The Balkans – Holding up

The signs had been positive for the Balkan states until very recently. Not only have countries in the region shown great commitment in pushing through reforms to bring domestic legislation in line with the rest of Europe, but many have also shown exemplary discipline in complying with International Monetary Fund (IMF) austerity measures. All this contributed to the IMF’s forecast last year that growth in the Balkans by 2013 would be three times that of western Europe.

However, the knock-on effect from the rest of the continent has been severe. With the eurozone crisis showing no signs of abating, forecasts for growth in the region have suffered amid fears that, as western Europe further tightens its belt and its major banks shrink outside of their home markets to help beef up capital levels, already low levels of liquidity within the region will drop even further.

Ratings agency Fitch cut its 2012 growth forecast for the wider ‘emerging Europe’ from 4.1% in June last year to 2.8% in December 2011. This was largely to reflect the downward revision to GDP growth in the eurozone to just 0.4% in 2012, but also on the back of fears for the stability of public finances, the inaccessibility of global capital markets and sluggish lending growth among eurozone banks, which account for a large majority of banking assets in the Balkan region.

‘There is not much appetite for equity issues and little debt capital markets work.’ Sebastian Lawson, Freshfields

But while law firms active in the Balkans attest to all of these trends – and to the large number of deals that never make it off the ground – they are strategically aligned to take full advantage of the pockets of very real opportunity that exist across the region.

Mixed fortunes

Most local and international lawyers describe the short-term outlook for the region’s economy as bleak. Schönherr Belgrade partner Matija Vojnovic´, one of the first equity partners to come from outside of the firm’s Vienna headquarters, says: ‘My personal impression is that in the short to mid-term, the outlook for the country’s economy is quite gloomy, [partly] because of the general illiquidity of the market and interrupted flow of fresh finance since the foreign banks have stopped pumping money into their subsidiaries in Serbia.’

The latest crisis of confidence in the global markets has inevitably seen a flight from illiquid assets, and with the exception of regions such as Montenegro, real estate has suffered again, if it ever recovered. Elsewhere, M&A levels have dropped alongside overall foreign direct investment levels. Freshfields Bruckhaus Deringer Moscow-based, CEE-focused corporate partner Sebastian Lawson says: ‘Undoubtedly our deal activity level has decreased as it has for everybody else. There is not much appetite for equity issues and little debt capital markets work.’

Rumours of deals abound in the market, particularly in the energy and telecoms sector, but Lawson adds: ‘We are not expecting a major upswing this year in M&A or capital markets work and I am a bit sceptical about privatisation deals talked about for so long. It’s a question of whether governments are able to succeed in getting those projects off the ground.’

There is a huge need for projects work across the region and EU funding is available to help oil the wheels, but the complex regulatory framework of many Balkan countries and the unrealistic price expectations of their governments are still very much deterrents or deal breakers for foreign investors.

Conditions may be tough but the regional players who have weathered the crisis since 2008 are serious contenders in this market. It is notable that, despite widespread fears of further economic contagion from the eurozone crisis, law firms feel well placed within themselves to face any contraction. DLA Piper Bucharest managing partner Marian Dinu says: ‘If Romania gets hit as a result [of the eurozone crisis] everyone is hoping that activity has stabilised at a low level and that there will not be a dramatic change for the worse in the economy or the legal market.’

‘In the past three years the Bulgarian renewable energy market has been very attractive for investors.’ Iliya Grozdanov, Dinova Rusev & Partners

Strategic positioning is key and at Schönherr, highly regarded by competitors in the region, Vojnovic´ says: ‘If you are lucky enough to be well positioned in key industries, most notably energy, telecoms, insurance and a bit of pharmaceuticals, these industries provide sufficient projects work because they have not been completely hit by the crisis.

‘This, combined with a huge amount of restructuring and workout deals, is more than enough to keep the firm busy.’

Schönherr is now present in five Balkan countries – Bulgaria, Croatia, Romania, Serbia and Slovenia – but for international firms with no direct presence in the Balkans, many are working hard to ensure they hear about large deals ahead of the market. At Freshfields, the firm services the region from its offices in Vienna, Moscow and London, with one Balkan/CEE specialist partner in each jurisdiction. Lawson, a regional specialist himself, says: ‘We don’t have local offices so that means we can’t afford to sit back, we really need to be a bit more proactive in getting the deals. Even now there are a number of interesting deals we would like to be working on in the region.’

Freshfields relies on its network of preferred local law firms in the region; its relationship with institutional investors; its own lawyers, often from a range of different backgrounds; and its clients to hear about deals at an early stage. ‘There are a number of different nationalities represented within our trainee intakes and if they join the firm from, say, Serbia or Croatia, we really encourage them to stay in touch with the local press and when something comes up we can start pitching it to our clients,’ says Lawson.

 

Transaction league tables for the region show, somewhat predictably, that advisers with a local presence – including Wolf Theiss; CMS; Clifford Chance (CC) (present in Romania); and Schönherr – are leading the field in terms of the volume of deals but that the picture is inevitably much more mixed for the big ticket transactions. Leading by deal value is CMS, present in all key Balkan jurisdictions, with £1.3bn worth of deals. However, US M&A powerhouse Skadden, Arps, Slate, Meagher & Flom follows with £1bn worth of transactions from two announced deals in the region and Linklaters, privately said by competitors to have taken its eye off the ball in the Balkans, is in fifth place with £703m of deals.

CMS, led by partners Vincent Dirckx, Louise Wallace and Stojan Semiz, advised on the largest deal of 2011 – the £816m acquisition by Brussels’ Euronext-listed food retailer Delhaize Group of Serbian retailer Delta Maxi. CC advised the seller, Delta Holding, alongside Belgrade-headquartered Jankovic´, Popovic´ & Mitic´, led by senior partner Nenad Popovic and partner Jelena Gazivoda.

However, when last year Schönherr, led by partner Sascha Hödl, advised Volksbank on the E645m sale of Volksbank International – with subsidiaries in the top financial institutions across the Balkan region and beyond – to Sberbank of Russia, it was Freshfields, with its top-tier Russian corporate practice that advised on the deal. It was led by Willibald Plesser, Maria Pflügl and Friedrich Jergitsch in Vienna and Mikhail Loktionov in Moscow.

One local partner adds: ‘It is not unexpected that Freshfields is getting high-profile deals; it is a major firm and in the good times wouldn’t touch deals of less than $1bn. Whereas Freshfields comes from the top, we are positioned more broadly and are building and improving our position.’

‘In the past three years the Bulgarian renewable energy market has been very attractive for investors.’ Iliya Grozdanov, Dinova Rusev & Partners

In the long term, lawyers are quietly optimistic that the vast potential for development of the region’s energy, roads and railways infrastructure, and the huge state-owned energy and telecoms companies that have yet to be privatised, will still provide rich rewards. Vojnovic´ says: ‘In the long term I really believe in the market and I’m quite optimistic because the country has plenty of room for improvement and relatively higher growth potential compared to more mature European markets.’

 

Booming Belgrade

Since the ousting of former Yugoslav President Slobodan Milosevic in October 2000, Belgrade, one of the largest cities in south-east Europe, has seen its gross domestic product per capita rise from $1,200 to $6,600 in 2011. The arrest last year of Bosnian Serb general Ratko Mladic is widely expected to clear the way for the country to achieve EU candidacy and law firms are lining up to assist domestic businesses unclear on what is expected of them.

Kinstellar Belgrade M&A partner Branislav Maric´ says: ‘Since 2011, parliament has adopted over 100 new laws and regulations in trying to meet its deadline for candidacy.’ These new laws span competition, capital markets and telecoms, leaving local businesses reaching out to their lawyers to advise on how to comply.

The results of the candidacy application will be followed swiftly by Serbia’s own national and local elections in May, and two such political hurdles, particularly in such quick succession, are expected to mean that any big business decisions will be put on hold until September, after the holiday season comes to an end.

According to Mark Harrison, founder of Belgrade firm Harrisons Solicitors, much now hangs in the balance. If the EU approves candidacy, it is likely to mean continued stability for Serbia and a boost to the incumbent Democratic Party, resulting in enough votes in May’s national elections to form a coalition government. This could pave the way for further major legal and business reforms.

Fail in the EU bid, Harrison says, and there are very real fears that the radical right wing Serbian Progressive Party, led by Tomislav Nikolic, will succeed in its bid to take over running the country. ‘If we don’t get the candidacy – and it’s only 50/50 – I seriously think the radicals will have a good chance of getting in,’ Harrison says. ‘This will have a dramatic effect on business and law firms.’

‘People see Montenegro as a small market they can service from outside which is wrong.’ Mark Harrison, Harrisons Solicitors

With leading EU member states so caught up with solving the eurozone crisis, the issue of Serbia inevitably finds its way to the bottom of a very large pile, but Harrison says: ‘I think the EU is savvy enough to think “let’s not let the radicals in” even if they just give Serbia candidacy.’

Meanwhile, Serbia’s unemployment level is at well over 23% and Vojnovic´ describes its exporters as ‘significantly stressed’. January brought the news that the country’s largest exporter, US Steel, was to exit its loss-making plant in Smederevo, 60km south-east of Belgrade, putting its departure down to the economic crisis. After months of discussions over its future the Serbian government made the surprise announcement in January that it had agreed to buy the plant for $1 (£0.63), guaranteeing the safety of jobs.

 

Government deals

While Serbia’s Prime Minister Mirko Cvetkovic is reported to have said the government has no intention to remain as owner of the Smederevo steel mill and will be seeking a strategic partner, the government’s recent record in finding majority investors in loss making state-owned businesses, including national airline Jat Airways and drug maker Galenika, has been poor.

According to local lawyers, the government’s unrealistic expectations on price have been a major factor in both the lack of investor appetite and the collapse of negotiations. Incumbent telecoms operator Telekom Srbija was put out for tender in 2010, with Harrisons taking a leading role for the government of Serbia on the sale and seven companies lining up to bid for a 51% controlling stake. Telekom Austria, advised by Schönherr, led by Vojnovic´, was the only bidder left by May 2011, with an offer on the table of E1.1bn (£980m) – shy of the government’s target bid of E1.4bn (£1.2bn).

Instead of proceeding with the deal, the government pulled out, and in January this year took a loan of E470m (£391m) from UniCredit and a syndicate of 19 banks, buying back the 20% of existing shares owned by Greek telecoms company Hellenic Telecommunications Organization (OTE) so that the company is now entirely state owned. CMS advised UniCredit led by Prague-based partner Mark Segall. The firm had an existing relationship with UniCredit in Vienna but this latest instruction was from the bank’s London office. Belgrade partner Semiz says: ‘We usually do business with Vienna so this is a new type of instruction received by Mark Segall.’

While the privatisation process and ultimate bank financing created work for local and international law firms, privately some lawyers are frustrated that the government rejected badly needed funds in favour of more debt. One local partner comments: ‘The government put a minimum price tag on that was not substantiated by the market. They could have got a billion euros into the economy.’

The government is expected to float around 21% of the shares of Telekom Srbija and it is expected that it will again try to sell the company. Large law firms are steering clear of more minor roles in the meantime so they are not conflicted when it comes to securing a role advising strategic investors. One local partner asks: ‘What will the government do with a majority share? Everyone thinks they need a strategic investor and the only question is whether it will happen this year or next.’

‘Companies are moving to Serbia because they have a trade agreement with Russia and can export without duty.’ Miroslav Stojanovi?, Wolf Theiss

The government is having more success in tying up with strategic partners in the energy sector. However, the international political community has raised concerns that much of the money coming in is Russian, with the prospect that, as EU woes increase, the Russian Federation’s cash-rich investors will tighten their grip on the Balkan EU wannabe.

Russia is one of Serbia’s four main investment targets, alongside the EU, China and the US. In December last year, Serbia announced a ten-year natural gas supply deal with Gazprom that includes the construction of gas-fired power plants and additional gas storage sites. As part of the deal Sogaz, Gazprom’s insurance subsidiary, has obtained a licence to set up an insurance company in Serbia. Also in December, Serbia’s infrastructure ministry said it was in final negotiations with Russia for an $800m (£665m) loan to overhaul the country’s dilapidated rail network.

While European politicians’ hackles may be raised by these deals, local lawyers have no such concerns over what they describe as ‘political bickering’. Semiz says: ‘Russians are bringing in direct investment and making widespread improvements to energy infrastructure and are more than welcome.’

For law firms the developments represent new client opportunities, with Russian clients particularly high up on many firms’ list of priorities. Semiz says: ‘We definitely see our relationship with Russian firms as the major new growth area.’

Maric´ adds: ‘For law firms it is clearly an opportunity as any new investor is an opportunity.’

For local partners, the conspiracy theorists are overplaying the risks. ‘The government is sensible enough to know not to sell the crown jewels,’ Harrison says.

Russia is in fact proportionally low down on the list of states investing in Serbia, which is led by Austria, Greece, Norway, Germany and Italy. Russia is grouped together with lesser (albeit still significant) investors such as fellow Balkan state Slovenia, the Netherlands and France. Wolf Theiss Belgrade managing partner Miroslav Stojanovic´ says: ‘The relationship [with Russia] in Serbia is not bigger than other countries in the EU and I think at the moment we have much more foreign investment coming from the US and EU than Russia. Russia is really strong in the energy sector but that’s it.’

Instead, greater opportunity is arising for lawyers because of Serbia’s free trade agreement with Russia. Stojanovic´ says: ‘Companies are moving to Serbia to produce here because they have a trade agreement with Russia and can export without any duty.’

 

One such recent deal is Cooper Tire & Rubber Company, a US-listed company advised by Wolf Theiss, on the acquisition of a passenger car tyre plant in Kruevac, Serbia, in December last year, from where the company will supply tyres to the European and Russian markets.

Meanwhile, Serbia has no such trade agreements with China but investors are increasingly prevalent in the energy sector, as Serbia’s state-run monopoly power producer Elektroprivreda Srbije prepares for market liberalisation following legislative reform.

At the end of last year Elektroprivreda Srbije signed a deal with a Chinese consortium of investors, including Hong Kong-based China Environmental Energy and state-run power company Shenzhen Energy Group, to develop a 744MW coal-fired power plant, coal mine and renewable energy project. The plant is to be built near the Nikola Tesla power complex.

Elsewhere, Norton Rose’s Beijing office advised Swiss-based energy trader Energy Financing Team (EFT Group) on an agreement with Chinese power generation equipment manufacturer Dongfang Electric Corporation for the construction of a 300MW thermal power plant near the Stanari lignite mine, scheduled to be put into operation in 2014. At the time the deal was signed Norton Rose London-based energy partner Richard Metcalf commented: ‘This represents another step along the growing Chinese involvement in global energy markets. They have already made significant strides in other regions, but this is really the first time we have seen any significant involvement on a European stage.’

Vojnovic´ says: ‘Deals from the east are beginning to flow and this is something new. My impression is that these guys mean business and they seem to know how to do it, although they still have to prove themselves with a few successful local projects and transactions.’

‘Since 2011, the Serbian parliament has adopted new laws and regulations in trying to meet its deadline for EU candidacy.’ Branislav Mari?, Kinstellar

Foreign investment from BRIC countries is also permeating Serbia’s real estate sector. Wolf Theiss, led by Belgrade partner Bojana Bregovic, is advising Indian property developers Embassy Group on the construction of the Embassy TechZone IT business park on 123 acres of land (and a total developable area of one million square feet) near Belgrade – the company’s first venture in Europe.

Stojanovic´ also reports that an Austria-based investor, interested in building a shopping centre in Belgrade and also expanding out across the Balkan region, recently approached Wolf Theiss.

The retail sector, meanwhile, is witnessing an uptick in big-ticket corporate work as major retail companies owned by over-leveraged high-net-worth individuals are forced to divest key assets. One partner says: ‘The market has been dominated over the last ten years by private oligarchs but some of these guys are in financial difficulties and are over-leveraged, so they are trying to sell or restructure bits of their business, presenting opportunities for funds and strategic investors.’ One such example is the sale of Delta Maxi to Delhaize Group.

Rumours in the sector are rife and Maric´ flags up the market speculation that household names such as German discount supermarket Lidl and Scandinavian furniture giant IKEA are looking to set up in the region. According to local news website Blic, Lidl registered a subsidy in Serbia in December 2010 and is currently looking at around 20 locations in the country. Meanwhile, the local press has reported that IKEA will open its first shopping centre in Belgrade next year.

The private equity sector in Serbia is also rife with a mixture of tangible and rumoured instructions as closely watched houses active in the region look to sell on, restructure, or take advantage of the buyers’ market by making acquisitions.

 

Schönherr recently received an instruction on a E100m (£83m) deal from a fund looking to exit its investment while Mid Europa Partners, which in 2007 acquired a controlling stake in Serbia Broadband, advised by Kirkland & Ellis, is rumoured to be looking to buy a stake in national broadcaster TV Pink.

‘One of the largest funds invested in Serbia wants to exit and everybody is looking at what is going to happen to their participations in industries, most notably dairy and confectionery,’ reports another Serbian partner.

The past year has also seen Balkan states, including Serbia, make their long overdue first foray into the international capital markets, with some success. In September last year Harrisons advised the Ministry of Finance on its first sovereign eurobond, totalling E1bn (£831m). Mark Harrison points out that the issue was two to three times oversubscribed with a yield of 6.7%, and the prime minister described the issue as an ‘historic event’ for the country. Harrisons’ Belgrade office acted as sole domestic legal advisers to the joint lead manager, J.P. Morgan Securities.

According to the Cbonds News Agency, the government is contemplating a second eurobond issue later this year.

 

Croatian sophistication

The Croatian capital market, meanwhile, may be one of the most developed of the south-east European countries but, in common with the country’s infrastructure and regulation, is seen as in need of development to increase market liquidity and attractiveness.

In January 2012 the Croatian population voted to join the EU with a majority of 66%, in a move predicted to send a positive message to investors. Fitch, which recently downgraded its outlook on Croatia’s BBB rating to negative, said the vote would have ‘tangible benefits’ for the country. In a report following the referendum, it said: ‘EU accession could strengthen governance, unlock substantial external financing sources, boost foreign direct investment and increase Croatia’s attraction for export-orientated foreign businesses.’

Local lawyers are inclined to agree. At Zagreb firm Zuric i Partneri, finance partner Bojan Fras says: ‘We expect more business and we already sense a lot more enquiries from the EU and the US about the potential positioning of businesses in Croatia.’

Croatia has passed a deluge of laws in an attempt to bring its legislation in line with EU expectations and firms including Wolf Theiss, which is now fully recognised by the Croatian Bar Association and stands out from its competitors in this market, are also anticipating an uptick in work advising domestic companies on how to comply. Wolf Theiss Zagreb managing partner Ronald Given says: ‘Many legal businesses are unprepared for what they have to do, especially on the tax side, and we’re prepared to exploit that for all its worth.’

With other neighbouring countries such as Serbia aspiring to EU candidacy, Fras is expecting to assist not only companies within Croatia but across the border. After all, he says, they were part of the same country. ‘I think it will be an opportunity to help businesses in other countries to adjust their compliance structures,’ he observes.

While Croatia has been hit by a massive drop in foreign direct investment – between 2009 and 2010 it dropped from just under $3bn to just under $600m, according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report – unlike in other Balkan jurisdictions privatisation work is still active, and Wolf Theiss, led by Given, last year advised ADC & HAS Airports on the E500m (£416m) public-private partnership of Zagreb airport. ‘I expect PPP will be examined closely going forward – we’re not going to have a return to the days of 2000 but the fact is governments are short of money, infrastructure needs to be improved and there are not a lot of ways to do it,’ says Given.

Given also testifies to a buyers’ market, commenting: ‘At the moment investors can buy good businesses at good prices.’ In May last year Wolf Theiss advised Bancroft Private Equity on its acquisition of City Ex, the fast-growing postal and courier services company, and private equity deals are expected to increase.

‘Deals from the east are beginning to flow and this is something new. My impression is that tehse guys mean business.’ Matija Vojnovi?, Schoenherr

While there has been less M&A over the past year, in the banking sector Turkish conglomerate Süzer Group acquired Croatia’s Banka Brod last summer, advised by Zuric i Partneri, widely giving rise to hopes that further investment from Turkish companies will follow. Elsewhere Schönherr advised Austrian energy provider Bewag on the sale of Croatian telecoms provider B.net to Telekom Austria for E93m. The deal was led by Schönherr partner Stephan Frotz.

In the retail sector, meanwhile, Freshfields’ Lawson points to activity within leading supermarket chains, including Croatia’s Agrokor, Slovenia’s Mercator and Serbia’s Delta Maxi, commenting: ‘One of the interesting trends is the way they are expanding across former Yugoslavia and into each other’s markets.’

While Croatia’s level of alignment with Europe in the energy field is high, further efforts are needed to open up the electricity and gas markets as well as meet the EU’s targets for renewable energy sources, energy efficiency and nuclear safety. Given says: ‘In general, Croatia is viewed as having a complicated and challenging regulatory market.’

However, in signs of what is yet to come Wolf Theiss is advising a major turbine company looking to deliver a licensing road map, while Zuric i Partneri is working on a major power production project that should go public in June or July this year.

 

Bulgarian power

Bulgaria has made great strides to bring its formerly closed system of energy generation, distribution and supply in line with the more liberalised model required by the EU over the last three years. Around 60% of the market is now said to be open to competition.

Formerly heavily dependent on nuclear power, the country has been grappling with initiatives to increase the ratio of alternative or green energy sources to 20% in 2020. In November last year, Boyanov & Co advised Société Générale on the E48m financing of a new solar power plant, constructed by AES Solar Bulgaria near the Danube city of Silistra.

As an incentive to investors, the Bulgarian government guaranteed to buy all alternative energy produced, and for a time the incentive worked well. At Dinova Rusev & Partners, senior associate Iliya Grozdanov says: ‘In the past three years the Bulgarian renewable energy market has been very attractive for both large and mid-size investors. The installed capacity of renewable (wind and photovoltaic) projects in 2008 has been under 300MW [but] in 2011 the installed capacity has tripled, there are projects in different stages of construction for another 1,000MW and another 3,000MW in applications for projects.’

However, the country’s outdated infrastructure has struggled to keep up with its politicians’ promises. At Sofia-headquartered Dimitrov, Petrov & Co, founding partner George Dimitrov explains: ‘The infrastructure has copper wires not suited to the energy produced by other sources so in many places the government, although obliged to buy all the energy produced, has not been ready to transport the energy.’

According to Dimitrov, the government moved quickly last year to resolve the issues in terms of both adding facilities to the infrastructure and improving the regulatory regime with new legislation. Energy is, Dimitrov says, the only sector that has been completely stable and unaffected by the crisis.

However, Grozdanov adds: ‘The legislative turmoil of the sector has led to significant withdrawal of investor interest in the Bulgarian renewable market. Some major investors such as Raiffeisen Green Energy and E.ON have withdrawn from the market.’

One of the largest deals in the Balkans last year saw E.ON sell its 100% subsidiary E.ON Bulgaria to the Czech Republic’s Energy Pro for E133m. In 2004, E.ON took over majority stakes in a grid operator as well as a sales company during the privatisation of the Bulgarian energy market and merged these two companies to form E.ON Bulgaria. E.ON intends to divest E15bn in assets by the end of 2013. So far, more than E9bn has already been realised.

Certainly foreign direct investment as a whole in the region has been dropping over the past three years (in 2009 the figure was $3.4bn, in 2010 it dropped to $2.2bn, according to the UNCTAD World Investment Report). The country has nonetheless protected itself from the bank fallout experienced by some of its neighbours, thanks to a law passed following the country’s bankruptcy in 1997, obliging banks to keep a 15% level of recapitalisation.

Furthermore, as market prices drop, local lawyers report an increase in interest among foreign buyers looking for opportunities to acquire assets. Sectors include hotel chains and factories, with particular interest from Arab states, China and Israel. A reduction in bank financing because of the eurozone crisis is also expected to give rise to private equity financing, although this is another anticipated trend yet to manifest itself in cold hard cash.

The market is closely eyeing up potential privatisations of the country’s ailing hospitals as well as the tobacco industry. Last October saw VTB Capital, the investment arm of VTB, Russia’s second-largest bank, acquire a controlling stake in leading cigarette manufacturer Bulgartabac Holding. Schönherr advised VTB.

Despite these opportunities, the impact of the global crisis combined with the size of the local market saw DLA Piper close its Bulgaria office in December 2010. The firm’s Bucharest managing partner Marian Dinu says: ‘They had very good lawyers in Bulgaria but to make a difference in the market required some serious additional investment and you have to think about what the prospects are for the market and its pricing to make money.’

However, the market is also very well served by local law firms and with the exception of CMS Cameron McKenna in co-operation with Petkova & Sirleshtov Law Office, international firms have failed to make much headway in the corporate league tables.

 

Bucharest benefits

Romania, regarded internationally as having made great progress in cutting its budget deficit and pulling out of recession, will this year face general elections that should impinge upon M&A activity as investors await the outcome. White & Case co-executive partner in Bucharest Lucian Bondoc says: ‘On the one hand we see a lot of interest from private equity houses and many actors/potential actors have had enough of working more in slow motion, but on the other there are still concerns about valuation and limited predictability, including specific [concerns], such as the outcome of the elections this year, and the impact they might have on, for example, taxation.’

DLA Piper advised Bridgepoint-owned Diaverum, one of the world’s largest renal care providers, on the acquisition of Romanian dialysis services provider Dialmed in December. Dinu says: ‘Diaverum had been looking at the market for quite some time.’

Elsewhere, local lawyers observe that opportunities are arising from strategic investors looking to take advantage of distressed prices and greenfield developments, taking advantage of crisis-hit labour costs.

As its westerly neighbours continue to aspire to join the EU, even in such troubled times, it is interesting to note that local lawyers attest to the benefits of Romania’s EU membership, as the single market has created a better and more ‘controllable’ platform for both foreign and local investors. Dinu says: ‘Accession to the EU has more to be said in its favour and very little to be said against it.’

DLA launched in Romania just after the collapse of Lehman Brothers in 2008 but has grown every year and last year launched a tax practice. Dinu adds: ‘There are always challenges, even in a growth period.’

‘The government is sensible enough to know not to sell the crown jewels.’ Mark Harrison, Harrisons Solicitors

Fierce competition from local firms, including Mus¸at & Asociat¸ii, Nestor Nestor Diculescu Kingston Petersen and former Eversheds alliance partner T¸uca Zbârcea & Asociat¸ii, have meant international players have made less headway than in other markets and international partners attest to fierce pricing.

The much anticipated tie-up of Lina & Guia and Eversheds, replacing Eversheds’ former relationship with T¸uca Zbârcea, has been said to evidence a new trend towards consolidation. However, in a market still heavily influenced by high-profile individuals, Dinu observes: ‘The tendency for Romanian firms is not to merge but to split up.’

 

Greek tragedy

Market turbulence and the desperate need of the Greek government and domestic companies to raise funds is causing a spike in work for the country’s leading law firms, presenting significant management challenges as the liquidity crisis grips their clients. At POTAMITISVEKRIS, managing partner Stathis Potamitis says: ‘As firm manager I have had to deal with an increase in volume of work (so you need to maintain and even increase manpower) in the midst of a liquidity crunch [where] some clients are failing, others delaying payment and nearly all are trying to renegotiate fees.’

While there has been the inevitable shift of focus from M&A, competition and capital markets to insolvency, restructuring and litigation, seven of mergermarket’s top 15 M&A deals for the Balkans are Greek targets. There is some expectation that the collapse in prices will generate further M&A. Potamitis adds: ‘There is also going to be a lot of consolidation, given the difficulty many enterprises face to go it alone.’

As Greek banks pool resources in a bid to cope with the country’s debt crisis, the merger of Eurobank EFG and Alpha Bank, Greece’s second and third largest banks, was the second largest Balkan deal of the past year. Linklaters, led by corporate partners Matthew Middleditch and Michael Sullivan, advised Eurobank alongside Turkey’s Somay Hukuk Büroso, while Skadden, led by global transactions co-head Scott Simpson and cross-border M&A partner Lorenzo Corte in London, lined up next to Kinstellar; Greece’s Karamanolis & Associates; and the Ukraine’s Sayenko Kharenko as counsel to Alpha Bank.

Furthermore, as Greece took its first steps to raise money from the sale of government assets, last year’s fourth-largest Balkan deal was the government’s exercise of an agreement to sell a 10% stake in state-owned OTE to Germany’s Deutsche Telekom for £356m. Freshfields advised Deutsche Telekom.

As Greece works towards a private sector involvement deal to halve its eurodebt as a precondition to obtaining a second bailout, local partners suggest that a vast privatisation programme is beginning to unfold, with law firms expected to also benefit from the need of many state enterprises to restructure.

Panayotis Bernitsas, managing partner of M & P Bernitsas Law Offices, says: ‘We are involved in a huge project by the Greek government to dispose of idle public land. It is in the preparatory stage and involves a lot of banks, legal advisers and other experts but it is a slow process as some of these plots will need zoning and town planning approvals.’

According to Bernitsas, the firm is experiencing a lot of capital markets activity. However, he says: ‘A lot of the activity in the capital markets is as a result of companies leaving the stock exchange; it’s not something that will generate more work but for the time being it generates activity.’

In the pharma sector, Watson Pharmaceuticals acquired privately held drug developer Specifar Pharmaceuticals for £346m. However, Bernitsas observes: ‘In some sectors, including pharmaceuticals, companies are considering whether they should relocate in view of the general instability and uncertainty over the regulatory regime and tax laws.’

There is an uneasy mix, particularly among the country’s younger lawyers, of uncertainty over a worst-case scenario future and optimism that the country is now putting in place much needed changes to reduce bureaucracy and open up the market to competition. Potamitis says: ‘It would be fair to mention the need to provide our lawyers and staff with some psychological support from time to time, given the tense environment and the prevalent sense of failure and disillusionment, as well as to provide them with a credible vision for their own future.’

While Greece’s economic problems are more pronounced than most it is clear that there is much to keep adaptable law firms busy. Much like the region as a whole, complications and imperfections still exist and further progress, as well as more than a little patience, is undoubtedly required. However, for the committed and the capable, the opportunities are certainly there. LB