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The Cyprus Bail-in/Bail-out: So far, so good
The prophets of doom predicted back in March that Cyprus would soon leave the eurozone, go bankrupt and (figuratively) sink and disappear into the Mediterranean. Hello, we are still here!
In our June Newsletter we outlined the reasons why Cyprus will recover sooner than most would expect. We stand by every line we wrote! Because our core activity is M&A Advisory, we often see the trends before they become public knowledge. And we had more interest and serious enquiries from foreign investors in the last few months, than we had the last two years. Most of them came for a first round of fact-finding and we are already expecting the follow-up "wave" beginning in October.
No doubt, things will get worse before they get better. The consensus is that the economy will bottom out between 2014 to early 2015 and start a steady recovery thereafter. This provides a time-frame for opportunistic, but patient investors.
In the sections that follow, we outline investments which are currently in demand by our foreign clients. Conversely, we also provide some pointers to foreign investors as to which sectors offer, in our view, solid investment opportunities given the current market situation.
In the meantime, the foundations for a sustainable recovery are steadily been put in place. The implementation of structural reforms is going ahead as planned, actually Cyprus has achieved in a few months what other countries have failed to achieve in years. Bank of Cyprus is out of administration, with an elected Board of Directors. The Co-Operative Credit Institutions have been recapitalized with €1,5 Billion and the Troika is coming back end of October, mainly to address the issue of privatizations - the next big chapter in the bailout agreement.
Most importantly, there has been no mass exodus of foreign companies from Cyprus, not even Russian ones which took most of the losses from the bail-in.
With respect to the Banking sector, the next major milestone is the establishment of an Asset Management Company that will take over non-performing loans from Bank of Cyprus. This will enable the "super-systemic" Bank focus on re-starting the economy, instead of managing distressed assets. There is still a lot of debate as to how this Asset Management Company should operate, but there is consensus on one issue: there will be no fire sale of property!
In the time it will take for local Banks to recover, there is an opportunity window to establish Banking or quasi-Banking operations. More details below in this Newsletter.
Deals in demand by foreign investors
There is only one thing in life worse than being talked about, and that is not being talked about (Oscar Wilde)
One good side-effect of all the publicity about the Cyprus bail-in, is that it has attracted the attention of international investors. Those that came first, were property investors expecting to make a "quick buck" but it was too soon for them. Maybe they will revisit once distressed property is transferred by Banks to a new Asset Management Company; but our main concern is not property.
There are two types of business investors who are likely to invest substantial amounts in the near future:
First those who specialize in acquisitions of distressed assets or enterprises. Investors who can properly assess risks, but also identify opportunities and are willing to "ride the storm".
Second, those who see an opportunity to establish a permanent presence in Cyprus. These are a mixed lot, mainly Gas & Oil services companies, Fiduciaries and Financial Services firms. Also, a variety of multi-nationals which find that Cyprus is still the best location to base their operations in the SE Europe/ Middle East/ N. Africa region.
Deals in demand by foreign investors:
- Distressed Manufacturing companies: US-based specialist Fund with track record in acquiring spin-offs from major multinationals. Deal size must be over €50M, majority or outright acquisition.
- Industrial Property over 10.000 sq.m: Multi-national engineering services company. Preferably near Limassol Port, suitable for maintenance & repairs of heavy equipment. Purchase or long-term lease.
- Single-tenant Sale Leaseback: International Property Fund. Minimum deal size €30M. Examples are prime Commercial, Hotel or Health-Care property with stable income.
- JV with existing private health care business (e.g. clinic) or property owner (e.g. Hotel) to establish Rehabilitation/ Medical Tourism business. US Rehab company.
- Companies in the Food & Beverage sector (production, wholesale and/or retail). Turnover over €10M with potential to become market leaders. Interest for majority or outright acquisition by UK and European investors.
- Licensed Photovoltaic Parks from 100kW up to10MW. Interest by Russian HNWI and other passive investors. Also interest by European VC Fund to invest in early-stage PV projects.
- Licensed Corporate Administration companies with existing clientele and qualified staff. Interest from strategic investors, primarily Russian Law Firms, also from UK investors.
- Import/ Wholesale/ Retail of High-end Jewellery & personal items: interest from investors based in EU and the Gulf for outright acquisition.
Quasi-Banking and Lending Opportunities
I was seldom able to see an opportunity until it had ceased to be one (Mark Twain)
Banks throughout Southern Europe (and not only) are struggling with liquidity and capital adequacy requirements. This creates great opportunities in quasi-banking services and specialized financial facilitation. No need for a Banking license, but some of the facilities listed below may be regulated or require a financial services license depending on the jurisdiction of the holding company and the countries in which it will operate.
The basic requirements for someone who wants to exploit this opportunity are:
- Strong Balance Sheet and/or good Credit Rating
- Focus on a specific market niche
- Highly Selective Deal-making & Ring-fencing
Of secondary importance are:
- Domain Expertise (which can be acquired, if not in-house)
- Intimate knowledge of local markets (which can also be acquired, if not in-house)
Ideas on specific market niches:
TRADE FINANCE/FACILITATION OF IMPORTS: Most Importers/distributors cannot secure credit from their suppliers any more. In addition, their Banks may not be accepted as creditworthy counter-parties in international trade finance. There are numerous ways in which a financial intermediary can profit, most of which involve non-funded facilities. Risk Management is relatively easy for someone with experience in Trade Finance.
- Suitable for intermediaries who prefer to extend short-term facilities, with minimal or no cash component
GUARANTEES: Tender Guarantees, Performance Guarantees, Payment Guarantees, Title Guarantees; the list is long, as are the purposes for which Guarantees may be issued. Prime clients could be Contractors executing projects for creditworthy clients, Developers who need to guarantee issue of title deeds to buyers, Service Providers who may need to guarantee performance, regulated companies which need to provide a Guarantee to Regulatory Authorities. There are too many market segments, each with different risks profiles, so an intermediary should specialize in one type of Guarantee or a suite of Guarantees targeting a specific market niche.
- Suitable for intermediaries who prefer to extend short to mid-term, non-funded facilities
MEZZANINE/BRIDGE FINANCE: Many Projects are stalled between the Seed Funding stage and the Financial Close or Sustainability stage. A prime example, are licensed Photovoltaic or other Renewable Energy projects, which have secure income once completed. Or a variety of other projects which have a ready and able Financier, or Buyer, upon completion. A financial intermediary can operate strictly as a lender, or as a lender with an equity kicker, depending on investment strategy and project characteristics.
- Suitable for intermediaries who prefer to extend medium-term facilities out of their own cash reserves or who can borrow at low interest rates.
REPLACEMENT CAPITAL: Numerous viable and profitable companies are on the brink of insolvency, just because they are over-leveraged (and I am not referring to property developers - no hope there!). A strategic or financial investor who can inject equity (or assume debt) can acquire majority stakes at very attractive valuations. May be investments for the long-haul, or medium-term investments with suitable exit planning.
- Suitable for Private Equity Funds, Sovereign Funds, Conglomerates or Strategic/Industry investors with large cash reserves and medium to long-term horizon.
Why M&A Deals Fail
Failure is only the opportunity to begin again more intelligently (Henry Ford)
As anyone who has been involved in an M&A transaction knows, closing a deal is a roller-coaster process and a nerve-racking experience!
Even the best prepared and professionally managed deals can fail at the last moment. I think this Divestopedia article says it all.
Note that the article refers to a case where both parties had already been brought to the negotiating table, after thorough preparation by expert advisors and the general terms of a transaction had already been agreed. How often have you come this far?
Now, imagine the chances of even getting to the negotiating table (never mind closing) when you start chasing leads in an amateur fashion.
Common mistakes include, among others, wrong pricing and unrealistic deal terms, not doing any research on comparable transactions and not assessing the odds of making a deal in the first place. But the most basic mistake of all, is trying to manage the M&A process via referrals, unqualified leads and word of mouth. The chances of success are close to nil. What is for sure, is that a lot of time and effort will be wasted.
|Dealmasters is an advisory firm providing Intermediary and Representation services to investors and privately owned enterprises in relation to acquisitions, fund-raising and direct investments in general. For further details of the range of services we offer, download our corporate profile.
Marios Argyris, for
Dealmasters D.M. Ltd.