M&A activity set to grow

It is rather well known that Greece does not offer the perfect legal, regulatory, tax and labor environment for corporate activity, including mergers and acquisitions. Yet pundits believe we will see a pickup in corporate activity this year as more and more local firms realize they will have to become bigger, more efficient and extrovert to compete. The pundits are absolutely right. A rise in M&A activity should be expected this year and small-and medium-sized banks should be at the forefront of corporate activity. After a significant slowdown in M&A activity in the last few years, usually linked to the stagnant stock market conditions, everything points to a pickup in Greek corporate activity this year. Of course, this is not just a Greek theme as a number of well-known international banks forecast strong levels of corporate activity across Europe. This comes on the heels of the recovery in deals seen in 2004. The merger of Sanofi with Aventis, the acquisition of UK’s Abbey National by Spanish BSCH and RMC’s by Mexican Cemex, the merger deals involving Telecom Italia and TIM, Royal Dutch and Shell as well as France Telecom’s and Deutsche Telecom’s buying out the minorities in Wanadoo and T-Online were among the most prominent deals announced in Europe last year. Unlike their European counterparts, Greek firms cannot look so much to US corporate buyers reportedly seeking cheap equity assets on the continent. However, the reduced geopolitical risk measured by the smaller chances of a major terrorist attack, a deterioration of conditions in Iraq or Palestine has definitely helped shape a much more favorable investment environment for M&A deals. High-profit growth Although forecasts for GDP growth rates in the eurozone and Greece in particular point to a slowdown this year, a negative for top-line growth, corporate profits are expected to grow faster, benefiting from moves to become more efficient. It is no coincidence that the corporate earnings of Greek blue chips are seen growing in double digits. Enhanced profitability, stronger cash flows and repaired balance sheets make firms more willing to talk to each other about possible deals. The drive for M&A and other deals is also powered by low euro interest rates. Cheap debt-financing in the form of bank loans and corporate bonds has made it easier for firms to borrow funds in order to buy cheap equity assets and this trend is expected to accelerate in the months ahead. Moreover, low debt-financing enables firms seeking to enhance shareholder value to retire their own equity financing. It is not a secret that sophisticated US and European firms prefer to borrow in debt markets in order to buy companies with a much higher free cash flow yield. Free cash flow is usually defined as what is left after investment spending is subtracted from EBITDA (earnings before interest, tax, depreciation and amortization). What does all this mean? Cash-rich companies seeking to maximize shareholder value will no doubt entertain different ideas as to what is the best way to deploy their resources. If returning cash to their shareholders in the form of increased dividend, return of capital or share buyback is not the best way to achieve this, then buying another company with bright growth prospects at home or abroad may be the only way out. Do Greek firms fall in this category? The answer should be positive. Some local firms fit the criteria to become a bid target for large foreign companies while others are ready to go hunting for growth abroad, especially in the Balkans. Banks expand Although one may find numerous local firms scattered across different sectors which may fit either role, no sector demonstrates this better than the banking sector. Four of the large five banks have already made it clear that they want to expand their franchise into neighboring countries. They have bought or continue to buy majority equity stakes in small banks in the Balkans. Just last week, Alpha Bank announced the acquisition of majority stake in a Serbian bank while Piraeus Bank sought a similar deal with a Bulgarian bank. Although a M&A deal among the five large banks should not be ruled out, the only visible deal at this point, pending the solution to the large deficit run by its employees’ pension fund, is the acquisition of a controlling stake in Emporiki Bank, the country’s fourth largest bank, by France’s Credit Agricole. A pickup in corporate activity appears to be more promising among Greece’s smaller banks. Already, Portugal’s BCP announced last week the acquisition of a 50 percent stake in Nova Bank from businessman Dimitris Kontominas for 330 million euros. After the transaction is completed, the Portuguese bank will own 100 percent of Nova Bank, a dynamic bank founded in 2000 which focuses on retail banking. But the BCP-Nova Bank deal may be just the beginning of a busy year for Greece’s group of smaller banks, including Attica Bank, Aspis Bank, Egnatia Bank and perhaps ProBank and Geniki Bank, the last-mentioned now controlled by France’s Societe Generale. All of them, especially Attica Bank, Aspis Bank and Egnatia Bank, offer a good base for a major foreign bank interested in either entering the lucrative Greek retail banking market or expanding its existing branch network. What are the chances of seeing such corporate action this year? Very high, it must be said, because time is running out for those who would like to participate in the Greek market’s growth in the remaining few years. The fact that the government has declared its intention of selling more than 35 percent in Attica Bank owned by the state-owned Postal Savings Bank and Escrow Fund also provides an opportunity for either a foreign bank to enter the Greek market or a medium-sized local bank to increase its market share and expand its branch network. In the latter case, an M&A deal could become a catalyst for more corporate action to come as the remaining banks will seek an alliance with others to stay competitive in the new banking landscape. All in all, the conditions are ripe for a pickup in corporate action, including M&A deals, in Greece this year. Although there are plenty of candidates across sectors, it is reasonable to expect more action in the market niche of medium-sized banks for different reasons. First, it is easier for a foreign bank to either enter or expand its presence in the Greek banking market. Second, there is a catalyst, namely Attica Bank, to spark a mini-consolidation among the existing players. Time will show whether this is a correct assessment.