Expectations are high in Slovakia for the mergers and acquisitions, private equity, and energy sector pipelines, according to Hillbridges Partner Miroslav Trencan, who highlights a series of shifts and trends shaping the market, from the challenges of financing and the impact of regulatory changes to geopolitical influences and the strategic decisions driving large-scale M&A projects.
"Over the last few months, we've seen significant strength in mergers and acquisitions, private equity, and the energy sector," Trencan begins. "There's a notable trend, especially in private equity, where there's been a push for the disposal of portfolio companies. This shift is partly due to the large increase in PE ownership we witnessed in 2021 (after the stalemate during the previous COVID period), followed again by a period of stagnation caused by high interest rates and financing challenges," he explains, adding that he is hopeful this indicates a healthy trend for the months ahead.
"Following the surge in PE activity in 2021, the rising interest rates made financing new deals difficult, leading to lower valuations for PE portfolio companies due to the lack of available financing," Trencan continues. "This resulted in a backlog of transactions ready for sale but facing unfavorable terms. Recently however, PE managers have shifted strategies, recognizing the need to sell and report returns on their investments, even if that means accepting lower valuations for target companies – which has led to an increase in PE activity in recent months," Trencan explains.
Aside from private equity, Trencan reports that 2023 saw "an increase in large-scale M&A activities, particularly in the energy sector, focusing on heat power plants and heavy industry targets like the steel industry. These targets were either overdue for sale or the result of strategic decisions – it's a trend that's clear in our pipeline and one we expect to continue into 2024," he adds.
Moving on, Trencan mentions that the new FDI regime, introduced under the EU umbrella with local specifics, "has indeed caused considerable challenges, particularly in terms of unpredictability in deal timings. The Slovakian version adds complexity, requiring FDI approval for EU investors acquiring certain strategic assets, which can delay transactions significantly," he says. "This, coupled with the Critical Infrastructures Act, allows the government to screen even intra-EU transactions, making the process more complex and unpredictable."
Focusing on the geopolitical landscape as an influencing factor in M&A activities, Trencan reports that "the Russian war in Ukraine and the consequent US-EU sanctions regime have profoundly impacted daily operations. Compliance with sanctions has become a daily task, affecting supply chains, customer relations, and transactions," he says, adding that this trend is expected to continue into 2024.
Finally, Trencan says he is "expecting further amendments to the FDI regime to align with the original EU goals of controlling non-EU investments. Additionally, the recent government changes in Slovakia could lead to other legislative and regulatory changes, especially in the energy sector," he reports. "The completion of a nuclear facility and the announcement of a new nuclear project reflect broader trends in the EU toward nuclear energy, which will likely influence our work moving forward," Trencan notes in conclusion.
