Concentration trends

Foreign fund managers, analysts, brokers and investment bankers may be right after all: Greece is likely to escape a severe economic slowdown this year, paving the way for a better economic performance next year. However, at least some of the same people have started raising another issue: the potential for a major overhaul of the Greek business landscape two or three years down the road. This is likely to be characterized by increased M&A activity, leading to bigger corporations dominating a number of sectors and the absorption or shutdown of many smaller firms. Are they right? We think so, but this may entail a government dilemma. Does it want to encourage the emergence of so called «national champions» or it is still content to see large local corporations becoming subsidiaries of multinational corporations? More than a month ago, we pointed out that foreign market participants were more upbeat about the prospects of the Greek economy and corporate profits than their domestic colleagues. Well, if press leaks over the weekend, suggesting the Greek economy grew by 3.5 percent year-on-year in the first quarter, turn out to be right, these guys will be vindicated and fears of a sharp deceleration in economic growth to or below 3.0 percent in the same period will be put to rest. Such an unexpectedly high growth figure will also provide a good basis for first-quarter corporate financial results to be published under IFRS (International Financial Accounting Standards). Moreover, this positive development will boost confidence that GDP growth will exceed the 3.0 percent mark in the first six months of the year even if growth lags in the second quarter partly due to the recently announced tax hikes. In addition, it will raise somewhat the GDP growth bar for the whole year, provided that tourism rebounds, as expected, in the second half of 2005. Undoubtedly, this positive economic backdrop underlines optimistic scenarios about the strong corporate earnings growth of major Greek companies this year and next, extending in some cases into 2007. The potential for merger and acquisition activity that would alter the Greek business landscape does not mean the new entities which will emerge from this process will be more efficient. After all, the success of any outcome will depend on a host of factors that are difficult to gauge at present. There are already some signs that this process of consolidation is already under way in a number of sectors. To start with, retail sales figures show that large supermarket chains and megastores continue to gain market share at the expense of the smaller shops that cannot compete. This phenomenon can be partly explained, at least in some urban centers like Athens, by changing demographics. As immigrants dominate certain neighborhoods, small shopkeepers realize a drop in their sales since immigrants’ savings rate is normally much higher than the Greeks. This leads to the closing down of small shops, which favors the large ones. Even in some key sectors, like telecommunications, there are signs of likely consolidation. For example, most analysts expect telecoms incumbents OTE to absorb its listed mobile subsidiary CosmOTE in the next couple of years in line with pan-European trends in the sector. Moreover, there are reports of merger talks between alternate telecoms providers, realizing the benefits of synergies at a time of increased capital expense requirements to build backbone networks. Recently, the chairman of Piraeus Bank, Greece’s fifth largest bank, predicted a pick up in corporate activity in the banking sector in the next 12 months or so, perhaps involving some cross-border deals. The potential acquisition of a controlling equity stake by French Credit Agricole in Emporiki Bank appears to be on the table, awaiting the outcome of negotiations over the resolution of the thorny pension issue. M&A activity among smaller local banks is also likely since it looks as if at least one wants to play the role of the consolidator. The need for economies of scale and stiffer competition also appear to point to greater consolidation in the transport sector, while pressure is mounting on companies in the software and hardware sectors to either close down or merge. Given this evolving landscape, it is reasonable to expect a pick up in M&A activity in a number of sectors and the further decline of others, such as textiles and apparel, which will ultimately alter Greece’s business landscape in the next couple of years. So, the foreign market participants appear to be on the right track again in predicting what is going to happen here the next couple of years or so. High-level Greek bankers share the view that corporate activity is inevitable and raise a related issue. «We have to ask ourselves a question and the government above all what kind most companies do we want them to be? Do we want them to be subsidiaries of multinationals or we want them to be large companies based in Greece?» To those who favor the so-called national champions, the offspring of mergers between large Greek corporations, the government has a role to play. This means signaling their political intention to see these mergers and taking additional measures to facilitate them by making the existing law governing M&As more flexible. They argue that bigger companies will enhance their international orientation and presence in southeast Europe. The same bankers also point out that companies with larger size can more easily make it onto the radar screens of large foreign institutional investors. The current conservative administration has yet to state its position on the matter other than saying that it favors solutions that foster competition. Since increasing the flexibility of labor market laws is considered a key to large scale M&A activity among large domestic players, the government’s initiatives on that front may provide a clue to its position on the subject. In the meantime, one thing appears to be certain: Greece’s corporate landscape will be much different in two to three years’ time.

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