Over the previous couple of years, the region of South-Eastern Europe, or more specifically, the Western Balkans, has enjoyed a globally acknowledged position of an investment hot-spot.
This comes as no surprise if we take into account how the socialist past of encompassing countries has provided their contemporary incarnations with a number of state-owned companies in core industries, all of which now present viable targets for Private Equity funds and M&A activities in general. Perhaps a front-running case in this regard (although far from being the only one) has been the case of Telekom Srbija, the telecommunications giant that went through a second unsuccessful attempt at becoming privatised four months ago. The case of Telekom Srbija, due to its size and wide extent of implications for the rest of the region, also presents a fitting base for the discussion on the overall state of the telecommunications industry in this part of Europe, and the ways in which it corresponds with unquestioned investors' interest. For similar reasons and against a similar background, the unsuccessful privatisation attempt for Telekom Slovenia echoes on the same pattern.
Considering the region's political past, a good starting point for an analysis can be the state of the regulatory framework. Many of the related issues in Serbia have been resolved, with the current regulations being significantly improved upon compared to those from 10 or 20 years ago, but with unequivocal room for further improvement in terms of how fast they have been introduced. Furthermore, it should be pointed out that the additional liberalisation of the rules would significantly increase the M&A allure of the market, all the while positively impacting the incumbent competition.
Likewise, the development level of the IT Infrastructure in Serbia and its ensuing effect on the companies' allure to investors is another area worthy of being outlined in this sense. More precisely, if we were to look at Telekom's historical inability to spearhead market trends (Telekom being the 10th operator to introduce Internet, 2nd to introduce mobile, etc.), in it we can perhaps see a potential turn-around point going forward. Having in mind Telekom Srbija's robust (in a national context) infrastructure, there is aptitude to be found behind certain IT updates such as banking services, retail services, music services, etc., all of which Telekom could try to tap into in order to, on the one hand, reach its goal of maintaining and improving on its market presence, while on the other, attract Private Equity and M&A interested parties in a newfound manner. A manner that would be based on better returns on investments (compared to the current ones), considering the tendency of Private Equity parties to give priority to ROI figures rather than to the company's strategic models. From here, the importance of being increasingly creative when it comes to the IT content offered can only be further emphasised – not just in the case of Telekom Srbija – but in general terms for an inherently creative industry like the one Telco is. A specific point of focus in this regard also being the companies' ability to capitalise on the biggest changes in Telco trends i.e. going from voice to data as main revenue streams.
A sure-fire example of such a creative approach that paid off can be found in the related KKR acquisition of SBB in 2014 – a deal in which Karanovic & Nikolic advised the sellers, Mid Europa Partners. It was the interest created by SBB through their offering of innovative broadcasting techniques and desired content (most notably its sports and entertainment content and the now emerging news content, etc.) that attracted the attention of a major fund such as KKR, resulting in a successful deal. Moreover, it should be stressed that the success of this large-scale acquisition resonated in the context of investors' interest during the last Telekom Srbija tender where there were six interested parties, as opposed to the prior one in 2011 that attracted two interested parties.
Unfortunately, even though a number of experts – including those highly versed in M&A and Private Equity related practices at the recently held EEL's "12th South-East Europe Telecoms Conference – acknowledged that the successful privatisation of Telekom Srbija would have been another 'landmark' deal for the regional market, with the ability to launch an entire wave of M&A activity (especially considering the presence of other covetable Telco options in Bosnia), it did not come to fruition, leaving behind a lot of room for such activity, but not that clear of a plan when it comes to exploiting it. This can perhaps also be derived from a speech that Aleksandar Vucic, the Serbian Prime Minister, gave at the recently held Kopaonik Business Forum, where he stated doubts on whether Telekom Srbija should have, in fact, been sold to the highest bidder four months ago.
If we were to draw certain conclusions on the topic, some of the more evident points of focus going forward in raising further interest of Private Equity parties for the Telco industry in the region seem to be the following: 1) Privatising Telekom Srbija for the purpose of further market liberalisation and consequential regulatory framework improvements; 2) Putting stronger emphasis on the development of IT infrastructure and user-relevant content services; 3) Make use of the existing room for growth in Serbia and Bosnia through M&A and consolidating endeavours; 4) Making active efforts to increase companies' ROI's.
By Rastko Petakovic, Partner, Karanovic & Nikolic
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