Our newsletter is designed to bring to your mailbox a wealth of experience and news on acquisitions, project finance, direct investments. In general, on anything to do with investments in private enterprises - both in our region and globally.
In every issue, you will find articles on the latest trends that impact the M&A market, analysis of technical issues and our corporate news.
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I should have written this newsletter in mid-March, but considering the amount of publicity around the Cyprus bail-in fiasco, I decided to wait it out until the dust settles a little.
I will resist the temptation of adding my voice to the multitude all over the world who are criticizing Troika's remedy for Cyprus, especially since this criticism is coming from the most respected and authoritative sources. Just do a search on #Cyprus on Twitter and you will see what I mean.
But, we have to focus on the "here and now" and what the near future holds, especially in relation to what interests our readers most, namely M&A opportunities in Cyprus.
Every crisis creates opportunities as well as disasters, or to put it differently, fortunes are made or lost in times such as these.
PS: This newsletter is unusually long (probably too long!) so check "IN THIS ISSUE" on the top right, to skip to the content that interests you most.
The flight to Real Assets and Direct Investments
OR - money in the Bank, is not money in the Bank anymore....
Despite assurances from the Eurogroup, it's obvious that Cyprus was an experiment to see how depositors may be exploited to re-capitalize banks which are too big to be bailed out by the State. Or, who knows, maybe just as an example to terrorize other nations with a sovereign debt problem.
The IMF/Eurogroup reasoning is that if you deposit your money in Bank A or Bank B, you are making an "investment" and an "investment" implies risks, which really begs the (rhetorical) question, since when is a Bank deposit in a regulated European Bank an "investment"?
Central Banks, Bank Auditors, sophisticated regulators and institutions have repeatedly failed to identify the risk in dozens, if not hundreds of Bank failures all over the world - even if this is THEIR job and taxpayers pay them very good money to do this job. From now on, you and I are supposed to assess the risk of Banks before trusting them with our money. Excellent!
Which explains the upsurge in demand for investments in real assets or direct investments in viable businesses. After all, a deposit can get a haircut at any time, unlike a hotel, clinic, shopping-mall, logistics centre or energy centre.
Judging from the requests we have been getting recently, as well as from our discussions with colleagues, a lot of assets will change hands in the next few months in Cyprus.
A word of caution: savvy investors have already finished the first round of investigations and are homing in on likely acquisition targets. Direct investments are time-consuming, complicated transactions which require a lot of research, preparation and lengthy negotiations. Therefore, it's never wise to wait for the market to bottom out.
An investor who waits too long may find that most of the prime assets have already been sold. And in an economic downturn, you definitely want to acquire prime assets and not the left-overs, even if it means waiting a little longer for a recovery.
Sectors and Deal Types to Focus On
Part A: Transactions under 100M (Mid-Market)
We focus on low- to mid-market M&A deals, as well as other direct investments, which are usually highly confidential and certainly not in the public domain.
Our job is to source such deals, screen them, evaluate them, ensure that the terms are fair and balanced and perform preliminary due diligence. Foreign investors who decide to go it alone, may waste too much time getting to know the local market and possibly make costly mistakes. Local knowhow and expert support make sense.
Types of Investors for Mid-Market deals
We have seen, for the first time in Cyprus, interest from Private Equity investors (Buyout/ Turnaround), Project Finance firms and Mezzanine lenders, in addition to the traditional Strategic / Corporate Investors and HNWI's
Types of Investments
Outlined below are investment opportunities that have emerged recently as a result of the recession, as well as those that are minimally affected by the recession. We have sell-side mandates for several of these investments, contact us directly for more details.
- Private Equity or Strategic buyouts to create dominant players in specific sectors offering need-to-have products or services. Examples of likely sectors are FMCG import/wholesale and F&B production/ wholesale/ retail. Solid asset backing preferable.
- Purchase of specific distressed assets directly from Banks (with loan assumption, maybe also loan reduction). Banks do not advertise that a client of theirs may be willing to sell at a "distressed" valuation, at least not before they secure a Court Order for liquidation. Best approach is directly with the Bank, discrete and preferably with the consent of the Bank client.
- Equity Investments and/or Project Finance of viable projects such as Retirement Communities, Assisted Living Centres, Rehabilitation Centres and other alternatives to mainstream tourist developments.
- Equity and/or Debt participation in consortia that have won PPP/PPI contracts under favourable terms for the development of Marinas with extensive landside development
- Renewable Energy projects with secure revenue stream, which need alternative sources to traditional Bank financing.
- Long-term Sale-Leaseback of prime, income-generating assets, mainly single-tenant, e.g. hotels or private hospitals.
- Mezzanine finance & bridge loans (to fill in gap left by Banks) for viable projects and business ventures.
- Minority Equity participation in viable local companies targeting international markets, especially in the area of Information & Communication Technologies.
Sectors and Deal Types to Focus On
Part B: Transactions over €100M (main market)
Major deals are in the news, so no need to elaborate here, except to give a short-list of what may be on offer to international investors in the very near future:
- Strategic investment or Privatization of Government-owned companies, primarily the national carrier, Cyprus Airways
- Strategic investment or Privatization of Government-owned utilities and profitable organizations, such as the Cyprus Telecommunications Authority (CYTA), the Cyprus Electricity Authority (EAC), the Cyprus Ports Authority (CPA) and several others.
The above transactions are highly political and negotiations will take place between investors and the State directly, most probably under the supervision of the Troika.
- Purchase of Loan portfolios directly from Banks. Hedge Funds and other institutional investors have already expressed interest, but nothing finalized yet. In any case, this is outside our scope.
- Purchase of Bank deposits at a discount, directly from depositors of Bank of Cyprus and Cyprus Popular Bank (ex Marfin-Laiki) - specialized institutional investors and financiers are already active in this area, offering a variety of schemes.
- Major projects on land offered by the Government under a long-term leasehold, concession or other Public-Private-Partnership (PPP) structure. One candidate is the old airport site, a huge sea-front property adjacent to the new Larnaca Airport. Another candidate is a large tract of land in the centre of Nicosia, opposite the Cyprus Hilton, suitable for any type of urban development. The Government has no specific plans how to develop these properties (and many others) and international investors are welcome to submit their proposals.
- The Church of Cyprus is probably the biggest land-owner in Cyprus. Reputable foreign investors are always welcome to submit proposals for land development of any type and negotiate a deal, on a case-by-case basis. The Church will, of course, not rely exclusively on economic criteria, social criteria as well as the profile of the investor are important.
- Casino Resort: New legislation will be passed in 2013 governing the establishment, licensing and operation of Casinos in the Republic of Cyprus. The relevant feasibility study will be completed by September, so no details are available yet. However, from our information, it seems that the preferred concept is that of brand new Casino Resort on a grand scale, possibly with 2 - 3 additional licenses for much smaller Casinos to boost the local economy of under-developed areas. Since a Casino Resort will take 3 -5 years to complete, there is pressure to allow operation of a Casino in temporary premises, until the Casino Resort is ready to operate.
Domestic Businesses: Not all will survive
Will you be one of them?
We stressed the urgent need for consolidation way back in our July 2012 Newsletter. Our small domestic market was already saturated with too many competitors fighting over market share of dubious value. I always remember my Marketing Strategy 101 lesson about the Value of Market Share Point (VMSP). Cypriot enterprises always invested too much in comparison to what they got back in VMSP.
As long as Bank credit was readily available it did not matter too much, after all, a Bank overdraft in Cyprus was more or less "permanent capital". In other words, you only paid interest and then again, as long as the business was growing, you could always get an overdraft increase every year. In cash-flow terms, this meant that you never paid interest, never mind principal. So, a Bank overdraft was much like a zero-coupon bond with no maturity!
Now, we are faced with a domestic market which will shrink appreciably over the next few years. At the same time Bank credit has virtually dried up. This situation creates new opportunities, both for local and overseas investors of all kinds, as outlined in other sections of this newsletter. This section, is addressed primarily to local businesses and entrepreneurs active exclusively in the domestic market.
This is a time for intelligent and very well targeted action to leverage the few resources left at the disposal of any domestic business. On one hand, you have to act, on the other hand you cannot go wrong since, during a recession, mistakes can be fatal. Hence, the temptation to do nothing and just stick it out.
Unfortunately, this is not an option: unless you are a highly differentiated niche player in a stable market with significant barriers to entry (a very rare species), you cannot ride it out, or just plod along hoping things get better. When you "wake up" three to five years down the road, it will be a very different market, with different rules and different players.
A wave of mergers and consolidation is inevitable. If the current situation does not provide motivation to merge, amalgamate, combine forces, I don't know what else will. When a consolidation wave starts it acts just like that: a wave.
- First there is a rapid growth of exploratory activity, solicitations, overtures and negotiations.
- Then the trend-setters close the first high-profile mergers which galvanizes others into action.
- At the peak of the wave, there is competition between large acquirers as to who will get the best companies, there is competition between smaller/weaker players as to who will attract the best suitors, while in parallel there is a frenzy of merger negotiations between roughly equal sized companies, so that they can stay in the game.
- And then it's all over: the war-chests of acquirers are empty - or they have got what they wanted and have no more appetite for acquisitions. Some of your competitors have merged, creating better capitalized and more competitive companies. Now, they are all focused on the long process of integrating operations and making the recent mergers or acquisitions work.
- If you chose to "ride it out", you will most likely find that your competitors are now part of much larger and better capitalized companies. Companies that are big enough to attract institutional investors from abroad. Companies that can afford to take losses for 2-3 years leaving out in the cold, alone.
The time for action is now, which means that each business has to take the initiative and decide whether it wants (and can... ) be a buyer, or anacquisition target, or a first among equals in a merger. It's neither easy nor simple and you will need expert advice and a lot of support. Which is what we are here for.
|Dealmasters is an advisory firm providing investors and privately owned enterprises with Intermediary and Representation services in relation to acquisitions, fund-raising and private investments. For further details of the range of services we offer, you can download our corporate profile here.
Marios Argyris, for
Dealmasters D.M. Ltd.
THIS IS A GOOD TIME TO INVEST IN CYPRUS
Regardless of the lack of trust in the local banking system, we firmly believe this is a good time to invest in Cyprus. The main reasons are:
- Cyprus has a small, resilient and highly adaptable economy and can recover much faster than bigger economies.
- Much of the uncertainty has gone. We know there will be a recession and hard times for three to five years, but the risks of bankruptcy, or leaving the eurozone, have diminished substantially.
- While there is still country risk, the new opportunities that have emerged more than compensate for this risk.
- Politically, The Republic of Cyprus remains a bastion of stability, democracy, safety and transparency in the Middle East & North Africa region. It is, after all, the eastern frontier of Europe and the EU.
- In addition, there is tremendous upside for international investors if re-unification talks succeed in the near future and relations with Turkey are normalized.
- The International Business sector has been hit hard, but the main advantages of Cyprus are still intact. Namely, its strategic location, highly educated workforce, low taxation, excellent professional services, numerous double taxation treaties, good infrastructure, business-friendly environment and high quality of life for international business personnel.
- The offshore Natural Gas finds are creating an entirely new sector, which will have a beneficial effect on the whole economy.
- In addition to Energy, new opportunities are emerging in the services sector, such as medical tourism and international tertiary education.
- Meantime, the mainstream Tourist industry is holding up very well, while assets are offered for sale, sale-leaseback or project finance
- Domestic business will inevitably consolidate, creating opportunities for M&A
- Valuations are down to earth, prime off-market assets can be acquired if you know where to look.
What we Can Do for Foreign Investors:
- Market Entry Services
- Market Mapping, Target identification and initial due diligence
- M&A negotiations and deal structuring
- Post-investment Board representation and monitoring