Austria has proven to be an economic safe haven in the past few years, but the troublesome CEE countries are still playing on lawyers’ minds.
A favourite topic of conversation around the dinner table for wealthy Viennese is the astronomical price of apartments in the centre of town. They bemoan how rich Russians are coming in and snapping up the grand, high-ceilinged apartments on the imposing avenue that circles the centre of town, the Ringstraße. The Russians, they say, like the climate and the genteel lifestyle that Vienna offers, and will pay almost anything to get these apartments.
Over the next year it’s likely that those wealthy Viennese will be complaining even more. Property prices rose by 10% in the first quarter of 2011 and the city’s beautiful 19th century buildings are a prime target for investors seeking a safe haven from the turbulence in the European markets. But alongside its property, Vienna is also increasingly seen as a safe bet for strategic investors, and that means Austria, and its lawyers, have avoided the economic doom and gloom of much of the rest of Europe.
Status quo
Austrian law firms have fared reasonably well of late, as the Austrian economy has been fairly resilient over the past few years. According to the International Monetary Fund (IMF), real GDP growth in Austria was a very healthy 3.3% in 2011, compared to 1.1% in the UK or 2.7% in Germany. The country has seen its fair share of banking problems, such as the nationalisation of Hypo Group Alpe Adria (see ‘Eine kleine Nachtmusik’, LB211, page 64). The recent downgrading of Austria’s credit rating by Standard & Poor’s has left its mark but this aside, it has been left relatively unscathed by world events.
That strong economy has meant that law firms in Vienna have had a relatively buoyant year and there is an air of cautious optimism among Vienna’s lawyers. Most of the major firms are expecting minimal growth, but growth nonetheless (although Austrian firms are notoriously secretive about disclosing financial information).
‘We are not normally affected by world-wide M&A activity as much as other countries’ says Herbst of Schönherr.
Wolf Theiss says it grew revenues by around 4% in 2011; Austria’s second largest firm by headcount, Schönherr, is expecting ‘positive growth’; CMS Reich-Rohrwig Hainz reports that revenues increased by 10%; and the country’s third largest firm, Binder Grösswang, is expecting revenues to stay largely static. Some of the smaller firms have had much more impressive growth. Peter Polak, managing partner of mid-sized Fiebinger Polak Leon, says that the firm managed to grow revenues by an impressive 12% in 2011, mainly driven by an uptick in energy work.
‘M&A developed much better than we feared. In the end we are at about the same level as we were last year. I think it’s mainly down to Germany having a good year,’ says Thomas Schirmer, the new managing partner of Binder Grösswang. ‘We have seen more strategic buyers from the US, UK, Canada and Germany.’
Austria’s economy is almost ‘Germany lite’ – the country’s fortunes largely mirroring that of its neighbour and biggest trading partner. According to the German government, in 2010 bilateral trade was worth Ä88bn, representing around a third of Austria’s trade. Because of these strong links with Germany, Austria has largely been pegged to its neighbour’s economy over the past five years. As such, Austria never had the massive boom that the UK and US saw and has been steadier in transactional terms. Given the relative rude health of Germany’s economy, that’s a pretty good place to be right now.
The strategic approach to M&A was evident in one of the biggest deals of the year: the closing of the merger between UK-listed PartyGaming and Vienna-listed bwin Interactive Entertainment in March 2011. The Ä1.7bn merger created the world’s largest listed online gaming company. The London and Vienna offices of Freshfields Bruckhaus Deringer advised PartyGaming, with tax partner Michael Sedlaczek leading the Vienna team and corporate partner Chris Mort leading the London team. Partners Thomas Talos and Christian Thaler of boutique capital markets firm Brandl & Talos advised bwin on the deal, with Clifford Chance advising on the English aspects, led by M&A partner Jonny Myers.
But these large M&A deals have been rare. As Polak points out: ‘Deals are returning to the Vienna market but at a small to mid-market level of between €10m to €180m.’ He adds: ‘We think mid-sized Austrian-based independent firms are best placed to pick up the new instructions.’ Firms just like Fiebinger Polak Leon, in fact.
While there are still traditional M&A deals being done, 2011 saw a continued increase in distressed M&A work, as Christian Herbst, a corporate partner at Schönherr, explains. ‘We are not normally affected by world-wide M&A activity as much as other countries,’ he says. ‘The type of deals getting done are dominated by distressed work generated by group restructurings.’
There have been a number of deals following the insolvency of the A-TEC/AE&E industrial group that went bust in late 2010, which saw the administrators looking to dispose of a handful of assets. In January this year, DLA Piper Weiss-Tessbach advised Doosan Power Systems on the acquisition of a majority shareholding in AE&E Lentjes from the insolvency administrator of AE&E Deutschland. Max Becker led the Vienna team, while corporate partner Martin Schulte and restructuring and insolvency partner Peter Jark led the DLA Piper team in Germany. Seoul-based firm Kim & Chang advised Doosan on the Korean aspects of the deal.
Major independent firm Cerha Hempel Spiegelfeld Hlawati (CHSH) has also been active on A-TEC-related work. In 2011 the firm advised Dubai-based Dodsal Group in several tender offers in the insolvency of AE&E for the acquisition of its Indian subsidiary. M&A partners Johannes Aehrenthal, Georg Konrad and Thomas Trettnak led the CHSH team.
‘We’ve still got many Austrian companies involved in the CEE, but not much hunger for new Austrian entrants into the CEE market’ says Lukas Flener of Weber & Co.
Eastern woes
While transaction levels may be relatively robust at home, the bigger worry for many firms is exposure to the more volatile Central and Eastern European (CEE) markets.
When the CEE markets first liberalised in the late 1990s, Austria became a gateway market because of its great trade links and the number of Austrian companies that piled into these new markets. Consequently, many of the larger law firms expanded heavily across the region and are now stuck with offices that are experiencing little growth.
However, compared to last year, deal flow has been trickling back. Austrian companies are not looking to exit these markets, nor are they looking to expand. Lukas Flener, an M&A partner at local mid-sized independent Weber & Co, explains: ‘We’ve still got many Austrian companies involved in the CEE, but not much hunger for new Austrian entrants into the CEE market.’
Peter Huber, managing partner of CMS Reich-Rohrwig Hainz, agrees, and believes that Austrian companies are consolidating their position regarding the CEE. ‘Austrian corporates, including financial services, having invested heavily in the CEE, remain headquartered in Austria although new Austrian foreign direct investment has slowed,’ he says.
However, Austrian firms have been able to capitalise on strategic deals in the region. One of the biggest transactions in the CEE in 2011 saw Russian bank Sberbank’s E585m purchase of CEE bank Volksbank International in September, the first time that Sberbank has acquired assets outside of the CIS. A team led by Willibald Plesser and Mikhail Loktionov in Freshfields Bruckhaus Deringer’s Vienna office advised Sberbank. On the seller side, Christian Dorda and Jürgen Kittel led the team at Dorda Brugger Jordis that represented Volksbank shareholders’ BPCE Group alongside Barthélémy Courteault of French firm Bredin Prat. Sascha Hödl led the team at Schönherr that advised Österreichische Volksbanken.
Again, restructuring work has dominated. In 2011 CHSH advised Telekom Austria Group on its Central European restructuring programme, involving several spin-offs, mergers and other reorganisations until the final group structure was achieved. Benedikt Spiegelfeld, Elisabeth Gruber and Heinrich Foglar-Deinhardstein led the team that involved subsidiaries in Austria, Slovenia, Croatia, Serbia and four other countries.
Although there may not be a significant number of new investors in the region, the large firms point out that they have built up substantial local client bases and are no longer solely reliant on Austrian and international investors. Public sector work continues to be an important revenue stream for many firms. For instance, Schönherr is advising the Montenegrin government on its privatisation programme, while in 2011 Fiebinger Polak Leon advised Montana Tech Components on its Ä50m refinancing and shareholder restructuring of its Romanian subsidiary, which involved a substantial new equity agreement with the European Bank for Reconstruction and Development (EBRD). Polak, Bert Ortner and Robin Lumsden led the team.
But a few bright patches aside, the Eastern European markets still suffered the deepest recession in the world after the Lehman Brothers collapse, according to the EBRD. And that grim economic outlook is not set to change very soon.
‘I personally don’t believe the CEE will return to the growth rates that we saw before Lehman. The CEE continues to be a disaster,’ says a pessimistic Schirmer of Binder Grösswang, which does not have any offices in the region. He says that the economic woes of the CEE have meant the firm has become a much more heavily domestic business. ‘At a guess I’d say around 10 to 15% of our revenues were generated outside of Austria at the peak, mainly in the CEE. But that is down to around 3% now,’ he adds.
‘I personally don’t believe the CEE will return to the growth rates that we saw before Lehman. The CEE continues to be a disaster,’ says Schirmer of Binder Grösswang
But at Wolf Theiss, which has 11 offices across the region, managing partner Erik Steger puts a positive spin on the CEE’s economic conditions. He points out that even if the CEE economies worsen there will still be work for lawyers as financial institutions, like Erste Bank, will have to get round to reorganising their operations in the region.
‘If there is another credit crunch, the banks will still have to bring up their capital levels and deal with non-performing loans,’ he says. ‘They will need real estate knowledge and people who know how to clean up the balance sheet, the sort of specialist knowledge that we have.’
Schirmer agrees that there will be significantly more banking work in the CEE but questions whether it is a sustainable workflow for Austrian firms.
‘The only chance for the Austrian firms is if the Austrian banks have to sell their local operations and not operate in certain markets,’ he says. ‘If you sell a bank there might be an increase in work, but then after that there won’t be any work left out there.’
The woes in the CEE do not look set to end any time soon. But given the robust health of the Austrian economy, that should not worry most of Vienna’s lawyers too much. In a strange twist, the trouble in the eurozone may mean that more investors look to Austria, and see that its assets and companies are a safe bet. That will mean more complaints round the dinner table in Vienna about property prices, perhaps not such bad news for Austria’s lawyers. LB