1 1 5% 5% 9% 29% 3 33% 31% 31% 29% 21% 18% 15% 1 3 1 12% 11% 9% 4% 4% 6% 3 9% 1 6% 5% 8% 6% 6% 5% Nov-09 Jan-00 Oct-10 Apr-11 Page 14
Mergers and acquisitions outlook Which of the following activities are you likely to consider or undertake in the next 6 and 12 months? Full data Next 6 months Next 12 months Divestment of core business Divestment of non-core business Divestment of distressed assets Divestment of non-distressed 3 3 3 3 11% 1 8% 5% 8% 5% 5% 5% 1 16% 13% 1 11% 14% 13% 13% 12% 1 12% 11% 8% 11% 9% 12% 8% 16% 1 16% 6% 5% Page 15
Organic growth Which statement best describes your organization s focus over the next 6 months? 5 Actively looking to take advantage of inorganic growth through M&A 5 Focused on organic growth 49% 5 Restricted in ability to pursue inorganic opportunities 5 Focused on survival 3 1 31% 38% 29% 31% 3 1 25% 38% 46% 3 1 14% 16% 12% 3 8% 1 1 9% 4% Page 16