Greek M&A activity lags

Better prospects seen for 2007, with foreign institutionals dominating

By Dimitris Kontogiannis - Kathimerini English Edition

Foreign institutional investors continue to build their positions on the Athens Stock Exchange but corporate activity, namely that of mergers and acquisitions (M&A), continues to lag far behind European averages for yet another year.

According to the most recent data released by the Central Depository SA, the participation of foreign-based investors – individuals, companies and institutional portfolios – in the market capitalization of the Athens bourse rose further to about 45.5 percent at the end of November. More than 48 percent of Greek large-caps are now in foreign hands.

The large capital inflows from abroad, amounting to some 4,636 billion euros since the start of the year, have helped to offset continuing net selling by domestic investors, pushing the Athens general index well above the 4000-point mark.

If one was looking for the reasons behind the continuous appetite of foreign investors for Greek equities, strong growth in earnings per share (EPS) should be at the top of the list but not M&A activity.

Sales and EPS growth of listed companies surpassed 20 percent in the first nine months of 2006, compared to the same period last year – one of the highest in developed European markets – was one of the reasons for attracting the attention of foreign investors.

The sale of a sizable equity stake in the Postal Savings Bank (TT) and a smaller stake in ATEbank by the state also helped to increase foreign investors’ participation along with treasury stock sales by private banks which aimed to boost their capital base.

However, the IPO (initial public offering) of the Postal Savings Bank and the other private placements do not constitute M&A deals. As a matter of fact, corporate activity, usually cited as a reason for the advance of other bourses, was not such an important factor in Greece. One may point to the late interest in OTE, the telecoms incumbent, which the government has slated for privatization but this is an exception to the rule.

Indeed, at some –17.7 billion so far, the total value of M&A activity in Greece compares unfavorably to the estimated European M&A volume of –1.2 trillion or $1.6 trillion dollars. (1 euro = 1.32 dollars).

It must be noted that the three largest European deals so far involved E.ON’s sweetened $71.7 billion unsolicited tender offer for Spanish Endesa, Mittal Steel’s $43.6 billion from Arcelor, and French Suez’s $41 billion planned merger with Gaz de France. Companies in the United Kingdom were the most frequently targeted, according to data from Thomson Financial, in the first nine months of 2006 and involved more than 1,800 deals. Spain came second.

In terms of sectors, the $37.6 billion merger between the Italian bank SanPaolo IMI and Banca Intesa helped to put the financial sector at the top with the energy and power sectors following closely.

To this extent, Greece was no exception. The banking sector dominated M&A activity again this year but telecoms, which many thought earlier it could steal the show at the end of year, failed to do so.

Undoubtedly, the purchase of a 46 percent stake in Turkish Finansbank by the National Bank of Greece in a deal worth more than –2 billion is perhaps the most important deal of the year. It is followed closely by the successful completion of the tender offer by Credit Agricole for Emporiki Bank.

The acquisition of a 35 percent stake in Marfin Financial Group by a Dubai-based Arab investment fund and the subsequent triple merger of Marfin with Egnatia Bank and Cyprus’s Laiki Bank also stands as one of the biggest banking deals of the year. A number of small bank acquisitions by other large Greek banks are noteworthy but cannot be compared to those mentioned so far. This trend is expected to continue next year but no one is sure at this point whether the time has come for a mega deal.

The acquisition of the Germanos chain retail stores by Cosmote, OTE’s mobile telephone company, the buyout of the Hyatt Regency Casino by private equity firm BC Partners, the purchase of an additional 25 percent stake in Duty Free Shops from Germanos by Folli-Follie and the agreed acquisition of majority stakes in Intracom Telecoms and Hellas On-Line by the Russian group Sistema also stand out. So does the agreed acquisition of Alpha Insurance by France’s AXA group.

On the other hand, the planned merger of telecom operators Lannet and Telepassport failed to make the telecoms sector live up to expectations. Private equity firms Texas Pacific Group (TPG) and Apax Partners announced last week that they had not found a buyer at the price sought for TIM Hellas, Greece’s third-largest mobile operator, and OTE’s advertised privatization process has just started.

This does not mean telecoms are not candidates for increased M&A activity in Greece next year. As more and more operators get into the lucrative broadband business and start offering packages of voice, video and faster Internet connection, competition is going to be on the rise and many alternate telecommunication carriers will have to team up with others or face death. This means a pick up in deals which will overcome objections.

The fact that borrowing in euros by private equity funds continues to be lower than dividend yields or/and free cash flow yields means it would be strange not to see some buyouts of Greek listed and unlisted companies in the food, retail hotel and supermarket sectors, among others. This is aided by the TIM Hellas, Q-Telecom and Hyatt deals which have taken Greece out of the unknown quantity group. These deals have made corporate raiders and financial investors more familiar with the market’s potential as well as its peculiarities.

There is no doubt that there is a lot of money around available for M&A deals from oil-rich countries to private equity funds and corporations seeking growth opportunities and greater respect in the financial markets through greater size. This does not mean reason will always beat egos and overcome objections to see more M&A deals involving Greek firms in 2007. However, there is a serious chance Greece can make its presence felt on the European M&A volumes in 2007 more than it did this year.