ECONOMY

M&A deals brewing

A pickup in corporate activity in the form of merger and acquisition deals (M&A) should be expected this year, resulting in a higher degree of consolidation in some sectors say investment bankers. Although the process of consolidation has been under way for quite some time in a few Greek sectors, it has yet to take off in others where hundreds of small firms operate, limiting potential efficiency gains. In this respect, an increase in M&A deals should be expected and welcome in line with expectations for a similar pickup in the rest of Europe. Forecasts for a pickup in corporate activity are not unique to Greece. Market analysts at major foreign banks, such as Citigroup, believe M&A activity will be one of the core European investment themes in 2005. In doing so, they are busy helping their clients devise stock market strategies to benefit from such deals by singling out potential bid candidate targets. They regard US corporate buyers shopping for cheap European equity assets as a potential source for such deals. The outperformance by Greece’s blue chip FTSE/ASE-20 stock market index since the start of the year has also invited speculation of prospective corporate deals. The fact that the recent rally was prompted by foreign funds fueled speculation which was based on the assumption that foreigners had better access to information than local players. The stretched valuations of some of the constituents of the blue chip index resulting from the stock market rally also reinforced the notion of corporate deals in the making. In this context, it is easy for anyone to understand how recently reported deals have played. The most recent is the reported agreement for the acquisition of a majority stake in listed Pegasus Publishing SA by Theodore Angelopoulos, the husband of Gianna Angelopoulos-Daskalaki, head of the Olympic Games’s Athens 2004 Organizing Committee. It is the first major deal of its kind in the Greek media sector and is certainly bound to make waves, coming after the conclusion of another major deal at the close of 2004, the agreement of local Mytilineos Group to acquire a majority equity stake in listed Aluminium of Greece from Canada’s Alcan. In the meantime, other M&A scenarios involving the dominant banking sector are circulating in the local bourse. The latest scenarios posit that major foreign banks, among them France’s Societe Generale, the major shareholder in Geniki Bank, are interested in one of Greece’s mid-sized banks. Aspis Bank and Egnatia Bank are supposed to be the prime candidates while other scenarios, sometimes eulogized by the major shareholders or top management of the banks, feature Aspis Bank, Egnatia Bank and Nova Bank as candidates for a three-bank merger. It is no secret that these banks have held talks in the past aiming at a potential merger with no success. The sale of a 38 percent stake held in Attica Bank by two state-owned entities has added more spice to the M&A stories as other banks, such as Marfin, have also expressed interest. Is there any grain of truth in the above scenarios? The answer should be in the affirmative even if one ignores statements by major shareholders and top management officials. They all need an optimum number of some 150-200 branches to attain economies of scale and also beef up their capital base to compete in the lucrative retail banking business. However, time is against them as none is capable of getting to the optimum size in the next couple of years via organic growth. It is therefore rational to expect some type of M&A deal, even in the first quarter of 2005, to act as a catalyst for further developments. In addition to small and medium-sized banks, 2005 could see more corporate activity in the league of large banks. The catalyst could be the resolution of the huge pension gaps facing some large banks. The potential bid by France’s Credit Agricole for a controlling stake in Emporiki Bank, the country’s fourth largest, reportedly depends on the resolution of the pension problem as reported under International Financial Accounting Standards. The rally in the shares of OTE telecoms and the launch of the much-advertised voluntary retirement scheme has also invited speculation of a corporate deal in the second half of 2005. In this case, the seller is likely to be the Greek state, which controlled more than 40 percent of OTE in the summer, and the buyer a foreign major telecoms operator. In this context, OTE will sooner or later absorb mobile subsidiary CosmOTE to tap its large cash flows and do away with minorities. The fact that OTE has initiated the process of increasing its equity stake in CosmOTE speaks loudly. But corporate activity will likely not to be limited to the banking, media and telecom sectors. Investment bankers see some potential, albeit limited, for M&A deals in the hard-hit construction sector. Executives at the country’s three large construction groups confirm contacts by the major shareholders of smaller companies who are seeking buyers. However, they add that the chances for such deals are slim as the large groups have little to gain by acquiring the smaller companies, barring one or two specializing in a market niche. Nevertheless, the sale of Pegasus Publishing SA by the major shareholders of construction heavyweight Aktor and its parent holding company Hellenic Technodomiki may pave the way for bigger deals in the top tier of the sector. Family feuding What could go wrong and disrupt plans for M&A deals? Family feuding, among others, investment bankers respond readily. This is nothing strange in a country like Greece where families own and even run big businesses. Although confidentiality agreements do not allow specifics, bankers involved in M&A talks in the past point out that many deals did not go through because of intra-familial feuds in which the father may have disagreed with his sons and daughters, brothers, etc. The small investment banking fees paid in Greece compared to other European countries also does little to persuade them to reach an agreement as they are 1/50th of the sums paid elsewhere. All in all, it is reasonable to expect a pickup in corporate activity in Greece in a number of sectors this year. Whether these deals will lead to better managed and more efficient corporations is something to be seen.