Transform - PwC

CEE Advisory Regional leader

LITHUANIA

Operations and restructuring

Mark Okes-Voysey

Vidas Venckus

Rafal Krasnodebski

[email protected] +7 495 232 5713

[email protected] +370 5 239 2308

[email protected] +48 22 523 4498

Albania

Macedonia

Governance, risk and compliance

Laura Qorlaze

Philippe Bozier

Michelle Moore

[email protected] +355 4 242 254

[email protected] +389 23 111 012

[email protected] +7 495 967 6150

BOSNIA

Poland

Finance and Accounting

Aida Soko

Olga Grygier

Marc Goessi

[email protected] +387 33 295 234

[email protected] +48 22 523 4214

[email protected] +41 79 342 03 89

Bulgaria

Romania/Moldova

Financial Due Diligence

Bojidar Neitchev

Dinu Bumbacea

Mike Wilder

[email protected] +359 2 93 55 288

[email protected] +40 21 202 882

[email protected] +48 22 523 4413

Croatia

Russia

Commercial/Strategic Due Diligence

Tanya Rukavina

Bob Gruman

Daniel Cappelletti

[email protected] +385 1 6328 834

[email protected] +7 495 232 5725

[email protected] +420 251 151 333

Serbia/Montenegro

Mergers & Acquisitions

Tanja Gligorevic

Chris Butters

[email protected] +420 251 152 048

[email protected] +381 11 33 02 100

[email protected] +420 251 151 203

Slovakia

corporate finance & infrastructure

Matt Pottle

Nick Allen

[email protected] +4212 59350 402

[email protected] +420 251 151 330

ESTONIA Teet Tender [email protected] +372 614 1800

SLOVENIA

Capital Markets

Georgia/Armenia/Azerbaijan

Francois Mattelaer

Jim Klein

Clifford Isaak

[email protected] +386 1 58 36 000

[email protected] +7 495 223 5177

[email protected] +995 32 50 80 61 UKRAINE

Valuation

Hungary

Boris Krasnyansky

Tibor Almassy

David Wake

[email protected] +38 044 490 6777

[email protected] +36 1 461 9644

PEOPLE

Dispute/Forensic Analysis

Kazakhstan/Uzbekistan

John Wynn

John Wilkinson

Vadim Khrapoun

[email protected] +44 7802 948 447

[email protected] +7 495 967 6187

[email protected] +36 1 461 9514

[email protected] +7 495 232 5709 Technology LATVIA

Philip Gudgeon

Arvids Kostomarovs

[email protected] +7 495 232 5434

[email protected] +371 6709 4453

TRANSFORM

Czech Republic Jiri Moser

PricewaterhouseCoopers

Contacts

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Issue 3/Spring 2009

This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, neither PricewaterhouseCoopers nor Bladonmore accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Now boarding

Why governments are rushing to revitalise the region’s airports

Child’s play

All systems go at Russia’s largest toy retailer

Food lovers

Retailers Tesco and Metro seek a bigger slice of the market

Transform Tough conditions

Riding the economic storm

Made in Donetsk

Ukraine’s SCM reveals its international expansion plans

Issue 3/Spring 2009

Editorial letter PricewaterhouseCoopers CEO Central and Eastern Europe: Mike Kubena Managing Partner Advisory in CEE: Mark Okes-Voysey Managing Partner Assurance in CEE: Nick Brasington Managing Partner Tax & Legal Services in CEE: Steven Snaith

cover image: photolibrary

Industry Leaders in CEE: Financial Services: Paul Cunningham Technology, InfoComm & Entertainment: Dinu Bumbacea Consumer & Industrial Products: Mike Hackworth Energy, Utilities & Mining: David Gray Published by Bladonmore Media Ltd Editor-in-chief: Richard Rivlin Editor: Eila Rana Managing editor: Sean Kearns Sub-editor: Lynne Densham Art director: Owen Thomas Designer: Ivelina Ivanova Production manager: Andrew Miller Publisher: Siân Griffiths Managing director: Jonty Summers T: +44 (0)20 7631 1155 E: [email protected]

PricewaterhouseCoopers

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willingness to make and implement tough decisions is a distinguishing feature of all great business leaders. In recent years, the toughest decisions focused on how many new products to launch or which overseas markets to enter. That was yesterday. Today, the decisions are tougher and are focused on where costs can be sensibly cut; where new customers can be found to replace the old; and how to motivate your talent. It is still a time of huge opportunity. Fortunes will undoubtedly be made by those who make the right decisions. The opportunities to acquire on valuations that have not been lower in more than a decade will provide a magnetic pull to some. Others will use this time to focus on their absolute distinguishing features and reposition themselves in the markets they operate in. New businesses will emerge. PricewaterhouseCoopers works with clients throughout the region to transform their future, by making the important decisions now. This edition of Transform, for instance, highlights the importance of strategic cost reduction programmes which will be a major theme throughout 2009. It is by no means all doom and gloom. Many firms are still seeking support to develop their growth strategies as they look to take advantage of these changing times. For instance, Detsky Mir, Russia’s largest children’s retailer, continues to grow and is profiled in this edition. Whatever challenge your business faces, PwC can assist. We look forward to standing shoulder to shoulder with you as we work through these difficult times. We would be delighted to receive any feedback you have. You can email us at [email protected]

Mike Kubena

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Contents

16 6 Upfront Achieving tax transparency; examining future trends in deal-making; Failsafe Strategies: Profit and Grow from Risks that Others Avoid by Dr Sayan Chatterjee; conversations with Miroslav Singer and Inna Fokina; and identifying effective customer relationship management

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Financial Crisis SPecial Report 23 Weathering the storm After years of roaring growth, how are CEE countries navigating the current economic crisis?

28 Holding ground Banks in CEE may not be completely insulated from the ravages of the financial whirlwind, but their position remains strong

32 Safe cargo

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28 The Big picture

As bank financing evaporates, exporters to untested overseas markets are turning to a different source for credit insurance – governments

10 Checking out CEE

34 Talent spotters

16 Good to grow

In lean times the temptation is often to slash training budgets, but it is a mistake to do so at the cost of talent management

Already established as a leading Ukrainian conglomerate with interests in more than 90 business divisions, SCM plans to use its policies of transparency and good governance as a springboard to global success

Retail is one of the most mature and competitive sectors in the region. So how can the UK’s Tesco and Germany’s Metro increase their share of the market?

42 46 Factory settings It may not be an ideal time to open a new production facility, but it is worth getting the ball rolling on feasibility studies

Project Finance and Infrastructure 50 Upgrade to first class Governments in CEE are pushing to improve the region’s airport infrastructure with a number of plans on the drawing board

54 DaTA CENTRE Facts and figures from across the region

34 The Power of Private Capital 38 Floating towards success Having proved itself as a CEE heavyweight, Warsaw Stock Exchange is now a serious contender in Europe

Optimising Operations 42 Child’s play Detsky Mir, Russia’s largest children’s retailer, has ensured its continued success by improving business processes PricewaterhouseCoopers

Widget Finn is a business journalist who writes regularly for The Times and the Daily Telegraph in the UK and a wide range of management publications. Her special interests include board level issues, business education and small businesses. Adam Leyland is editor of The Grocer. He has edited a number of leading weekly business magazines in a 20-year career, including Real Business, Press Gazette, PrintWeek and the US edition of PRWeek. Tony McAuley is a senior editor within The Economist Intelligence Unit’s Industry and Management Group. He has written on capital markets, banking, finance and energy for 20 years for, among others, Reuters and Dow Jones.

Vicky Meek is an award-winning business and finance journalist of more than 15 years’ standing. Specialising in private equity and M&A, she regularly contributes to a range of titles including Real Deals, Emerging Private Equity and Corporate Financier. Scott Payton is a regular contributor to numerous publications including Spectator Business, The Spectator, Financial Management and Accountancy. He is also editor of Linklaters Quarterly and former editor of Business Voice. Kimberly Romaine has been researching and writing about private equity for seven years, and has a particular interest in Central and Eastern Europe. She is currently editor-in-chief of unquote”.

CONTRIBUTORS

Christian Doherty has 10 years’ experience as a financial journalist on a range of titles. He specialises in corporate governance, risk and accountancy issues. Most recently he edited Real FD.

Elliot Wilson is an associate editor of Spectator Business and Hong Kong’s Asiamoney magazines. He also writes for The Spectator and Euromoney.

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Most companies do not know what their total tax bill is, let alone how it breaks down. That puts them on the back foot when it comes to knowing the full extent of taxes borne that hit their P&L account and the taxes collected, which affect their administrative costs. Not having such information limits what can be communicated externally to demonstrate the true total tax contribution being made to public finances. One company that has managed to produce a detailed breakdown of its tax bill is Kazakhmys – the Londonheadquartered natural resources company, whose principal operations are in Kazakhstan. It paid $1.1bn in taxes in 2007 – $1,058.9m of that went towards corporate income taxes, excess profits tax, royalties and employer taxes; the company paid the remaining $48.6m indirectly by collecting it on behalf of government authorities.

Standardised methodology Kazakhmys has achieved such high levels of transparency in its tax affairs by adopting the principles set out in PwC’s Total Tax Contribution (TTC) framework. TTC uses a standardised methodology for gathering data across different companies, industry sectors and countries. Not only can the framework gather data on taxes borne and collected, it can also collect data on other payments made to or received from government, the costs of tax

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compliance and on the company’s economic footprint. Data, collected via a standard questionnaire, can be analysed in various ways.

Compare and contrast Not only can TTC create overviews of how an entire industry is contributing to a country’s tax revenues, it also allows companies to benchmark themselves against others in their sector. That can lead to high-level discussions with the management of companies around understanding what the company pays and collecting the taxes efficiently. PwC first developed TTC four years ago. Today, it collects and analyses tax data for companies and business groups across 15 countries and that number is set to grow. This international dimension is also captured by a project undertaken with the World Bank, called Paying Taxes – The Global Picture. This study compares the tax regimes around 181 economies using TTC to calculate one of three indicators, the Total Tax Rate. The latest edition of the study has been published this quarter. For Kazakhmys, the benefits of TTC have been numerous. The detailed reporting of its total tax contribution in its annual report positions it as a company that is using good practice when it comes to transparency, corporate reporting and governance.

photolibrary, istockphoto

upfront>

From the network Tax transparency

From the network Deal-making in 09 Pricing is expected to be the biggest challenge for deal-makers in Central and Eastern Europe (CEE) over the coming year, according to a new report from PwC. Future Trends in CEE M&A: Which Way Forward? reveals that buyers – particularly private equity firms – are becoming much more selective with a focus on quality and price as the business environment cools off, but sellers are still looking for high prices.

Between The Covers Managing risk Lev Holubec, a partner with PwC in Ukraine, shares his thoughts on his favourite business book – Failsafe Strategies: Profit and Grow from Risks that Others Avoid, by Dr Sayan Chatterjee (Wharton School Publishing, $25.59).

Step change “A year ago an acquisition might have been done at 12-15 times EBITDA but as we go forward, the buyers are less excited about growth potential and more driven by hard economics,” says Chris Butters, PwC’s CEE M&A leader. “We will probably come back to something more consistent with the historical average, which is between 5-8 times EBITDA.” Just as private investors become more picky, their investment opportunities are likely to grow. The credit crunch is squeezing traditional funding sources, making CEE entrepreneurs more willing to entertain equity partners as a way of securing growth capital or refinancing loans. And despite an anticipated fall-off in 2008, private equity funds in CEE enjoyed increased liquidity (see chart). The rise of the middle class in CEE is expected to be the underlying driver of deal activity. “They have an expectation to live like their Western European neighbours,” says Butters.

The rise of the middle class in CEE is expected to be the underlying driver of deal activity

For a copy of Future Trends, please contact Jitka Hauserova at [email protected] or on +420 251 151 229.

Private equity fundraising in CEE Amount ($bn) 20 18 16 14 12 10 8 6 4 2 0

Why is this your favourite business book? The whole concept of risk is something that people fear. This author took a different perspective on risk. What he tried to do is show that companies that know how to take and manage risk are the companies that differentiate themselves and maintain a sustainable level of growth and profit over time. What made you pick it up? I teach a class at the University of Virginia’s Darden School of Business on making a success out of M&A. Dr Chatterjee is a fellow there. I got to know him a little and he asked me to review the book before it was published. Can you summarise the book’s main message? The reason for the existence of business is to take risks. Profit is the result of a firm’s ability to take risks and avoid the adverse impact of those risks. What would you say is its key strength? The strength is that it provides a different, positive perspective on risk. That positive perspective will be extremely applicable to today’s world in particular. With what is happening with the credit markets, companies that sit on their laurels and take no risks at this point in time frankly may find themselves in worse positions than they were before the crisis. What did you learn from the book?

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Source: Emerging Markets Private Equity Association

PricewaterhouseCoopers

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Many of our clients ask us to show them best practice. But how can you get beyond best practice and find those opportunities that will leapfrog you beyond the others so that you can create best practice as well? This book helped put that all into perspective.

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upfront> As vice-governor of the Czech National Bank (CNB), Miroslav Singer oversees one of the most stable financial systems in Central and Eastern Europe (CEE) – a system that is weathering the current global financial storm more successfully than many of its peers. Before joining the CNB in 2005, Singer spent what he describes as “three very fine years” at PwC. As director of business services in PwC’s Czech Republic practice, he specialised in corporate recovery, restructuring and distressed assets transactions, and spearheaded a range of high-profile and complex projects, including a comprehensive financial feasibility study for holding the Olympic Games in Prague.

Another string On top of all this, Singer has an ongoing career as a lecturer on mathematical analysis and economics at the University of Economics in Prague. He previously lectured at the Centre for Economic Research and Graduate Education at Charles University, also in Prague. “I am an economist by education,” Singer explains. After receiving a PhD from the University of Pittsburgh

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in 1995, he became chief economist at Expandia Finance, a stocks and bonds trading company based in the Czech Republic. “In this role, I took part in a major restructuring of the overall Expandia Group, and became managing director in 1998,” he says. “As a consequence of this, I started talking to PwC about joining their restructuring team – and did just this in 2001.” Singer’s successful, high-profile work at PwC, alongside his influential lectures and contributions to economic journals such as the Review of Economics and Statistics and Economics of Transition, led to an invitation to join the board of the CNB in February 2005. Despite the demanding nature of his role steering the Czech economy through the financial crisis, Singer remains a regular attendee at PwC alumni meetings. “And I often see my friends at PwC on a social basis, too,” he adds.

alamy, reuters, istockphoto

where are they now? Miroslav Singer, vice-governor, Czech National Bank

90 seconds with... Inna Fokina Inna Fokina, a senior manager with PwC’s forensics practice, rejoined the Moscow office in December 2008 after a three-year secondment in London. Fokina joined PwC Russia in 1996, working as an auditor for six years before moving to transaction services. After getting a taste for forensics, she transferred to London to learn from PwC’s forensics experts. Transform found out how her time in London will help PwC Russia step up a gear. How did you first get into forensics work? While I was working in the Moscow office, a partner who transferred from the Polish office established a forensics practice. I began working on a few forensics projects before switching to the forensics practice entirely. I realised I really liked it, but I needed to get some technical expertise and I wanted to learn from a centre of excellence. London was considered to be just that for forensics. What experience have you picked up during your time in London? When I started to do forensics in Russia, I thought it was only about investigations work. When I moved to London I realised that there are more than 13 to 14 different lines within forensics – international arbitration; commercial disputes; transaction shareholder disputes; money laundering, etc. Forensics is a really well-developed practice in the UK office and during my time there, I focused on transaction shareholder disputes – because it fits well with my experience in transaction services – international arbitration and commercial disputes.

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Trend watch Customer care

How will your new skills add to what PwC already offers clients from its Moscow office? We do investigations work in Russia but as far as transaction shareholder disputes, international arbitration and litigation support work are concerned, this is not currently widely performed in the Moscow office. That is the case generally across Russia. These

“Getting the chance to learn the way the world works has been absolutely amazing” Inna fokina, senior manager, pwc types of projects used to be performed by the foreign branches of the consulting firms, but that is changing now so it is perfect timing for me to return to Moscow. Russian clients are not used to getting the services we can now provide, so we will need to explain the unique benefits they can bring. So has it been worth investing such a long time in the secondment? These three years have been valuable not only in terms of career development, but also in terms of personal development. Getting the chance to broaden my horizons, learn the way the world works and raise my levels of selfawareness has been absolutely amazing.

A global economic crisis is not all bad news. As companies cut back on spending, they can expect their business advisers to step up their game on customer service – not only will suppliers in the business advisory field be fighting to hold on to their existing contracts, they will also be facing increased competition for less new business. Those supplying the Central and Eastern European (CEE) market face an even greater challenge, reckons Mikhail Magrilov, a Russia-based PwC partner who advises telecoms companies. He says that for the majority of CEE companies trying to achieve economies of scale, the market for helping them do that was already fiercely competitive anyway. Magrilov says customer relationship management (CRM) – the business jargon for good customer service – can be a real differentiator during hard times. So much so that during a downturn, some companies will not commit themselves to the time and cost of a tender process, going straight to the supplier that they know and trust.

Key pointers So what are the signs of effective CRM? Magrilov says a good business adviser will know their client and have excellent oneto-one relationships with the key decision makers within the organisation. They will not only react quickly to problems and difficulties but more importantly, they will be proactive. Great advisers stay on top of their clients’ financials and anticipate problems before they even arise. They also share contacts, encouraging clients to network with and learn from each other. Such personalised CRM does not work in all industries though. Magrilov says it is most effective where there are a limited number of players. In industries that are more saturated, CRM tends to be more systematic.

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The big picture

Checking out CEE Encouraged by the consumer boom of the 1990s, global retailers opened stores across the region, but has one expansion strategy proved more effective than another? Words: Adam Leyland

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getty images

caling back growth plans during an economic downturn may be a disheartening prospect but on the plus side, it is also an opportunity to regroup and review the effectiveness of expansion strategies in readiness for the upturn. That is what many of Central and Eastern Europe’s (CEE) inward investors are doing right now. Retail, one of the most mature and competitive of CEE’s sectors, has attracted many multinationals since the region’s markets opened up at the beginning of the 1990s. Two of the early movers were Germany’s Metro and Tesco, the leading supermarket in the UK. At first glance, Metro’s strategy of regionwide expansion promises greater profitability but experts say, on closer inspection, Tesco’s approach of targeted expansion has its own merits. Trolley dash: while German retailer Metro made its move into the CEE market as a cash and carry wholesaler, UK supermarket giant Tesco has adopted a different strategy, entering as a pure-play retailer

Since expanding into Eastern Europe in 1994, Metro has built a €15bn-sales business in the region, with operations in 13 countries – and it continues to push outwards and eastwards. In 2009, a number of new cash and carry outlets that are due to open have been earmarked for Eastern Europe.

Bright outlook Metro’s prospects in CEE are good, says Christopher Hogbin, a senior retail analyst at Sanford C Bernstein, a research firm. “The strategy for Metro is to keep growing its cash and carry business and Media Markt [its consumer electronics outlet]. Although it has high shares of the wholesale market in Europe, it’s generally underpenetrated in Eastern Europe,” he says. Tesco made its move into CEE at a similar juncture to Metro. Its first thrust beyond the former Iron Curtain was to Hungary, with the acquisition in 1994 of Global. Since then, the British retailer has

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foreign retailers in russia For multinational retailers with expansion sights set on Central and Eastern Europe (CEE), Russia is undoubtedly the biggest prize. The country is now a bigger retail market than Poland, Spain and Italy and, based on recent growth forecasts, it will soon be bigger than Germany and the UK. Globally, of the world’s seven fastest growing economies, Russia will have the highest income per head by 2050, according to PwC. And the International Monetary Fund says that the Russian economy is still expected to grow by 3.5% in 2009, despite the global economic downturn. High demand, regional expansion opportunities and improved consumer credit infrastructure will all attract new foreign investors, and provide growth opportunities to already established market players. Yet Russia remains a daunting prospect for Western companies. “It’s a very tricky market to be in,” says Bob Robbins, CEO for CEE at Tesco – a UK-based global retailer that has chosen, thus far, to steer clear of Russia. Wal-Mart, Carrefour, Lidl and Aldi also have no presence there. In fact, there are currently only a handful of foreign-based retailers in Russia of any note: Germany’s Metro and Rewe, Ikea, French supermarket group Auchan and Turkey’s Ramstore. For many global retailers, Russia may be a step too far. The challenges are numerous: the struggle for operational effectiveness, the difficulty in finding affordable retail space, warehousing, logistic and supply chain management including the availability of specialists. The lack of international players also reflects the fierceness of the competition there, says Chris Skirrow, the PwC partner responsible for consumer industrial products in Russia. “When the Russian retail scene started to open up, the foreign-based companies had the technology and the experience, while the Russians knew how to do business,” he says. “Now the international players are familiar with how to do business and the Russians have the technology, so there’s true competition. In this market, it’s really now who’s the better retailer.”

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On the scene

Weighing it up

If Tesco has a good track record elsewhere – in China and India, for example – why would it not want to consider Russia? But it already has, says Robbins: “We have looked at Russia, but it’s not where we want to be at the moment. We went to the markets we saw as the fastest emerging and westernising. That’s not necessarily the case with Russia. There’s lots of opportunity, but it’s very expensive, and there’s instability. And it looks like it’s about to go through a difficult time.” Skirrow understands the decision. “There are not many local scale players in China,” he says. That suits Tesco, which is better at competing with international rivals rather than domestic retailers. Christopher Hogbin, a senior retail analyst at Sanford C Bernstein, adds: “The issue with Russia is that it’s been very fast growing, and it’s quite well contested, with every kind of format from discounter to hypermarket already established, and that’s made it expensive. In the US, on the other hand, although it is competitive, Tesco has identified a gap and developed a unique format (Fresh & Easy) so if it moves fast enough Tesco can establish a lot of clear water from its rivals there.” Another thing to consider – Russia’s population is declining by approximately 70,000 people per year. That said, the larger cities are insulated from this to some extent by inward migration from smaller centres and generally better life expectancies. Skirrow reckons the Russian market has a strong future, despite any challenges it poses: “It’s hard to see why companies would want to ignore a country with 6% growth at a time when most international retailers are finding it hard to show any real growth at all.” The current economic downturn is likely to kick-start consolidation in the country’s retail sector as target prices start to come down, Skirrow adds. Already there are signs of movement – Wal-Mart and Carrefour have reportedly locked horns over the acquisition of Lenta, a domestic hypermarket chain, as Carrefour steps up plans to invest up to $100m to develop a hypermarket business in Russia.

The big picture

Fruitful yield: Metro’s approach for entry into Russia is to start in big cities, establish a supply chain then expand outwards to smaller cities

expanded into four other CEE markets ­– Poland, Czech Republic, Slovakia and Turkey – and built a business which has contributed to sales of just under €7bn across Europe in the year to February 2008. The CEE operations are a major contributor to that Europewide figure – to put this into perspective, sales in CEE in 2007 were more than Tesco’s 1989 group sales figure of £4.7bn. To understand the performance of the two retailers, says Hogbin, you need to appreciate their different strategies. Metro chose to enter the market as a purely cash and carry wholesaler. “Cash and carry works particularly well in developing economies. You’re not trying to change consumer habits, or the structure of the market economy, you’re just bringing a new wholesale supply chain for existing customers. Often, in Eastern Europe, that means bringing new, Western products to consumers.” PricewaterhouseCoopers

Subsequently, Metro has been able to piggyback on the infrastructure it has established, to launch hypermarket retailing operations. The modus operandi, notes Chris Skirrow, PwC’s partner responsible for consumer industrial products in Russia, “is to start in big cities, getting to grips with the supply chain, build a hub and then push out from there to smaller cities.” In contrast, Tesco entered CEE as a pure-play retailer, buying small businesses. The strategy has been the same in each country, says Bob Robbins, the group’s CEE CEO. “Global was a toe in the water: it helped us to see what was going on.” In each of the subsequent markets it entered, the supermarket giant made similar acquisitions: in 1995, it bought the Savia chain in Poland and the Carrefour hypermarket business in the Czech Republic; in 1996, KMart’s operations in

TESCO 2007/2008 SALES IN CEE n Poland n Hungary n Czech Republic

n Turkey n Slovakia

x524m x1,192m x784m

x1,784m

x1,688m

Total: x5,972m Source: Annual Report Notes: Tesco sales are ex-VAT and have been rebased from sterling at an exchange rate of £1: €1.2

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The big picture

“We started with hypermarkets, but to reach a higher percentage of the population, which is predominantly rural, you need to have more than one format”

photolibrary

bob robbins, CEE CEO, Tesco

the Czech Republic and Slovakia; and in 2002, Hit supermarkets in Poland. “If you enter as a pure-play retailer,” says Hogbin, “that can be a longer adoption process, because you’re trying to change the structure of the marketplace and change consumer behaviour with it. They are very different entry strategies. Metro has been able to enter earlier and more profitably into each market.” But Tesco is certainly gaining momentum. With more than 750 stores and 13 distribution centres, it has built a sophisticated supply chain across CEE and is now number one or number two in each market in which it operates. And it is profitable too, Robbins adds. One of the keys to its strategy has been its multi-format approach. “We started with hypermarkets,” explains Robbins, “but to reach a higher percentage of the population, which is predominantly rural, you need to have more than one format.” The multi-format approach marks Tesco out from its international rivals. “On the one hand, the variety of formats makes it more complex, but it’s worked very hard to simplify the running of the business,” says Hogbin. “It has Tesco in a box: the systems, organisation, it’s PricewaterhouseCoopers

set out and copied that from country to country. They’re very good at best practice sharing across the countries.” The key difference, however, is not format. It is scale. Hogbin explains: “Tesco has entered relatively few countries. One every year. It’s now in 12 to 13 countries around the globe. But when it’s entered, it’s sought to build share as quickly as it can. In Hungary, Tesco has a mid-teen share; in Poland, the Czech Republic and Slovakia, its share is in the high single digits, so it’s much more likely to be aggressive in these markets.”

METRO 2007/2008 SALES IN CEE n Poland n Romania

n Russia n Turkey

x258m

x290m x1,381m x367m

Increasing scale Scale can also be the catalyst for new opportunities. Although each country in Tesco CEE has its own supply chain, the company has developed two panEuropean distribution centres, which allows the company to directly source Asia-manufactured products at highly competitive prices. Other possible future opportunities include rolling out retailing services such as personal finance and internet retailing. To speed the adoption of scale, Tesco has supported its growth through strategic acquisition. Until a couple of years ago, for example, Tesco was a minnow in Poland, with a 4% market share. But in July 2006, it bought the 279-store Leader Price chain from French supermarket chain Casino for €105m to become the clear market leader in grocery retail. Tesco shared the spoils from Casino’s Polish divestment with Metro, which picked up 19 Géant hypermarkets and seven land bank projects for €224m. The deal perfectly illustrates the different approaches to growth that Tesco and Metro have taken. Cash is key to both groups sustaining that growth. Even in a cash-generative business like food retailing, it is imperative, and right now it is difficult. “In food retailing there should be good

Total: x2,296m Source: Annual Report

cash flows. The flipside is retailers work on negative working capital, a position that has been complicated by using cash and short-term facilities to fund expansion and the acquisition of long-term assets. “If any company has expansion plans, and can’t arrange debt, it’s a more complex equation,” says Skirrow. “Everyone is seriously looking at reducing their expansion plans right now. It’s going to be intriguing to see who will be able to continue to expand. Because when things get better, the retailer that’s been able to do that will have clear blue water.” n

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Good to grow Ukraine’s largest company, System Capital Management, has already implemented world-class standards internally – now it is ready to become a global business Words: Elliot Wilson

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ystem Capital Management (SCM) is to Ukraine what General Electric is to the United States, CITIC Group is to China, or the Tata Group is to India. Few corporates in a region encompassing the former Soviet bloc, including Central and Eastern Europe (CEE), can reasonably claim to cover such a vast range of sectors and industries, or to do so with world-class levels of corporate governance and transparency. Founded in 2000 in Donetsk, an eastern Ukrainian city close to the Russian border, SCM’s interests straddle more than 90 business divisions, led by metals and mining, energy, finance, telecommunications, real estate and media interests. By far the group’s largest presence is in metals and mining, where its Metinvest subsidiary controls steel-rolling facilities as far afield as Italy, Bulgaria, Switzerland and the UK. The man behind SCM’s prodigious success, Rinat Leonidovich Akhmetov – a 42-year-old Ukrainian who made his first fortune in the 1990s, after the Soviet Union was dismantled, and his second after merging his sprawling business interests into a single, centrally controlled corporate outfit – is not shy about promoting domestic industrial and cultural interests. A graduate of Donetsk National University, Akhmetov has done much to advance the international exposure of both his home country and his hometown.

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All new sovereign states need role models, and in SCM Ukraine is lucky to have unearthed a brace of top-notch corporate and cultural leaders Donetsk, an industrial city of 1.1 million founded in 1869 by a Welsh businessman, John Hughes, is often compared to America’s Pittsburgh or Britain’s Newcastle, cities built on coal and steel. The Donets Basin holds the country’s largest seam of iron ore and coking coal, and during the Cold War the city was renamed ‘Stalino’, as much in deference to Joseph Stalin as the former Soviet premier’s adopted surname, which translates in Russian to ‘Man of Steel’.

Steel city Akhmetov is not just Ukraine’s leading businessman. He is also an ardent supporter of the country’s extension of influence into the wider world. The industrialist, named by Korrespondent magazine as being the richest man in the CIS region, with a fortune of $31.1bn, has been the president of Shakhtar Donetsk football club since 1996, providing unmeasured financial support to a provincial team that has become a mainstay of Europe’s premier footballing

the big picture

Lofty ambitions: SCM subsidiary DTEK aims to become the largest power company in Ukraine

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“Having that clean corporate structure is not a silver bullet. But we have made certain that our actions have made us more attractive to the capital markets” Jock mendoza-wilson, SCM tournament, the Champions League. Akhmetov has earned praise at home for supporting the fortunes of a Ukrainian football team rather than a soccer outfit in, say, the English Premier League. He also owns two five-star hotels, one in Donetsk, the other in Kiev, as well as two Ukrainian media outlets: the TV station TRK Ukraina and the newspaper Segodnya. Akhmetov’s charitable interests have grown in lockstep with his wealth. He founded the Foundation for Effective Governance, a forum that supports economic reform and development in Ukraine, and the Rinat Akhmetov Foundation for Development of Ukraine, which aims to tackle and eliminate underlying social problems in a country of 46 million people struggling to impose the interests of an ancient land with a new identity on a world dominated by more powerful national interests. All new sovereign states need role models, and in SCM Ukraine is lucky to have unearthed a brace of topnotch corporate and cultural leaders. “I would describe Mr Akhmetov as the country’s leading businessman, an entrepreneur who saw the potential inherent in building a leading business in the private sector when the Soviet

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Union fell,” says Jock Mendoza-Wilson, SCM’s director of international and investor relations. “SCM was set up in order to manage his assets; he then put in place a team capable of managing those assets transparently. It shows his entrepreneurial flair, and his ability to build and manage a wide variety of industrial assets over the long term.” SCM is the country’s largest firm by far, generating an estimated 8% of annual gross domestic product. Net sales leapt 42% year-on-year in 2007 to $9.6bn, following hard on the heels of a near-20% rise in sales the previous year. Earnings before interest, tax, depreciation and amortisation jumped by more than 70% in 2007 over 2006 figures, to $2.7bn, with net profit almost doubling over the period, to $1.4bn. The value of SCM’s total assets under management rose to nearly $20bn in 2007, from less than $12bn the previous year, while the group added 5,000 new staff to its roster, pushing employee numbers to 165,000 at the end of 2007.

Staying at home: SCM’s concerns include the five-star Dombass Palace (main picture) in Donetsk; Vostokenergo (right), which owns three thermal power plants; and steel-rolling facilities (below) in Ukraine and Western Europe

Ever ready The years preceding the credit crunch have been good to almost everyone, but particularly to leading diversified energy and metals and mining firms, and SCM is no exception. But the best of the best have spent those years improving internal procedures – improving the plumbing and plugging leaks – in expectation of a rainy day. Notes Mendoza-Wilson: “It’s always better to repair the roof while the sun is shining. While steel prices have been high over the past three to four years, we used the time wisely, investing in energy efficiency and production efficiency, and ensuring we have best-practice corporate governance in place. “Investors and banks trust us, and that helps them understand our structure. And now that capital is scarce, that structure is helping to weather the downturn. Having that clean corporate

structure is not a silver bullet,” he adds. “But we’ve made certain that our actions over recent years have made us more attractive to the capital markets.” It’s clear that the current global economic environment provides SCM with a stern test of its ability to operate

the big picture

The current fiscal environment is a challenging time for major acquisitions, yet SCM remains on the lookout for high-quality, low-priced prospects, particularly in the metals and mining sector under pressure. Ukraine recently received a hefty capital injection from the International Monetary Fund, and Kiev’s problems will not stop there. The issue for SCM, a company that operates across multiple business sectors, is to ensure that it is capable of adapting with alacrity to the current, forbidding business environment.

Looking ahead “The situation at the moment is challenging,” admits Mendoza-Wilson. “When there is a downturn in steel prices it hurts our business, and the slowdown in many industries affects the capital we have at our disposal. It has made it harder to fully fund our aims and our production processes.” But he adds that SCM is prepared for the added pressure it places on the company. “Over the next 15 months the aim is to operate as efficiently as possible, and remove from the cost line any extra fat. At every stage of the production process we are looking to cut inefficiency.” Two unanswered questions about SCM remain: its listing plans, and the scope PricewaterhouseCoopers

of its determination to become a major global player across multiple sectors, whether organically or via a slew of mergers and acquisitions. In terms of seeking to list one or all of its subsidiaries, Mendoza-Wilson admits the opportunity should be a compelling one when the market returns to normal, and says that the systematic process of improving corporate governance and transparency allows the management structure of SCM’s disparate divisions to operate as though they were already listed vehicles. He notes: “The goal for each of our sub-holding firms, such as Metinvest and DTEK, is to put in place a corporate structure, governance, management team, financial reporting and operational standards and performance which ensure they are capable of being market-ready. We don’t have any concrete plans to list any division right now. But the benefit of being marketready is significant.” Acquisitions are a different kettle of fish. SCM has plenty of cash on hand, and in recent years it has been strongly

on the acquisition trail. In late 2007, Metinvest paid around €500m to buy steel-rolling mills in Europe. The mills – Trametal, based in northeast Italy, and Newcastle-based Spartan UK – boosted Metinvest’s plate-rolling capacity to more than one million tonnes of steel per annum. Those two new assets posted combined sales of more than €370m in 2006. At the time, Metinvest’s general director, Igor Syry, said the two acquisitions suited Metinvest’s long-term strategy of producing “more value-added products” and “improving the company’s industrial balance”. The current fiscal environment is an equally challenging time for major acquisitions, yet SCM remains on the lookout for high-quality, low-priced prospects, particularly in the metals and mining sector. “We’re trying to compete globally in the steel market,” says Mendoza-Wilson. “Our acquisition of Trametal and Spartan helped us to be closer to customers in those markets (Italy and the UK, as well as the European Union). Our expansion needs in that sector are being met.

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AD

the big picture

“We’ve also been looking at opportunities in North America, which would allow us to increase our supplies of high-energy coal used in the steelmaking process, particularly in terms of acquisitions in terms of coking coal. We want those deals to be a good strategic addition to our overall metals and mining strategy,” he adds. SCM’s leading executives are looking down the line to a time when the group is a leading global holding company with one or several business divisions listed and heavily traded on one or more international stock exchanges. From the group’s 39-yearold chief executive officer, Oleg Popov, a graduate of Donetsk State University, to the 33-year-old chief financial officer, Roman Vodolazkyy, a former executive at PwC, the group’s upper echelons exude youthfulness. Mendoza-Wilson, a Scot who ran his own public relations firms in London and Dubai, adds a dash of international piquancy to a company that covets greater international exposure and accomplishments.

External assistance Those aims are being aided and abetted by advisers including PwC. And SCM’s drive for transparency and best practice is further evidenced by its commitment to international audits, performed by PwC since 2004, and the introduction of audit committees, which include experienced independent members who have vast international expertise. The drive for transparency has also, as Mendoza-Wilson noted, boosted SCM’s global reputation, enabling it to raise capital when other domestic and regional private corporations have stumbled. Last year, Metinvest completed the issuance of a $1.5bn syndicated loan underwritten by four global lenders: ABN AMRO, BNP Paribas, Deutsche Bank and ING. That marked the largest credit facility ever raised by a privately run Ukrainian firm. To a large extent, SCM has benefited PricewaterhouseCoopers

In eight years, Rinat Akhmetov has grown SCM into Ukraine’s largest private corporation, estimated to generate about 8% of annual gross domestic product

Akhmetov has done much to advance the international exposure of both his home country and his hometown from ensuring that each of its corporate divisions is separately run by professional managers. Akhmetov might sign off on every important deal, and views everything from a central position at the heart of the firm, but the likes of DTEK and Metinvest are run to industry maxims by managers with long histories in their respective industries. SCM sees itself less as a conglomerate in the historical sense of the term – sprawling groups that hold assets in every possible industry, whether they generate profit or not – than as a strategic, professional investor which invests in the long term in the industry sectors in which it is involved. “Our aim is to employ world-class standards in each of the sectors,” says Mendoza-Wilson, “and to bring global best practice to each of our company divisions. We are competing on a par with the world’s best corporations, with global steel companies such

as ArcelorMittal and Tata Steel,” he adds. “In the metals world, it’s a global marketplace so you have to be able to compete with the best. We are constantly upgrading our technology, improving energy efficiency, and investing in new, more environmentally sustainable business procedures.” The message that comes out from SCM’s leading executives is that it is good to be clean and it is good to be transparent, especially when one is trying to create a leading emerging market corporate capable of competing alongside global leaders in the worlds of energy, metals and mining, telecommunications, media, and beyond. Of course, it is also good to be big and, as Ukraine’s largest private corporation, that battle is being won as well. This is a company that started in Donetsk, and expanded to Europe, but is already becoming one of Ukraine’s leading corporate flagships to the world. n

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Special Report: financial crisis

In this special report, Transform analyses the impact of the global financial crisis on companies in Central and Eastern Europe (CEE) and examines how they can survive and even become stronger (p23). CEE’s banks are a case in point. While the crisis may have caused their balance sheets to shrink, growth opportunities remain (p28). As bank lending dries up, businesses are looking elsewhere for financial security. Among export businesses, for example, credit export guarantee schemes have risen in popularity (p32). As in every downturn, job losses have been inevitable but experts are urging companies not to stop developing their brightest talent (p34).

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Weathering the storm Words: Scott Payton

Through the clouds: the financial crisis has not yet broken over many CEE economies

photolibrary

M

iroslav Singer, vice-governor of the Czech National Bank (CNB) and a former director at PwC, has reason to be cheerful. As the global financial crisis continues to rock the foundations of economies elsewhere in the world, the Czech Republic’s financial system remains in good shape. “It’s a case of so far, so good,” he says. “Less than 1% of total assets in the Czech financial sector are toxic, and even these are not concentrated in a way that could harm one particular institution.” But not all Central and Eastern European (CEE) states are weathering the international financial storm so well. “The CEE region is not homogenous,” Singer explains. “Countries have developed very different financial structures, which means

PricewaterhouseCoopers

that the crisis is having very different effects from one state to another.”

The impact on the financial sector A key factor determining the impact of the global financial turmoil on specific CEE countries has been the proportion of foreign currency loans as a percentage of total recent borrowing in each state. Hungary and the Czech Republic are the two extremes in this area. During 2008, almost 90% of loans to Hungarian households were made in Swiss francs or euros rather than in the local currency, the forint. Indeed, by October, nearly one third of Hungary’s total debt was denominated in a foreign currency. Taking out a foreigndenominated loan made sense while interest rates were low. But as the forint

weakened, Hungarian borrowers faced soaring repayment costs. The result was widespread market panic over the ability of the Hungarian financial system to sustain itself. In October 2008, the International Monetary Fund (IMF), the European Union (EU) and the World Bank stepped in with a $25.1bn rescue package. Early signs indicate that the bailout seems to be working. In the days following the announcement of the rescue, the forint recovered some of its value against other major currencies. In the Czech Republic, the impact of the global crisis could not be more different. As the country’s national bank announced at the end of September: “The Czech financial system continues to be relatively isolated from global turbulence.”

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Special Report: financial crisis

Power cut: Moscow’s stock exchange was hit by falls in demand for natural resources including oil, gas and metals

This, says Singer, is due in large part to a far lower dependence on foreigndenominated loans. “Foreign exchange flows to households in the Czech Republic are virtually zero, compared to 90% in Hungary,” he says. Why? “Czech banks have preferred to invest in the healthily growing domestic economy rather than

looking abroad. And they have not been hit on the liability side because they financed themselves from the deposits of Czech citizens when interest rates were around or below eurozone levels,” Singer says. “So there was little incentive for the banks to engage in anything risky.” Hungary and the Czech Republic may

Projected GDP growth in CEE % 8 7 6 5 4 3 2 1

24

Britain

(for comparison)

Croatia

Ukraine

Slovenia

Slovakia

Serbia

Russia

Romania

Poland

Lithuania

Bulgaria

Latvia

Hungary

Kazakhstan

reuters

Czech Republic

0

Source: Economist Intelligence Unit

represent the worstcase and best-case scenarios, but how well are banks in other CEE countries standing up? Emilian Radu, transactions advisory partner at PwC Romania, puts Poland and Slovakia alongside the Czech Republic as the CEE states in the strongest position to ride out the storm – and Ukraine alongside Hungary in the weakest position. “Romania and Bulgaria lie in between these two groups: there is some vulnerability, but there has not yet been any need to request IMF assistance,” he adds.

Careful practices Paul Cunningham, financial services partner at PwC Czech Republic, says that many CEE countries’ banks are withstanding the global maelstrom better than those in Western Europe because they have followed more prudent lending practices in recent years. “For example, there haven’t been 120% mortgages or other kinds of behaviour that characterised the US sub-prime mortgage sector. The banks have been building a mortgage market in the CEE region that hadn’t really existed before, so they were able to attract high-quality borrowers in the emerging middle classes.” The widespread preference for variablerate rather than fixed-rate mortgages among banks in the CEE region has also stood them in good stead. “It has allowed them to pass on the cost of borrowing to the consumer,” says Philip Buljan-Law, an advisory director at PwC Croatia. Radu agrees that the prudent policies of central banks have also helped many CEE states to withstand the fallout from the global crisis. “The IMF, the World Bank and the

EU imposed strong financial regulations in the run-up to the first wave of EU accessions, so countries took the rules of the game seriously,” he says. Tight regulations have certainly helped to protect banks operating in Croatia, adds Buljan-Law. “A couple of years ago, the Croatian National Bank limited the growth of banks’ loans portfolios to 12%,” he explains. “For banks, mortgages and the like then became unattractive as there is more profit to be made from unsecured personal lending. As banks were slow to react (to improve credit processes, etc) and migrate from mortgages and securitybacked lending to unsecured personal lending, they were spared the full force of the credit crash.”

Drop in demand In the commodity-driven and, until recently, booming economies of Russia and Kazakhstan, the financial crisis has been compounded by recent falls in demand for oil, gas, metals and other natural resources. “In the Commonwealth of Independent States, a lot of the phenomenal growth enjoyed by major companies was built on high commodity prices, availability of ample credit and dynamic construction and real estate sectors,” explains Alper Akdeniz, PwC managing partner, Central Asia and Caucasus. “As with Russia, Kazakhstan has been, and will continue to be, affected by a decline in oil and gas prices.” Both the Russian and Kazakh governments have taken dramatic steps to shore up their banking systems and commodity-focused companies. The Kremlin, for example, has earmarked $50bn to help Russian resource companies and financial institutions meet their foreign debt obligations – which exceeded $500bn by November 2008. In turn, the Kazakh government has allocated PricewaterhouseCoopers

a total of $15bn for supporting banks and other businesses through the global crisis. Like their Russian counterparts, Kazakh banks were left heavily exposed to foreign debt obligations when the global financial crisis began to bite. Akdeniz believes that while the government’s immediate reaction is timely, the degree of success will depend on how conditions develop. “The situation is evolving on a daily basis, so the response will have to be fluid, depending on how events unfold, and the government’s agile response is paramount,” says Akdeniz. He says that the global crisis highlights a crucial long-term issue for the Kazakh economy: that it must branch out in order to secure future growth. “Countries like Kazakhstan cannot rely on their commodity-based economy to drive sustainable economic development going forward, so diversification is essential,” he says. “This will not be easy. It will require a lot of homework to determine how to diversify, and how to measure the successes of the diversification process.”

“Czech banks have preferred to invest in the healthily growing domestic economy rather than looking abroad” Miroslav singer, vice-governor, czech national bank

The Kazakh government is all too aware of the need to diversify, Akdeniz says. This is the reason authorities are working to achieve a much broader economy by 2030. Agriculture is one area of diversification with significant potential for Kazakhstan, he adds. “Given the size of the country, and its fertile land, there is an opportunity to help meet rising global demand for food.”

Beyond financial services Three other sectors that are key in many CEE economies are also being directly affected by global market turmoil: car manufacturing, construction and real estate. Although he is positive about the Czech banking system’s ability to withstand the global financial crisis, Singer admits that other sectors in his country are more vulnerable. “We will be harmed through the real economy: that’s the bottom line.” For the Czech Republic, Slovakia and many other CEE states, the global fall in demand for new cars is having an adverse effect on the prospects for export revenues and, potentially, job security. “Central Europe has become a major auto maker. So the consequences of the crisis are very obvious,” Singer says. “You are already seeing car manufacturers cutting back production in the CEE region,” adds Cunningham. In November 2008, Volkswagen announced that output at its Czech Skoda plants would be reduced by 18,000 vehicles during the last two months of the year. This came on top of an earlier cut of 13,000 vehicles. Auto makers in other parts of the CEE region have also announced production cuts. The repercussions of the crisis are being felt just as acutely by the real estate and construction sectors. “We’re seeing a real reluctance to lend, transactions drying up and entities finding it very Brakes on: Skoda cut production by 18,000 cars at the end of 2008, prompted by a fall in demand in Western European car markets

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Special Report: financial crisis CEE flashpoints

Sept 17, 2008

The Russian government closes trading on the country’s two major bourses, RTS and MICEX, following the sharpest share falls in a decade.

Sept 29, 2008

Russian prime minister Vladimir Putin announces that $50bn worth of loans will be made available through Russian state-owned Vneshekonombank (VEB) to help the country’s financial institutions and companies meet their foreign debt obligations.

Turbulent times: Hungary’s stock market has been badly hit by the global financial crisis

“Diversification is essential… Given the size of Kazakhstan, and its fertile land, there is an opportunity to help meet rising global demand for food”

reuters

Alper akdeniz, partner, Pwc difficult to raise finance, even for existing projects,” says Cunningham. “The property bubble – particularly that seen in the Baltic states – has been pretty sharply pierced.” While the effects of the financial crisis vary dramatically from country to country, banks are generally unified in their response: they are cutting costs,

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while pressing on with their business transformation and expansion plans. “They still expect to grow this market, but they are looking to do so more efficiently than in the past,” says Cunningham.

Best practice What banks are not doing, adds BuljanLaw, is making extensive redundancies. “Instead, they are looking at standardising processes, optimising efficiency, tightening controls and focusing hard on profitability. They realise that they can’t stop reducing the time to market for new products; improving their services; and enhancing customer support – because if they freeze any of this activity, then a competitor will step in and take away market share,” Buljan-Law says. This acceleration of the business transformation process

is leading banks to differentiate their business models more clearly, he adds. “Some banks are focusing on the service side, losing market share but winning more profitable segments of the market; while others are focused on becoming a supermarket – saying: ‘We want as many customers as we can because we’re lean and mean.’” Banks’ advisory requirements have also sharpened, he adds. “In this market, clients are looking for real valueadd. More than ever, they want truly specialist help from advisers who deeply understand the local market, language and culture – as well as having the ability to offer a world-class service.” Cunningham, meanwhile, points to another reason why CEE financial institutions and organisations in other sectors are particularly keen to tap into the best possible advisory services: many senior executives have never experienced a downturn in their professional lives. “It’s been 10 years since Russia had a problem, and longer than that in other parts of the region. Things have been very comfortable for many institutions. Now it’s only the clever that are going to make the decent money and the rest are going to struggle.” Mark Okes-Voysey, CEE advisory regional leader, says that CEE companies outside the financial sector are also responding to the global uncertainty by focusing their minds on improving efficiencies wherever they can: “Companies tend to learn a great deal during crisis periods. It’s important that businesses take out non-core activities and ensure they have the right people to

Oct 27, 2008

Oct – Nov 2008

The International Monetary Fund offers a $16.4bn loan “to restore financial and macroeconomic stability” to the Ukrainian economy, following a 25% fall in the value of the local currency and tumbling global demand for steel – a key export for Ukraine.

The Kazakh government earmarks $15bn for supporting the country’s financial institutions and companies. This includes an injection of $3.4bn into four major banks – Alliance Bank, BTA Bank, Halyk Bank and Kazkommertsbank – plus $5bn worth of short-term loans and a $1bn fund to absorb toxic debt.

drive the business forward. There will be a lot of restructuring.” How should the region’s governments and central banks help their economies through the challenging months ahead? Radu urges them to strike the delicate balance between tightening controls and maintaining the flow of credit. “What’s really important for the Romanian government and central bank, for example, is not to fall into the trap of completely discouraging credit. By not injecting cash into economies, we will run the risk of recession. We need a balanced approach that still funds growth, yet also provides credit on more prudent terms – but not on excessively stringent terms.” “Balance” is also the watchword for Singer at the CNB. “Our conflicting goals

are achieving price stability and avoiding deflation on the one hand, and preserving our credibility on the international financial markets on the other.”

The long view Despite the ongoing consequences of the global financial crisis across CEE, Radu cites one reason to be positive. “A recent Economist Intelligence Unit report projected that growth in the CEE region during 2009 will average 4%. This might be around 2% lower than those seen in recent years – but growth in the UK and the eurozone will average -0.4%.” (See ‘Projected GDP growth in CEE’ p.24.) In other words, compared with Western Europe, CEE countries will continue to enjoy substantial economic growth in

“Pricing is becoming more attractive and sellers’ markets are becoming buyers’ markets” Mark okes-voysey, CEE advisory regional leader, pwc

Cold comfort: debts owed to distributors have led to empty freezers in stores

PricewaterhouseCoopers

Nov 5, 2008

The IMF, World Bank and EU agree a $25.1bn rescue package for the Hungarian financial system, designed to restore investor confidence and reduce stress on debt holders – many of whom faced soaring repayment costs on foreign-denominated loans. In November 2008, Hungary has a national debt worth 97% of GDP.

the long term. However, the short-term challenges are considerable and require decisive policy measures. Cunningham agrees with Radu, adding that the outlook for investors in the CEE region remains relatively rosy, although, as the downturn proves, nothing is predictable and uncertainty remains in all markets. Okes-Voysey says: “Sure there are risks out there, but pricing is becoming a lot more attractive and sellers’ markets are becoming buyers’ markets.” He anticipates that the new global economic landscape will attract new types of investors to the CEE region: “I think we will see a raft of different potential investors coming in – such as sovereign wealth funds – from countries which are less affected by the crisis, yet haven’t shown substantial interest in the region to date.” Singer also believes that the environment for inward investors remains favourable in the CEE region. “There are still natural growth opportunities in many sectors, including finance. And since the developed world appears to be harmed more severely than Central and Eastern Europe, it may pay off for investors to look for localised growth opportunities.” Akdeniz believes that Central Asia is also in a strong long-term position. “We will bounce back, particularly in Kazakhstan, due to our very close proximity to significant emerging markets such as China and India and robust fundamentals,” he says. “There is going to be a global slowdown, but growth will remain prevalent in this part of the world.” As Okes-Voysey concludes: “The region at large is still going to be an exciting place; fortune will definitely favour the brave.” n

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Special Report: financial crisis

Holding ground Bankers in CEE have to get used to a slowdown in growth and consolidation strategies, though they are still in a position of strength Words: Tony McAuley

28

F

or European banking, the markets east of the Danube have been the continent’s most compelling growth story for so long that it is particularly depressing when the hope that they might be able to escape the financial crisis is dashed. There was no way, of course, to completely avoid the epochal financial unravelling, even for the relatively underdeveloped and fast-growth banking markets of Central and Eastern Europe (CEE). However, there are still plenty of growth opportunities, especially for the well-positioned banking groups – the early international movers that have established dominant market positions, such as Erste, Raiffeisen International (RI) and UniCredit. It is becoming clear, though, that the nature of competition is likely to change, and therefore the way that banks must respond. The “land grab” of the past few years will most likely give way to a period when banks concentrate on organic growth. Already, there is evidence of the effect of the financial crisis on the sector’s mergers and acquisitions activity. Whereas banking groups had been falling over themselves to buy

istockphoto

The Big picture

up assets over the previous five years, the brakes came on for deal flow in 2008. In the year through to November 10, the total value of announced acquisitions was less than half that for 2007 (full year) and none of the deals topped €1bn (see chart overleaf). The earlier pace of deal-making is not likely to return anytime soon. “It’s not only the market risk that analysts are now focused on, but also the perception that banking is not as profitable as it was in the past,” says Roman Hager, who is general secretary to RI CEO Herbert Stepic. “To buy a bank in such an environment, with assets that you cannot 100% evaluate or determine how risk is developing, and with financing resources scarce… it’s not happening.” Some deals have continued to go through (see table overleaf). For example, the purchase by GE Money of Poland’s BPH banking group in 2008 is a deal that typifies the strategy of many of those that continue to pursue expansion plans in

CEE. With BPH, GE expanded its Polish offering from consumer finance to universal banking. GE’s strategy is to merge its Polish banking interests in the first half of 2009 and to expand the branch network over the next three years. But CEE banking M&A is, nonetheless, expected to hit a dry spell. As Federico Ghizzoni, head of UniCredit Poland’s markets division and CEE banking, says: “It’s not because opportunities will not come but clearly the so-called consolidators are looking at their own balance sheets. There are very few banks willing to invest, not only in Eastern Europe but overall. Maybe in the second half of 2009 there will be some more consolidation, though probably indirectly,” as international groups may pull out of the region and put their banks up for sale, he says. Although it is slowing down, CEE banking has shown remarkable resilience. According to a report from Raiffeisen Zentralbank Österreich (RZB), CEE banking assets grew

“Banks have to optimise their distribution networks, significantly improve their customer service, anything that can help them to grow organically” marc gössi, partner, pwc

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Special Report: financial crisis 2008 CEE commercial & savings and investment bank targeted M&A transactions more than $100m Completion date

Deal status

Deal value $(m)

Target (Target nationality)

Acquirer (Acquirer nationality)

Feb 11, 2008

Completed

759

OTP Bank Rt (7.99%) (Hungary)

Groupama SA (France)

Mar 3, 2008

Completed

745

Expobank Ltd (Russian Federation)

Barclays Bank plc (UK)

Feb 4, 2008

Completed

730

Pravex-Bank AKB (Ukraine)

Intesa Sanpaolo SpA (Italy)

May 27, 2008

Completed

718

Komercni Banka as (7.35%) (Czech Republic)

Julius Baer Investment Management LLC – JBIM (USA)

Sep 24, 2008

Completed

697

FinansBank AS (9.68%) (Turkey)

National Bank of Greece SA (Greece)

Jun 20, 2008

Completed

654

Kazkommertsbank OAO (17.12%) (Kazakhstan)

Alnair Capital Holding (United Arab Emirates)

Jun 26, 2008

Completed

576

Uniastrum Bank OOO (80%) (Russian Federation)

Bank of Cyprus Public Co Ltd (Cyprus)

Mar 20, 2008

Completed

549

Istrobanka as (Slovak Republic)

KBC Group NV (Belgium)

Sep 23, 2008

Pending

502

Bank BPH SA (21.26%) (Poland)

General Electric Co (United States)

Sep 22, 2008

Pending

500

Renaissance Capital ZAO (50%) (Russian Federation)

Onexim Group (Russian Federation)

Source: Dealogic

This means that deposit rates, which rose through 2008, will probably have to rise further. Also, banks will have to become much more sophisticated in their offerings for customers. Marc Gössi, a banking partner at PwC in Moscow, expects many banks to make this strategy shift towards distribution and product optimisation. In terms of consolidation, it remains to be seen how the credit crisis will shake out the bank sector players. In the meantime, the strongest regional operators will focus on their existing portfolios. “I think what banks have to do is optimise their distribution networks, significantly improve their customer service, anything that can help them grow organically,” Gössi says. After all the acquisitions, bank groups now should start to integrate those fully under the one brand. And optimising the branch networks means not only evaluating

by €333bn to €1,417.4bn in 2007, an even faster rate than in 2006. Banking assets continued to grow through the first half of 2008, though at a cooler annualised rate of about 20%.

Margin squeeze Banks’ immediate concerns are centred on funding in still-rigid credit markets. But financial distress has handed a comparative advantage to banks with a large depositor base, a relatively conservative lending-todeposit ratio and strong equity backing. Those dependent on wholesale and/ or international funding are in a weaker position. That is, some of the asset sales over the past year in CEE have reflected the need by some banking groups to sell in order to shore up their capital base. The opportunities for growth combined with the funding challenges have led to intensifying competition for depositors.

CEE commercial & savings and investment bank targeted M&A transactions Value ($m)

Value ($m)

Number of transactions Number of transactions

25,000

25,000

200

200

20,000

20,000

150

150

15,000

15,000

100

100

10,000

10,000

5,000

5,000

50

50

0

0

0

0

2007(to Nov 10) 2007(to Nov 10) 2008 (to Nov 10) AnnouncementAnnouncement date 2007 date 2008 date 2007 date 2008 Announcement 2008 (toAnnouncement Nov 10) Source: Dealogic

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outlets on the basis of inhabitant numbers but also in terms of customer profiles and attitudes, Gössi adds. RI has been among the most aggressive expanders. Hager says: “We won’t stop growing our distribution network, but we will be more cost-conscious.” Similarly, UniCredit has grown rapidly, but it too will pause for a while, Ghizzoni says. “It is time for us to really focus on the efficiency of our network, and on cost management and product development.” For RI, there are many ways it is looking at optimising distribution, such as developing a mobile sales force. However, RI will be reining in mortgage and other lending in foreign currencies because of increased risk and loan-book deterioration. In the CEE banking sector*, growth is predicted to average about 15% over the next four years, according to RZB. That’s not as good as the 20% to 30% growth rates of recent years, but pretty healthy for those in a position to take advantage of it, such as UniCredit. Ghizzoni says the bank has been very conservative, lending only a very small proportion of Forex Products to individuals, where most of the credit problems lie. “The crisis will be severe in the region, but there are also good opportunities. For us, I see benefits: it is a chance to get back to basics, develop the network and focus on the customers.” n *RZB defines CEE as: Poland, Hungary, Czech Republic, Slovakia, Slovenia, Romania, Bulgaria, Hungary, Serbia, Bosnia and Herzogovina, Albania, Russia, Ukraine, Belarus and Kazakhstan

Special Report: financial crisis

Safe cargo Exporters are finding their banks less willing to finance their trades with customers in emerging markets. But they can still turn to their governments for backing Words: Christian Doherty

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overnments across the world have long encouraged domestic firms to chase export deals beyond their own borders. Foreign trade not only benefits the individual firms, it can do wonders for the exporting country’s balance of payments. Doing business overseas comes with its own risks, though, and they are often heightened when dealing with trading partners in emerging markets such as Central and Eastern Europe (CEE). Political instability or supply chain glitches, for instance, can mean that big order from overseas turns out to be more trouble than it is worth. Worst-case scenario? Invoices do not get paid.

Credit export guarantees (CEGs) are seen as a necessity for companies doing business in CEE

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In the past, banks were willing to take export financing risks on a regular basis, says Andreas Klasen, director at PwC’s export and investment finance practice in Germany. “That’s partly because the risk appetite of the banks was huge.” Private credit insurers were also happy to take on risk in different markets. Now, however, with the financial services sector suffering heavy losses, banks and private credit insurers have partly lost their appetite for risk and that makes them nervous about backing exporters going into untested markets. So is the downturn about to put a brake on lucrative trading partnerships? Not necessarily. The financial crisis has swung the spotlight back on a little-used

government initiative called credit export guarantees (CEGs). CEGs first emerged in Europe in the 1920s. In order to stimulate trade, governments – via Export Credit Agencies (ECAs) – offered firms protection against non-payment by their foreign trading partners by guaranteeing up to 100% of the value of the contract. Klasen advises firms on how to use CEGs and how to structure deals in a way that keeps risk to a minimum: “The overall idea is to strengthen the global competitive position of domestic exporters in difficult markets to preserve jobs.”

“The overall idea is to strengthen the global competitive position of domestic exporters in difficult markets” andreas klasen, director, pwc

Experience gap Klasen notes another issue to bear in mind: “Over the last few years, ECA cover probably wasn’t at the top of the list of priorities for many companies working in the CEE region.” Now, many larger companies – and indeed banks – are discovering their corporate finance departments lack the necessary expertise to deal with this issue. How to compensate for this lack of experience? “We tell exporters to start the process [of applying for a CEG] early,” Klasen says. “Even if a deal isn’t done in the end, it’s worth investigating. And the ECA can be quicker than the banks. One client last year told us: ‘It’s hard, complicated, long-winded and it will take years.’ After six weeks the ECA agreed while the bank needed another five months to complete.” n

Germany’s insurer of last resort For German firms looking to ramp up their revenues from exports, Hermes Cover is an indispensable piece of insurance. The scheme, which provides export credit guarantees for German businesses, is administered by Euler Hermes, an insurer, and PwC on behalf of the German federal government. In 2007, Hermes Cover guaranteed orders in the region of €17bn – with the lion’s share involving deals in the CEE and CIS regions. Hermes Cover underwrites export contracts to protect exporters from nonpayment due to various risks. Exporters will typically pay a fee to cover administration, as well as a risk-dependent commission (mainly based on the country they are exporting to). In any claim, exporters will be obliged to pay an excess of between 5% and 15%. As an insurer of last resort, Hermes Cover is expecting greater demand for its services over the next year as some private insurers turn away from the credit risk business in a bid to de-risk their books.

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There has, in the past, been a feeling among some exporters that CEGs were anachronistic and bureaucratic. Now, thanks to the financial crisis, their profile and importance is growing. In Germany, for instance, compared with 2007, applications for the cover increased by 30% in 2008 (see ‘Germany’s insurer of last resort’). To Klasen, a credit export guarantee is now a necessity for many companies looking to do business in CEE. As demand increases, will companies exporting to CEE find it difficult to secure export cover? No, says Klasen, who points out that CEGs are open to all up to the statutory cover limit. “Substantial parts of the system as it currently stands

are regulated by an OECD consensus, which means it won’t change with the demand and ECAs won’t react to increased applications. For example, each country’s risk profile can change, and the credit crunch can influence that, of course – which means the premiums can go up. But it’s not about governments spotting an opportunity to make more money as the demand goes up.”

PricewaterhouseCoopers

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Special Report: financial crisis Bridging the gap: retaining and developing high-potential employees during a downturn may be costly, but it is even more expensive to recruit new staff

Talent spotters Employers might be under pressure to trim learning and development budgets when money is tight, but there are still ways to keep good people on board and motivated Words: Widget Finn

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The Big picture

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T

o cut or not to cut? That is a question many HR directors will be asking themselves about their learning and development budgets as they face pressure to make savings. When the axe has fallen in past downturns, training has been a usual suspect. But if any lesson has been learnt from that, it is this – if talented employees are neglected during bad times, when economic growth resumes they will lack the leadership potential to take the company forward. Learning and development budgets are vulnerable to cuts in difficult times because, unlike redundancies, they are an unemotional area, argues William Schofield, partner and leader of HR services for Central and Eastern Europe (CEE) at PwC. “Talent management can also suffer because it tends to be

PricewaterhouseCoopers

an expensive item on the development agenda,” he says. Talent is expensive to maintain, but it is even more expensive to recruit, so it is imperative that employers hold on to their best people – particularly because they are a source of new ideas and innovation or, put another way, the company’s future.

Changing demographics In CEE, there is an added pressure to keep good people because the demographics of the region are changing. “The downturn doesn’t conceal the fact that in Eastern Europe there is a significant ageing workforce,” says Schofield. “Hungary, Poland and Slovakia, for example, are facing a huge problem over the next 10 years so the pool of talent will diminish.”

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Special Report: financial crisis

How to… develop talent during a downturn The current financial squeeze means employers have to think laterally and come up with low-cost or no-cost ways of keeping their brightest and their best. Experts say plenty of options are available:

1. secondments: PwC sends some of its best young people to developing economies, including India, to learn about issues other than those they experience during their daily work.

2. Mentoring: At Cushman & Wakefield Stiles & Riabokobylko, a Moscow-based real estate consultancy, managers are encouraging older and wiser members of staff to mentor younger, bright talents.

Enlightened companies have learnt from past downturns and are focusing on issues that are important for the future success of their business: how can they keep leadership development programmes going when money is tight, and how can they identify and retain key talent? In CEE, where generous salaries and big bonuses have been key motivators, HR directors face even greater difficulties – now that the purse strings have tightened, what other retention tools are available to them? The global financial crisis has yet to have a full-on effect across CEE, but some sectors are starting to feel the pinch. Property is very exposed to what some are calling the economic storm, says Anne Ramsay, HR director of the Moscowbased real estate consultancy Cushman & Wakefield Stiles & Riabokobylko. “Recently we have seen material changes to our income projections for next year, based on an immediate knock-on effect from impacted developers and we are having to make decisions about how we manage our HR budget to get the optimum effect,” she says.

3. Get them involved in decision making: Involve tomorrow’s corporate leaders in strategic decision making now and that experience during the economic downturn will make them stronger leaders in the future.

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4. Mixing with management: At Unilever, a Dutch consumer goods company, high flyers are encouraged to build ongoing relationships with senior management through small gestures such as breakfast with the board.

So who are these valuable individuals who must be nurtured, and how can organisations identify them? According to David Valentine, a director with psychometric tester SHL, responsibility for finding tomorrow’s leaders starts at the top. “Chief executives and senior team players must start to develop a one to three-year HR strategy as part of a wider business plan,” he says. “This will allow them to pull together a comprehensive competency map to demonstrate exactly what skills are needed to drive forward and complement the initial strategy. Once the competency audit has been carried out, companies can adopt a ‘traffic light’ approach to test their people against the competencies required [to help identify tomorrow’s leaders].” But not all today’s stars will be up

alamy, punchstock, istockphoto

Skills sets

in the firmament tomorrow, Schofield warns. “It’s no use looking at your current high flyers and assuming that they are all future leaders. In order to identify the right people, you need to understand your own business and recognise the skills sets required to develop your business strategy.”

Encouraging loyalty Having identified the people who will make a difference to your company’s future, how do you ensure that they stay loyal? An Economist Intelligence Unit survey of nearly 200 board-level executives in Russia, conducted in July 2008, found that a competitive salary package was the most important factor when it came to nurturing talent. The global financial crisis has changed that landscape completely, and significant financial incentives for high flyers are no longer necessarily a viable option for cash-strapped employers. Schofield says talented employees must be made to feel both nurtured and challenged. “Talented people know who they are – the company must ensure that they don’t feel neglected and start looking elsewhere,” he adds. “PwC has a number of strategic training initiatives for its own people, including building international experience. For example, we send some of our best young people to developing economies, including India, to learn about broader issues than they would find day-to-day in the workplace.” He also recommends involving tomorrow’s leaders in strategic decision making. “This generation has little experience of hard times in the workplace,” he says. “Here is an opportunity to expose them to the challenges and involve them in planning strategy so that when it’s their turn to manage the process, they can look back at what they did in 2009 and learn from the experience.” Ramsay suggests that those who have experienced previous downturns can contribute to developing the younger PricewaterhouseCoopers

When they walK Not all companies will weather the downturn well on the talent management front. “Individuals in other businesses may feel that their future is no longer bright and are in the market for a new challenge,” says William Schofield, PwC partner and leader of HR services for Central and Eastern Europe (CEE). That gives savvier organisations the opportunity to recruit and enhance their own talent pool. But when good people walk out the door, there are ways to ensure that all is not lost. It is critical to treat your top talent well if they decide to leave or perhaps take voluntary redundancy, says Sarah Chiumento, a talent management expert. “Maintain a good relationship so that in better times they may well look to you for future employment and return to the fold,” she says. “When the market picks up in the next two or three years, companies will start recruiting again. How you deal with departing talent now will have an impact on how you are perceived in the future.” The ideal scenario, however, is to stop them walking out of the door in the first place.

generation. “We are encouraging the older and wiser members of staff to mentor our younger bright talents, though the role of mentor must be well defined. We need to be confident that the people we’re asking to act as mentors are able to do so effectively. In the fastmoving, entrepreneurial environment of real estate, there hasn’t always been the same embedded culture of giving feedback [to our ‘mentees’] as there is in some other organisations.” There are other initiatives that need not cost money. Karel Leeflang, vice president for HR Central Europe at Unilever, says:

“The downturn will be an opportunity for the cream to rise to the top and the best to show their employers what they can do” William Schofield, partner, pwc “We build an ongoing relationship with our high flyers by involving them in some of our more complex business projects and giving them exposure by inviting them to breakfast with the chairman and making sure all the board team meet them. Having encouragement from the top makes these high potentials feel appreciated and adds more value than salary increases or bonuses.” That said, Unilever, keeping its eye on the long term, is continuing its Early Leadership programme, which Leeflang concedes is expensive. “Thirty high potentials from CEE countries are currently involved,” he says. “We are also getting them involved in cross-border projects to give them new experiences and expose them to high performers in other countries. It creates a community of high performers which is a valuable asset for the future of the business.” SHL’s Valentine says these kinds of initiatives are invaluable: “The contribution that talent management makes in terms of identifying the most valuable employees cannot be underestimated, but it is still not top of the agenda for many businesses.” On the positive side, Schofield believes “the downturn will concentrate us all on efficiencies and innovations, and will be an opportunity for the cream to rise to the top and the best to show their employers what they can do.” n

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Firmly on the map: the first half of 2008 saw Warsaw Stock Exchange ranked second in Europe by both number and value of IPOs, behind only the London Stock Exchange

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the power of private capital

Floating towards success When it comes to courting private investors looking for an exit, Warsaw Stock Exchange is pulling ahead of its CEE competitors Words: Kimberly Romaine

Alamy

W

PricewaterhouseCoopers

here to list? That was the big question for New World Resources (NWR) when it decided to go public last May. The private equity-backed Czech mining company needed a market that had a good fit with its business strategy, but no single location stood out – so the backers opted for the first-ever triple flotation on the London, Warsaw and Prague stock exchanges. “The standards for corporate governance are very high in London, meaning transparency is very attractive from a shareholder point of view,” says Adam Levin, a lawyer who advised NWR’s private investors on the float, “so London was a good bet. Prague was important because of the company’s roots, and Warsaw is where NWR can see a lot of its future.” The triple listing became the largest IPO in London

in 2008, the largest IPO in Prague to date, and one of the largest in Warsaw after shares were priced at £13.25 – the top of its range – corresponding to a total offer valued at £1.3bn and market capitalisation of approximately £3.5bn. The offer was oversubscribed approximately 7.3 times at the top of the price range, thanks to strong institutional demand from all the regions in which the shares were offered. Not all private investors can afford a three-way float, but experts reckon there are some common factors to bear in mind when choosing to list on even a single stock market. “It’s all about liquidity,” says Robert Manz at Enterprise Investors, a Warsaw-based private equity firm that has seen 25 of its 91 exits on the public market. “Where will your company place compared to others? Is it best to be a big fish in a small pond

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Alamy

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“WSE investors are not afraid to buy shares from us due to our track record of bringing high-quality companies to the market and acting responsibly after flotation with regard to share trading” Robert manz, ENTERPRISE INVESTORS

The number of private investor-backed IPOs on CEE exchanges over the past five years

5 4 3 2

Moscow Source: Dealogic

Prague

Sofia

Warsaw

2008

2007

2006

2005

2004

2008

2007

2006

2005

2004

2008

2007

2006

2005

2004

2008

0

2007

1

2006

By comparison, the Warsaw Stock Exchange (WSE) appears to be going from strength to strength. Not only is it a CEE heavyweight, it has quickly become a real European hub. In the first half of 2008, it ranked second in Europe by both the number and the value of IPOs, behind only the London Stock Exchange, according to figures from PwC’s IPO Watch Europe survey. “There is a tremendous amount of liquidity and lots of appetite for quality new listings, where institutions can put a lot of money to work,” says Mike Wilder, a PwC partner. What is more, the WSE’s capitalisation at the end of the first half of 2008 was €126bn, greater than that of Austria’s Wiener Börse, according to statistics from the Federation of European Securities Exchanges. In a sombre Q3, London clocked up 19 IPOs, down from 79 in the same quarter in 2007. Warsaw’s figures also decreased, but less severely, with 13 recorded in Q3 2008, down from

2005

Strength in numbers

31 in Q3 2007. Luxembourg was a distant third, with just five listings in Q3. Warsaw is also proving capable of attracting foreign businesses – it has more than two dozen non-domestic listings, up from just one in 2003 (see graph below). The WSE does have its drawbacks. “Where Warsaw lets itself down is in its requirement for all documents to be translated into Polish. What is an annoyance in a good market becomes a deal-breaker in a market like today. That said, it will still attract listings since it has so much pension money captive,” Levin says. The WSE owes much of its success to the legacy of pension fund regulation: the rules mean that only 5% of their assets can be allocated to the investments in foreign markets. If and when the rules change (which is likely in a few years’ time), some money might shift to London, since the funds will aim to both diversify and gain other currency exposure. However, this is not likely to have a severe impact: “Pension funds will remain Poland-centric.

2004

or a smaller fish in a big pond? Bankers will have many ideas, but it comes down to size, liquidity and who are the target buyers. Post-IPO trading volume and, with it, analyst attention are important factors in deciding where the business will be best received.” That is something Zentiva knows all too well. The Warburg Pincus-backed Czech pharma floated on the Prague exchange in 2004 – it was the first substantial IPO since the stock market resumed activity in 1993. The flotation allowed the company to raise CZK2.4bn ($100m) in new equity and Warburg to exit part of its holding, fully exiting in 2006. Unfortunately, it did not vitalise the exchange the way optimists had hoped, with analysts blaming poor local lead managers and a lack of proper liquidity for the shortage of subsequent IPO activity. Prague would have to wait for the NWR flotation – the first major private equity-backed IPO since Zentiva – to witness its next home run.

the power of private capital

WSE: An insider’s perspective Jacek Socha, a vice president and partner with PwC, has been instrumental in developing Poland’s capital markets. As the country’s Minister of Treasury from 2004 to 2005, he privatised a number of companies via the WSE. Prior to that, he spent 10 years as chairman of the Polish Securities and Exchange Commission. He tells Transform about the exchange’s current and future success

This is because it is the market they know and they have an experience advantage – so maybe their foreign exposure would increase from 5% to 10%, but I doubt more,” Manz points out.

Private equity-friendly The glut of capital in the WSE owing to regulation has seen many brokers and researchers build an ecosystem around it, so even if some money flows to London, the infrastructure is already in place in Warsaw. This bodes well for exit-hungry private equity backers: unlike other small exchanges in Europe – such as London’s AIM – where vendors have been disappointed with the ability to fully exit post-IPO, Warsaw is more private equity-friendly, according to Enterprise’s Manz. He has generally been able to exit significant stakes at IPO and the remainder within six to 12 months. “We see WSE investors understanding our role in a company pre- versus postIPO; they are not afraid to buy shares from us due to our track record,” Manz says. “We have spent an immense amount of time talking to investors about our intentions and plans. The market generally recognises the value that we bring as private equity investors and that the company we want to sell is well prepared.” Enterprise has been the most active in taking companies public in Warsaw and others may be able to benefit from the precedents it has set. One such company is RPG Industries, which, between 2004 and 2007, turned NWR around via a significant PricewaterhouseCoopers

From a vendor’s perspective, what are the WSE’s major selling points? During the WSE’s first session in April 1991, it turned over just $2,000 trading the shares of five companies. The start of the WSE may have been modest, but its ambitions were huge. The structural assumptions of the capital markets in Poland were based on the most developed markets such as the UK, France or the USA, where the focus is on regulation, full information disclosure, transparency and supervision. These assumptions enabled companies in Poland to sell shares through swift IPO mechanisms and they also provided investors with an efficient secondary market. The approach has worked. As of the end of November 2008, 447 companies were listed on the WSE, which now ranks number one across CEE in terms of money raised in IPOs. To what extent does the WSE owe its success to Poland’s pension funds? While individual investors account for a significant minority of the liquidity in the Warsaw market, it is dominated by institutional investors – investment and pension funds own 70%-75% of shares issued by companies listed on the exchange. The €4bn worth of premiums the funds collect each year ensure stable capital inflows. How are the rules governing those pension funds expected to change? The change we should expect is the increase of the investment rate in foreign capital markets. Currently, Polish pension funds can allot up to 5% of their assets in such investments. That limit is likely to be increased to 10%-15%, which would allow greater diversification of funds’ portfolios. What challenges must the WSE overcome to enjoy continued success? First, it must ensure it will be company- and investor-friendly by using attractive exchange fees. The second challenge is finding a strategic partner and privatisation. Currently, the WSE is 99% owned by the Polish State Treasury. Privatisation will offer new opportunities for growth, such as acquiring other trading platforms in the region.

restructuring. It consolidated mining businesses under one company, OKD, and demerged non-mining businesses, including railways, mine gas extraction and certain property. The restructure also saw the partial sale of NWR to First Reserve Corporation, a US private equity firm, and American Metals and Coal International, Inc. Finally, a recapitalisation took place before the

IPO. By 2007, NWR was posting profits of €351m against €1.3bn of sales, a 10% increase on the previous year. Today, NWR is one of the largest industrial groups in the Czech Republic in terms of assets and revenues and is the second largest private employer in the country. Its IPO locations, carefully chosen with growth in mind, certainly turned out to be a good move. n

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Child’s play Russia’s leading children’s retailer, Detsky Mir, looks set to continue its fairytale expansion programme. Olga Kamenskaya, the firm’s finance director, tells Transform how the business has invested in strong systems to sustain its growth rates Words: Richard Rivlin

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Just what is an ERP programme? ERP stands for Enterprise Resource Planning. It is an information system designed to maintain, in a single database, all that is required for a number of different business functions. It is focused on providing an organisation with a joinedup way of using its data and contacts across the whole business, and then ensuring it can be used by those in the business with various needs such as supply chain management, human resources, project plans and customer relationship management. A common database can allow every department of a business to store and retrieve information in real time. The information needs to be reliable, accessible and easily shared so that the action taken by one department results in the appropriate follow-up action by other relevant departments.

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any senior executives in the CEE region will have purchased Lego and Action Man figures for their sons and Bratz dolls for their daughters at Christmas. Those who live and work in Russia will have bought them from Detsky Mir – translated as Children’s World – which is the largest dedicated children’s retailer in the country. For more than 50 years it has provided many Russians with their first memories of shopping for toys and has become a brand with huge equity in the Russian market. Detsky Mir’s stores have moved on significantly from its early Socialist days. Today, the shelves are filled with endless rows of toys, including those ubiquitous Bratz dolls; maternity and nursery goods; clothing and footwear; as well as stationery and sporting goods targeted at school-goers. The business behind the household name is a fascinating example of the opportunities available to successful brands. Detsky Mir is owned by Sistema, one of Russia’s leading conglomerates (see ‘Where Detsky Mir fits in the Sistema empire’, p.44), which has been a shareholder in the business since 1996. In an increasingly competitive environment,

Runaway train: Detsky Mir has enjoyed dramatic growth in recent times. It now has 128 stores in 67 Russian cities and a further two in Ukraine

Optimising operations

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WHERE DETSKY MIR FITS IN THE SISTEMA EMPIRE AFK Sistema was founded in 1993 and is led by Vladimir Yevtushenkov, who holds 62% of the group’s stock. It has its headquarters in Moscow and has a number of assets straddling the telecommunications, technology, petrochemicals and consumer industries.

For instance, it owns Mobile TeleSystems OJSC (MTS), the largest mobile phone operator in Russia and the CIS, with more than 90 million subscribers. Sistema is structured along a number of sector-focused lines. The group’s consumer assets include the following parts:

SECTOR

Company

Real estate

Sistema-Hals

Financial services

Moscow Bank of Reconstruction and Development

Travel

Intourist

Trade

Detsky Mir

Healthcare

Polyclinics Medsi

Retail

TS Retail

Source: www.sistema.com/businesses/consumer_assets

Sistema has backed the development of the business and today, Detsky Mir has 128 stores in 67 Russian cities and a further two in Ukraine.

Dramatic growth Olga Kamenskaya, the finance director at Detsky Mir, says: “The goal of our shareholder (Sistema) is that they are the number one in every sector in which they operate. So our mission is to have the largest and most efficient children’s retail network across Russia and the CIS.” The Detsky Mir business is already more than just a successful retailer. It owns C-Toys, Russia’s leading importer and distributor of toys, which brings additional revenues and profits to an already flourishing operation. The business has enjoyed dramatic growth in recent times, increasing its revenue in 2007 by almost 80% to $597.2m. Same store sales, retail analysts’ favourite barometer when tracking successful performance, rose by a staggering 36% in the same year. Detsky Mir might be operating from a position of strength, but that does

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not mean it is without challenges. The board needs to focus on how the company can sustain its performance and simultaneously exploit new opportunities. This determination led Detsky Mir to appoint PwC to assist across a range of areas. Kamenskaya says: “Our ambition is to have a financial function that can operate to best practice and that means putting in place the appropriate financial systems to allow the business to report to GAAP standards.” GAAP stands for Generally Accepted Accounting Principles and is the now standard framework of guidelines for financial accounting. The implications of doing this were huge for Detsky Mir and the results rapidly emerged. Kamenskaya says: “We have moved to a system by which we are able to track performance in each of our stores. It is like having 128 businesses, and there has been

a big shift in our approach.” The result of the programme has been to give the managers and owners of Detsky Mir much greater visibility of the performance of their business, enabling more effective budgeting and planning to take place, which makes it a fundamentally stronger operation.

Trusted adviser The mandate for PwC began by writing the policies for Detsky Mir to translate its reporting processes to the GAAP standards. This began in April 2007 and fed into a new Enterprise Resource Planning implementation and IT upgrade at Detsky Mir (see ‘Just what is an ERP programme?’, page 42). Since then, PwC has been involved in a number of projects aimed at increasing the effectiveness and efficiency of Detsky Mir’s finance function and processes, including the development of accounting methodologies, definition of “to be” processes and information flows, and shortening of the reporting cycle. The approach and support that PwC provided has led it to become a trusted adviser for Detsky Mir. Kamenskaya says: “We have recommended the firm to other parts of our business at C-Toys and to different departments of Detsky Mir-Center, including logistics and organisational development. We are happy to have them, as they are business experts who bring so much experience to bear.” Ekaterina Serova, a partner in PwC advisory, says: “We were under pressure constantly to deliver a high performance and meet the strict deadlines to satisfy the client’s needs. As we did this and proved our value, it led to the scope of our role expanding.” The relationship is built on trust. PwC has a strong understanding of the key priorities facing the business and the calibre of the relationship owes much to the regular communication flows. Serova says: “We have total openness and

Optimising operations

Shelf life: Detsky Mir’s range includes maternity and nursery goods, clothing and footwear, as well as its famous collection of toys

are not afraid to discuss problems that emerge and then resolve them. The frequent visits we make and conversations we have ensure that Detsky Mir understands our commitment to them.”

getty images, istockphoto

Future growth This trust has led to a blossoming of the relationship and an opportunity for other parts of PwC to contribute to the development of the business. “Detsky Mir has become a great example of different parts of the PwC organisation collaborating together to help an industry leader get stronger in its marketplace,” adds Serova. For instance, PwC now provides Detsky Mir with taxation support in relation to its foreign trade in Germany and Hong Kong and has provided extensive training in International Financial Reporting Standards to members of the finance team and methodological advice in PricewaterhouseCoopers

“Our mission is to have the largest and most efficient children’s retail network across Russia and the CIS” olga Kamenskaya, Finance Director, Detsky Mir

Ukrainian Accounting Standards. The future continues to look exciting for Detsky Mir. As well as focusing on retaining its leading position in Russia, it is expected to continue expanding into Ukraine, Belarus and Kazakhstan. Other emerging opportunities include the development of a premium children’s wear brand that is intended to take advantage of the rising middle and upper classes in Russia, who are able to spend more on looking after their children. As the company continues to expand, it will need to manage its performance even more effectively by not only ensuring everyone in the organisation understands its strategic goals but by linking forecasting and budgeting processes to the business’s strategy, and by providing timely and accurate data to help with decision making. PwC continues to work closely with Detsky Mir to help it achieve these objectives. n

45

Factory settings Although it may seem counterintuitive to open a new production facility in the current times, it is still worth considering a feasibility study for expanding into CEE Words: Christian Doherty and Eila Rana

46

optimising operations

Businesses can reduce customs duty costs by locating their factory in a different market to the one in which they sell. As long as the factory is within the same customs union, they can look to take advantage of inward processing relief

PricewaterhouseCoopers

getty images

M

artijn Peeters, director of transaction services strategy at PwC Russia, was in London recently to present to a group of UKbased companies interested in locating production facilities in CEE. Considering major capital investment projects as the world contends with an economic downturn may seem strange, but Peeters says he has not noticed a fall in the number of queries he is getting about expanding operations into the region. While companies may be cutting back on short-term costs, it seems that long-term projects are still very much on the cards. That is particularly true of Eastern Europe (or the CIS) where, despite a temporary drop in consumption as a result of the financial crisis, longer-term growth will be significant and the existing manufacturing facilities do not have the capacity to meet that demand. It is also becoming apparent that companies that export to the region are less price competitive than those that produce goods locally, making it even more costeffective to site a production facility there. That said, is it wise to plough on with large capital investment projects when financing is becoming so scarce? Peeters reckons this should not be a problem for companies that have already kicked off the process of locating a new production facility in CEE – for most of them, financing has already been arranged. For companies that are only just starting to explore their options, even if financing is not immediately available, it is worth starting feasibility studies now. Such studies can often take up to one year, including the internal decision process, which means facilities that are considered today are not likely to be in operation until 2010-2011, by which time governments expect the region to be pulling out of the downturn. Peeters says there is an added upside to looking into setting up new production facilities in CEE now – real estate costs are becoming cheaper.

Once the green light is given for a new production facility, site location is probably one of the toughest decisions to make. Peeters says that while each case is individual, there are a handful of standard factors that it is important to take into account: availability of personnel; the degree of red tape – how easy will it be to get a permit, for example; and the level of support from local government. “It is also worth considering whether you can get some tax incentives to set up, although we consider tax incentives to be an add-on benefit rather than a decision maker,” says Peeters (see box on p.48). A major factor is the lack of good-quality infrastructure, including the road network surrounding the site and access to utilities. That is more of an issue for Eastern rather than Central Europe, where infrastructure is better developed. In fact, underestimating just how difficult it can be to access the right infrastructure is one of the most common mistakes companies tend to make when selecting a production facility site, says Roderik Hijlkema, who works on Peeters’ team at PwC. Another mistake is not starting the site selection process early enough. “Companies think that things can happen very quickly but there can often be delays, whether that be in getting the right permits, environmental approvals or even local government support,” says Hijlkema.

Extensive planning Companies that make the right decision tend to be the ones that conduct thorough research, often with the help of an external adviser. Peeters says it is important for the pre-site selection research to cover a wide range of areas, including supply chain costs; the availability and cost of labour; the supply of new labour from local colleges and universities; the availability of quality suppliers, suitable industrial zones, government investment plans, etc. “These quite detailed analyses allow companies to make a decision on a preferred region

47

“It is worth considering whether you can get some tax incentives to set up, although we consider them to be an add-on benefit” Martijn PeEters, Director, pwc

but also on developing their own business model,” says Peeters. It may be that a joint venture or an acquisition turns out to be a better bet than opening a completely new facility. Either way, Peeters reckons CEE is still an attractive region in which to site production facilities, particularly if you want to access its increasingly producthungry consumers. This is a point worth noting. Five to 10 years ago, the availability of cheap, highquality labour would have been a major driver for companies locating in CEE. Today, as more companies have taken advantage of these particular benefits, labour costs have risen and good people are generally tougher to find.

Lighten the load

photolibrary

Another factor worth taking into account is relief on import duty. This duty break, sometimes known as “inward processing relief” (IPR), is based on a system of bilateral agreements on customs and excise duties designed to promote interterritory trade. The European Union has long operated a ‘customs union’ of this sort and those countries comprising the Commonwealth of Independent States now operate a similar system. The rules governing this appear at first glance to be arcane, but Paul Tobin, a partner at PwC in Russia, says businesses that fail to factor customs taxes relief into discussions about locations for new facilities could be missing out on an opportunity for significant cost savings. So how do the rules work? If you import and process your raw materials outside of the market in which you intend to sell your end product, as long as the entire production and sales process happens within the same customs union, you will be exempted from import duty at both the raw materials and end product stage. For companies that want to look into the benefits of IPR, the main message from Tobin is simple: start early. “This

48

type of thought process is often taking place too late,” he says. PwC advises firms on how best to accrue the benefits offered by this tax break. PwC’s long-term experience in more established markets bears out Tobin’s point – many businesses miss out on the potential benefits of IPR

Today, the overriding reason to locate a production facility in CEE, and particularly in Eastern Europe, is to supply that region, which is so geographically large and isolated that it becomes less cost effective to supply it from anywhere else. “For example, you’re not going to manufacture in Russia or Kazakhstan for low labour costs but you would manufacture there for local markets,” says Peeters. In fact, producing in and distributing goods to trade partners within CEE is the logical endgame for those serious about exploiting the opportunities that exist. The spin-off benefits are savings in distribution costs and import duties. n through a lack of market knowledge and planning, and, if they miss the window, then trying to build export tax benefits into their business model can create more trouble than it is worth. It is also important to not lose the benefit of IPR through additional lastminute compliance costs, which means applications for the relief must be made in good time for negotiations with the relevant authorities to take place. There is one other thing to bear in mind – a system that relies on bilateral agreements remaining in place through thick and thin does carry risk. Martijn Peeters, director of transaction services at PwC in Moscow, advises multinationals on matters related to locating in Eastern Europe. He points out to his clients that before embarking on an investment in the region, they need to take account of the political situation of the market. One way to mitigate that risk is to set up a facility in one country that at least initially supplies a number of countries across the region. This would increase the use of the new capacity, while longer-term market growth in the chosen country can offset the potential risk of changes in tax treaties.

Upgrade to first class Opportunity knocks for investors as CEE governments push to modernise their airports Words: Vicky Meek

photolibrary

W

50

ith relatively few exceptions (such as Prague, Warsaw’s new terminal and Domodevedo in Moscow), those of us who travel widely around Central and Eastern Europe (CEE) will know that our airport infrastructure falls well short of Western European standards – indeed well short of other developing parts of the world. The Airports Service Quality Awards – an annual study of the best airports in the world – routinely features Far and Middle Eastern airports. Those in CEE rarely get a look-in. Sebastian Gosciniarek, senior manager in the infrastructure team at PwC in CEE, concurs with the study’s findings. “Airport infrastructure in our region is of lower quality than many other emerging markets. The service is of lower quality and the capacity does not meet the rising demand.” Why is that? “The truth is,” says Nick Allen, head of PwC’s infrastructure team in CEE, “that while 20 years may seem a long time, since the Berlin Wall came down there have been plenty of other things for our governments to do and plenty of other things for them to spend our money on. Infrastructure, be it energy, road, rail, water or airports, has continued to suffer from under-investment. Our economies have grown despite that – and

the growing demand has only served to highlight the deficiencies. Investment now is really needed, otherwise the tremendous growth rates we have seen in the recent past will begin to stall, even as the credit crunch also begins to bite.” CEE’s economies have been growing fast over recent years, with many countries recording growth rates of 5% and above. The region has seen the rapid rise of sectors such as retail, financial services and construction. The result? Per capita incomes in parts of CEE are now on a par with some of the stilldeveloping regions of Western Europe. Clearly, CEE has been affected by, and will continue to be affected by, the financial crisis, particularly given its strong ties with the rest of Europe. However, it is still on a growth trajectory, according to recent International Monetary Fund projections.

Growth drivers The state of CEE’s airports matters because continued growth – and competitiveness on a global stage – will be dependent on improvements to the region’s transport infrastructure, with airports being a particular area of focus. “Airports are seen as economic development generators,” says Gosciniarek. They create jobs, both

project finance and infrastructure

Private investors have flocked to some of CEE’s major airports

Poland: Sochaczew and Bydgoszcz – Meinl Airports holds a minority share but may try to exit due to current economic situation Gdansk – privatisation under consideration Czech Republic: Prague – privatisation in progress, though process has slowed due to current economic downturn Pardubice – privatisation under reconsideration after one unsuccessful attempt

Russia: Pulkovo/St Petersburg – Public Private Partnership transaction in progress. A shortlist of seven bidders has been announced

Ukraine: Odessa and Lviv – privatisation under consideration

Bulgaria: Varna and Burgas – Fraport has a 20-year concession Rousse – privatisation under reconsideration after one unsuccessful attempt

Albania: Tirana – Hochtief AirPort holds a concession; Hungary: Budapest – a number of private partners, led by Hochtief AirPort, have a minority shareholding; Latvia: Riga – privatisation transaction in progress. Five consortia have been shortlisted; Kosovo: Prisztina – a Public Private Partnership transaction is in progress. A public-side adviser has been selected; Macedonia: Skopje and Ohrid – TAV has a 20-year concession; Montenegro: Podgoritza and Tivat – privatisation under consideration (see ‘New arrivals in CEE’ overleaf)

PricewaterhouseCoopers

51

directly and indirectly.” A recent report by Oxford Economics, a research firm, found that airlines and airports created 29 million jobs globally through a combination of direct employment and through their contribution to sectors such as tourism. It also found that 25% of all companies’ sales are dependent on air transport and makes the point that air transport can promote social inclusion and improve living standards in more remote areas. “An airport can fulfil a significant economic and social development purpose,” says Allen. “Building an airport in a remote area connects it with other regions, creates employment and increases trade.”

On the drawing board CEE governments are recognising this and are starting to push for improvements to airport infrastructure, boosted by aid from the European Commission and finance from the European Bank for Reconstruction and Development and the European Investment Bank. “Airports have a great influence over the development of the regions and so are a high priority for governments,” says Gosciniarek. For example, Polish regional airports will benefit from EU structural funds to the tune of about €270m. In addition, nearly all operating airports, and a number of those currently under development, will receive support from Regional Operational Programs (see ‘New arrivals in CEE’). “Up to 10 years ago what airport development there was tended to be the larger city airports and tended to involve public money. Now governments are looking more and more to mobilise private sector capital for these assets, and at the same time are turning their attention to the smaller regional airports,” says Gosciniarek. “There are a number of plans to develop new airports on brownfield sites, such as former military airports, across CEE,” he adds. “For governments, it makes sense because these facilities are no longer being used and need to be utilised. Making new airports from them helps them in their plans for economic development.” Yet not all will be viable.

52

An abundance of airport development projects are in the pipeline...

Expected...

Expected...

Expected...

As one of CEE’s biggest markets, Poland is showing particular promise. Warsaw airport opened a second terminal last year to meet increased demand, but it is widely expected that it will reach full capacity within a few years. A new airport is planned on a former military airport site at Sochaczew, near the capital city. The development was won by Austrian Meinl Airports, which is also developing and operating the existing regional airport Bydgoszcz.

Bulgaria has had an active airports development market over recent times. Sofia is developing its runways and it opened a new terminal in 2006. As part of plans to develop the Black Sea as a tourist destination, it awarded a concession for operating Varna and Burgas airports to Fraport in 2006. There are also plans to commercially develop a former civil and military airport in Rousse as a relief airport for Bucharest and for developing an existing cargo airport in Gorna Oriahovica.

Prague International Airport is currently up for sale and has attracted interest from around 65 investors. The sale is scheduled to be completed by the end of 2009, but recent market conditions have led to some speculation that the sale could be halted if the airport does not fetch the price of around €4bn that the government had been looking for.

“There has to be a good rationale for developing these sites. You can’t just build an airport for the sake of it. Sochaczew (a newly planned airport in central Poland) should work well as it will be a relief airport for Warsaw, but not all developments have the same clear strategy.” Plans such as this are starting to generate interest among international investors. “Airports are relatively stable assets,” says Stephen Wainwright, airport infrastructure expert at transport consultants Steer Davies Gleave. “They are considered more risky than some other infrastructure investments, such as utilities, because they are more exposed to cyclicality, but in general they demonstrate good growth of between 2% and 4% a year. Also, a big selling point is that CEE airports can provide the potential to develop commercial revenues.” “Airports are good opportunities for longer-term investors,” says Paul Davies, corporate finance partner at PwC. “They tend to be index-linked as fares and fees

can go up according to inflation. They don’t generate racy returns, but they do offer long-term growth generally in excess of GDP growth.” The case for investing in CEE airports in particular is strong. Passenger numbers are increasing rapidly. In Poland, for example, they are set to rise by up to 230% by 2020, according to research by the United Nations Economic Commission for Europe. This kind of expansion offers the prospect of better than average growth for airport investments. The other attraction of the region for investors may be the opportunity to pick up assets at reasonable prices. Airports in more developed locations are still going for high valuations, even against the backdrop of the credit crisis. Belfast City Airport recently sold for a multiple of 22 times EBITDA, despite the turbulence in the financial markets. In the US, Chicago Midway went for a similarly high multiple at around the same time. “Asset prices may fall,” says Allen. “But it doesn’t look as though they

project finance and infrastructure

Landed...

Expected...

Expected...

Expected...

Expected...

With a new terminal launched last year, Tirana airport is undergoing substantial redevelopment and upgrading. The airport concession was awarded in 2006 to Hochtief AirPort Retail, a subsidiary of German construction company Hochtief, in a €100m deal, which will see it run the retail activities until at least 2014.

Hochtief took over the concession for Budapest airport in 2007 from BAA. It aims to become the most successful airport in CEE in terms of passenger number growth, service quality and operational efficiency. Plans to develop the airport include upgrading and expanding its two terminals and establishing a business park around the site to drive economic growth in the area.

With Bucharest facing capacity issues, the pressure is on for Romania to develop smaller airports. Further development of Baneasa, in the northern part of Bucharest, is currently under discussion, although plans to develop a new terminal there may be restricted because of its city centre location. Instead, a third airport serving Bucharest may be built from scratch.

As a relatively small country, Macedonia has been able to proceed reasonably quickly with its airport development programme. Last year, it awarded a 20-year concession to sole bidder Turkish company TAV to operate Skopje and Ohrid airports as well as develop a new cargo terminal. The anticipated investment in the airports is €80m.

Given the sheer size of Russia, it is hardly surprising that there is a lot of activity surrounding the country’s airports. The government is currently running a tender process for a 30-year concession to run St Petersburg airport. It has so far shortlisted seven bidders, including international players such as Fraport, Hochtief, Macquarie and TAV and Vienna Airport. There are also a number of other deals planned in the more remote parts of the country, such as Siberia.

“Airports are good opportunities for longer-term investors. They tend to be index-linked as fares and fees can go up according to inflation and offer longterm growth generally in excess of GDP growth” paul davies, partner, pwC will do so significantly. Investors may therefore be looking for smaller, less developed projects that they can buy at a lower multiple.” That is not to say investing in CEE airports is without its challenges. They can be difficult deals to do. “Investors will need to deal with the inexperience of the respective governments in doing this type of transaction,” warns Momchil Vasilev, transport and logistics leader for the south Eastern Europe region at PwC. “It’s often a case of trial and error. One of the obstacles is a lack of consolidated political will. Another is the fact that a lot of these facilities have been cash cows for governments and so are hard to give up.” PricewaterhouseCoopers

A longer-term issue is the type of air carrier that some of the region’s airports are serving. Many countries have become low-cost carrier destinations. These may be easier to draw in initially but years down the line, they may not be so attractive. “Low-cost airlines operate on a point to point system, connecting two destinations, such as London and Prague,” explains Gosciniarek. “By contrast, traditional airlines take a network approach. If passenger numbers don’t meet a low-cost carrier’s expectations, they will simply cut the route, while traditional airlines will consider the impact on its overall network before cutting routes.” Traditional carriers are also more

profitable for airports than low-cost ones because some park overnight and because their passengers tend to spend more money in the airports, especially when they are transiting. Because of such challenges, deals don’t always go to plan. A tender for Rousse airport in Bulgaria has had to be relaunched, for example. “The government was looking for a large operator to take it over, expectations which were not met,” says Vasilev. With the uncertainty created by the credit crisis, some projects may also be taken off the market if governments feel they will not get the price they were seeking. Yet these factors should not deter investors. The pipeline of deals looks strong and the impetus is clearly there to develop CEE’s airports, particularly in the regions, where an added attraction in the downturn will be government subsidies to ensure the success of the projects. As Davies puts it: “A lot of people will be looking for the next Stansted in CEE.” n

53

data centre>

PwC

Recent economic performance and forecasts (percentages)

Russia GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Poland GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Czech Republic GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Hungary GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Kazakhstan GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Romania GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment Ukraine GDP growth Inflation Consumer spending growth Investment growth Exports growth Unemployment

2005

2006

2007

2008(e)

2009(f)

Sources

6.4 12.7 11.8 10.6 6.5 7.1

7.3 9.7 11.2 17.7 7.3 6.7

8.1 9.0 10.0 20.8 6.4 5.6

6.8 13.0

3.1 9.3

1, 2, 3

2005

2006

2007

2008(e)

2009(f)

Sources

3.6 2.1 2.1 6.5 8.0 17.8

6.2 1.0 5.0 14.9 14.6 13.9

6.6 2.5 5.0 17.6 8.4 9.6

4.6 4.0

3.0 3.3

1, 3, 4

2005

2006

2007

2008(e)

2009(f)

Sources

6.3 1.8 2.5 1.8 11.6 7.9

6.8 2.5 5.4 6.5 15.8 7.2

6.0 2.8 5.3 6.7 14.9 5.3

4.4 6.6

2.5 2.8

1, 3, 4

2005

2006

2007

2008(e)

2009(f)

Sources

4.0 3.6 3.4 8.5 11.3 7.2

4.1 3.9 1.7 -6.2 18.6 7.5

1.1 7.9 0.6 1.5 15.9 7.4

1.2 6.2

-1.0 2.5

1, 3, 4

2005

2006

2007

2008(e)

2009(f)

Sources

9.7 7.6 11.1 28.1 1.1 8.1

10.7 8.6 13.8 26.5 6.9 7.8

8.5 10.8 10.0 10.0 9.3 7.3

4.0 15.6

3.1 6.2

1, 3, 5, 6

2005

2006

2007

2008(e)

2009(f)

Sources

4.2 9.0 9.9 12.7 7.7 7.2

8.2 6.6 12.8 23.5 10.4 7.3

6.0 4.8 11.1 28.9 8.7 6.4

8.0 7.6

2.8 5.0

1, 3, 4

2005

2006

2007

2008(e)

2009(f)

Sources

2.7 13.5 19.3 3.9 -11.2 7.2

7.3 9.1 13.6 18.7 -4.9 6.8

7.3 12.8 5.5 12.2 6.3 6.4

4.9 25.1

-1.2 15.5

1, 3, 5, 6

Sources: 1. International Monetary Fund 2. Federal State Statistic Service 3. PricewaterhouseCoopers estimates (e) and forecasts (f) 4. Eurostat 5. The World Bank Group 6. International Labour Organisation

Spotlight: Country risk premia 12.0%

Russia

Poland

8.0% 6.0% 4.0% 2.0%

Source: PricewaterhouseCoopers

PwC Macro Consulting economics.pwc.com Yael Selfin I +44 (0)20 7804 7630 I [email protected]

54

Kazakhstan

10.0%

0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

PwC CEE Strategy strategy.pwc.com Daniel Cappelletti I +420 251 151 333 I [email protected]

istockphoto

Reflects risks inherent to investing in different sovereign territories. It is close to zero for most developed countries, but can be higher in emerging markets. It can broadly be attributed to variations in the degree of economic, political, financial and institutional stability. The chart presents calculations by PwC.

From Almaty to Zagreb... real experience of M&A deals throughout Central and Eastern Europe Sale of

Sale of 66% of SLOVENSKÉ ELEKTRÁRNE, a.s. to

Sale of a 66% stake in

2008

by a consortium of sellers to

Sale and leaseback transaction of office building portfolio

Privatisation of 70% of share capital of Acquired by

KG Maritime Shipping Lead adviser to the Privatisation Agency

Lead adviser to sellers

Sale of 66% stake in subsidiary of

Disposal of 100% stake in

Acquisition of

(steel materials merchant) to

DELTAX SYSTEMS (software firm) by

to a consortium of

Lead adviser to seller

Lead adviser to seller

Lead adviser to seller

Acquisition of a hydrocarbon exploration licence in Libya by

Joining the Consortium SKANLED which is developing gas pipeline from Norway to Sweden and Denmark

Acquisition of

Financial adviser

non-core business Lead adviser to seller

Long term lease of the enterprise formed by 3 hospitals for

Financial adviser to Olomouc Region

Acquisition of

Lead adviser to Slovak Government

100% acquisition of ARTIMA supermarkets from

by

by Carrefour Romania for €55m

Lead adviser to seller

Financial adviser

Financial adviser

Acquisition of Germanos Polska

Acquisition of

Acquisition of

by

by

by

by

Sale of Albinuta Shops (supermarket chain) by Maxima to Profi Rom Food

Financial adviser

Financial adviser

Financial adviser

Financial adviser

Seller advised by

Siemens financial services

75% stake in

SUMMIT AUTÓ HUNGARY

Sold it Hungarian subsidiary

Sale of 99.9% Diana Forest by Fadesa

Megaink Digital purchased by INX Group Limited, a whollyowned subsidiary of Sakata INX

(electricity distribution & supply)

to De Lage Landen

Sale of Electrica Muntenia Sud to ENEL for €820m

Siemens advised by

Seller advised by

Sold its Hungarian subsidiary

to Barllinek Poland for €23m Seller advised by

to Gablini Buyer advised by

Summit advised by

For any information or questions relating to deals in Central and Eastern Europe please call: Mark Okes-Voysey Nick Allen Chris Butters Robert Paterson Albania +355 4242 254 Bosnia +387 33 295 234 Bulgaria +359 29355 200 Croatia +385 6328 888 Republic +420 215 151 111 Estonia +372 614 1800 Georgia/Azerbaijan/Armenia +995 3250 8050 Hungary +36 1461 9100 Kazakhstan +7 3272 980 448 Latvia +371 709 4400 Lithuania +370 (5) 239 2300 Macedonia +389 231 16 638

+7 495 232 5713 +420 251 151 330 +420 602 714 492 +44 207 583 5000

Laura Qorlaze Aida Soko Ivailo Vatev Tanya Rukavina Czech Nick Allen Teet Tender Clifford Isaak Tibor Almassy Ferenc Geist Vadim Khrapoun Arvids Kostomarovs Vidas Venckus Philippe Bozier

Advisory Regional Leader - CEE CF Leader, Infrastructure + PPP M&A Leader Energy, Utilities & Mining: TICE

Poland +48 22 253 4000 Romania +40 21 202 8500 Russia +7 495 967 6000 Serbia/Montenegro +381 11 3302 100 Slovakia +421 259 350 111 Slovenia +386 14750 100 Ukraine +380 44 490 6777

Jolanta Kokosinska Geoff Upton Emilian Radu Radu Stoicoviciu Mark Hannye Michael Knoll Victor Ovsyannikov Tanja Gligorevic Vesna Stefanovic Piotr Nogajczyk Bojidar Neitchev Gennadiy Greblov

CEE Advisory Regional leader

LITHUANIA

Operations and restructuring

Mark Okes-Voysey

Vidas Venckus

Rafal Krasnodebski

[email protected] +7 495 232 5713

[email protected] +370 5 239 2308

[email protected] +48 22 523 4498

Albania

Macedonia

Governance, risk and compliance

Laura Qorlaze

Philippe Bozier

Michelle Moore

[email protected] +355 4 242 254

[email protected] +389 23 111 012

[email protected] +7 495 967 6150

BOSNIA

Poland

Finance and Accounting

Aida Soko

Olga Grygier

Marc Goessi

[email protected] +387 33 295 234

[email protected] +48 22 523 4214

[email protected] +41 79 342 03 89

Bulgaria

Romania/Moldova

Financial Due Diligence

Bojidar Neitchev

Dinu Bumbacea

Mike Wilder

[email protected] +359 2 93 55 288

[email protected] +40 21 202 882

[email protected] +48 22 523 4413

Croatia

Russia

Commercial/Strategic Due Diligence

Tanya Rukavina

Bob Gruman

Daniel Cappelletti

[email protected] +385 1 6328 834

[email protected] +7 495 232 5725

[email protected] +420 251 151 333

Serbia/Montenegro

Mergers & Acquisitions

Tanja Gligorevic

Chris Butters

[email protected] +420 251 152 048

[email protected] +381 11 33 02 100

[email protected] +420 251 151 203

Slovakia

corporate finance & infrastructure

Matt Pottle

Nick Allen

[email protected] +4212 59350 402

[email protected] +420 251 151 330

ESTONIA Teet Tender [email protected] +372 614 1800

SLOVENIA

Capital Markets

Georgia/Armenia/Azerbaijan

Francois Mattelaer

Jim Klein

Clifford Isaak

[email protected] +386 1 58 36 000

[email protected] +7 495 223 5177

[email protected] +995 32 50 80 61 UKRAINE

Valuation

Hungary

Boris Krasnyansky

Tibor Almassy

David Wake

[email protected] +38 044 490 6777

[email protected] +36 1 461 9644

PEOPLE

Dispute/Forensic Analysis

Kazakhstan/Uzbekistan

John Wynn

John Wilkinson

Vadim Khrapoun

[email protected] +44 7802 948 447

[email protected] +7 495 967 6187

[email protected] +36 1 461 9514

[email protected] +7 495 232 5709 Technology LATVIA

Philip Gudgeon

Arvids Kostomarovs

[email protected] +7 495 232 5434

[email protected] +371 6709 4453

TRANSFORM

Czech Republic Jiri Moser

PricewaterhouseCoopers

Contacts

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Issue 3/Spring 2009

This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, neither PricewaterhouseCoopers nor Bladonmore accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Issue 3/Spring 2009