Martin Kúšik
Foto: Jakub Hněvkovský
Yet, some investors try to take advantage of the crisis by seeking fire sales and consolidation opportunities.
Partner at Penta Investments Martin Kúšik claims his organization hasn’t lost its “firepower” with the onset of the financial crisis. In fact, Penta considers this period as an opportunity to consolidate attractive industries by scooping up leveraged assets at rock bottom prices. So far however, Penta was disappointed by the “friendly” attitude of banks towards troubled borrowers, which reduced the amount of fire sales they hoped for. Kúšik argued that Penta stays alert and believes opportunities will arrive as soon as banks will eventually have to admit their bad loans and push struggling companies to pay down debts.
Struggles in the M&A sector were the topic of a conference held last week in Prague. “Today, deals are finalized at five or six times of their earnings before interest, tax, depreciation and amortization (EBITDA). In good times, a multiple of ten was a norm,” said Petr Formánek, executive director at Patria Corporate Finance. An example was the acquisition of the power plant equipment maker Škoda Power by Korean company Doosan Heavy Industries & Construction for some €450 million (Kč 11.8 billion) or 6.3 times EBITDA. Yet, market players are relatively optimistic towards the future, as the economy recovers and the improving availability of financing sparks hope.
Q: How would you describe the current situation in the M&A market?
A: Private equity has been hit by the crisis with the same magnitude as other companies, and it is possible that one-quarter or even one-third of the private equity firms will disappear.
Q: Do you have any estimate of the M&A market contraction?
A: I don’t have any tangible data, but it was a dramatic decline in any case. In my opinion the M&A market might have fallen by as much as 50 percent.
Q: Can you give us some specific factors behind the decline?
A: We can distinguish a few reasons for slower activity in the M&A sector. First of all, these days, private equity houses are focused on internal problems, fixing their existing portfolios of companies. Some of them may realize that it is better for them to close the shop rather than to continue with losses.
Q: What is the outcome of this approach on deals newly commenced on the market?
A: First of all, exits are very challenging. Private equity houses are not able to sell a ‘rosy future’ anymore. Today it is the price—mostly EBITDA multiples—which is the major factor on which investors base their decisions. Moreover, this year we are disappointed with the deal flow, especially in the sector of distressed assets.
Q: What is the situation of Penta Investments in this context?
A: We are not a typical private equity [firm]. We manage the money of five partners and not of many investors. This allows us much more flexibility and swiftness of decisions.
Q: Which trends do you observe at the level of companies?
A: The focus at the management level is to squeeze as much cash as possible to give it to banks and investors. The current market situation favors consolidation trends: the strong will be stronger and the weak will be weaker. Small players suffered a lot during this crisis. When the economy was doing well, small businesses were self confident and avoided takeover bids. Today the case is quite the opposite.
Q: What are the major trends in deal activity?
A: As an investment thesis, consolidation play will be the good investment approach. It is much easier to be a market leader and to consolidate the fragmented sector than to buy a platform and to grow the company to be a market leader. Building a business is another opportunity in an environment where the M&A activity is quite slow. Good healthy smaller targets in sectors where the M&A activity is rather slow can be purchased at attractive prices and grown further. Yet, there is still a risk of execution, even if the business will grow.
Q: In which industries do you notice the most activity and in which countries?
A: We do not think that M&A activities are tied to any specific industry. I think it goes through all industries. I really see no point to say go for food and beverage or other sectors. It doesn’t work this way.
Q: A couple of years ago, we saw many transactions allowing the seller to participate in the upside via many deal structures such as keeping the minority stake. Has the situation changed anyhow?
A: It depends case by case. Earn-out concepts or vendor financing allow the seller to retain part of the upside potential in exchange for a delay in the receipt of cash and risk. This option is considered in most of the deals, however it isn’t not favorable for buyers today, in our opinion.
Q: Why is it so?
A: These days, we are in a buyers market where cash is the king. If someone has cash, he also has plenty of opportunities in how to allocate the money. As we have cash today, we rather prefer to push the seller and take the upside. We are open to all options, but I will not hide that we are trying to take advantage of the current situation.
Q: What is your outlook for 2010?
A: We follow and respect predictions of the International Monetary Fund (IMF) and other respectable institutions. However, as investors, we remain cautious about the currently-forecasted recovery. Therefore, in our base scenario the macro environment shall not improve much compared with the current situation.
Q: How much do you plan to invest next year?
A: This is difficult to say. For example at the beginning of 2009, we expected to spend some €500 million, out of which €350 million of our own money and some €150 million borrowed from banks. In reality, we spent much less, as we did not find a sufficient amount of investment opportunities. Therefore, we are cautious with any guidance for 2010, even internally. However, we haven’t made and don’t expect to make any capital rising soon, which indicates our conservatory approach. I expect we should reveal our investment expectations at the beginning of 2010.
Q: What is the current situation with your portfolio company, the bookmaker Fortuna?
A: We are at the exit stage of this investment. In fact, we have contemplated the disposal of Fortuna for a long time already. Already in mid-2008 we started a disposal process. We obtained eight indicative offers and fetched valuations of up to 12 times the EBITDA. However, we were so unfortunate that the Lehman Brothers collapse interrupted the disposal process before binding offers were submitted. Eventually, we had only one bid at six times the EBITDA and we cancelled the deal.
Q: What is your current strategy for the exit?
A: Currently we are seriously considering an IPO in Warsaw or Prague.
Q: The countries you operate in are characterized by different macro conditions. Does it influence your investment strategy in them?
A: A dominant part of our portfolio is in Slovakia, the Czech Republic, in Poland and even in Hungary. There are differences in the macroeconomic situation of those countries; however they are not so substantial to be a major driver for our success. For example, Hungary has been in a very difficult situation for the last few years. Yet, we are convinced that we can and know how to make money there.
Q: Which factors determine if a country offers attractive investment opportunities then?
A: More important than the current macro [environment] is the political situation in a given country. For example, Ukraine is a market we would rather avoid currently due to political uncertainties. In fact, this country combines both negative features, economical and political.
Q: How many transactions did you close this year?
A: We have completed six transactions this year which is around the same amount of transactions as last year and close to our long term average. Among the most important I must mention the acquisition of [Fabryka Lin i Drutu] Drumet in Poland, one of the largest steel wires and ropes manufacturers in CEE. Two acquisitions were completed in the health care sector in the area of IVD [in vitro diagnostic devices] labs, where we acquired DD Lab in Poland and recently Aeskulab in the Czech Republic. We have also continued in expanding our ‘window’ holding and we acquired the number two player in Slovakia Noves Okná company. However in terms of the deal size, in 2009 we have not completed deals comparable to 2008, when we acquired leading meat processing companies in Hungary and Slovakia.
Q: The major headache in private equity these days is difficult access to debt financing. How are your relations with local banks?
A: We are obviously feeling the constraints on debt financing. We cannot escape the market reality. However, we enjoy the advantage of our strong market position and reputation. During these days, banks appreciate strong partners at the cost of ceasing cooperation with smaller and weaker business partners. The track record of cooperation is a very important factor.
Q: Is the general availability of bank financing improving?
A: My impression was that in the first half of this year, there was a lot of uncertainty in the market. Today, the situation is more tangible and predictable; we see that banks are finding it gradually easier and easier to finance transactions. We have consistently rising capital from several banks throughout this year. For me, the fact that we were able to raise debt financing even in the fourth quarter of 2008, in the midst of financial turmoil, was the most conspicuous confirmation of our strong position and reputation with banks.
Q: Real estate is your second arm. Would you like to buy some asset in the Czech Republic or other countries in CEE? What kind of assets are you particularly interested in?
A: We would like to buy some real estate assets. For this purpose, we established our office in Prague. We also have an office in Bratislava dealing with real estate. As far as financing is concerned, a ‘friendly attitude’ by banks towards distressed assets is particularly true.
Q: Do you expect this approach to change eventually before the market recovers?
A: I assume the longer this situation exists, the worse it gets. Eventually however, [banks] will have to face the music and admit the mistake and write-off part of the loans.