Czech M&A market in 2023: Short summary

Dear Friends,

A year ago, I hinted at the expected „slight“ correction of the Czech M&A activity in 2023 y-o-y. Yet, the 2023 one was quite challenging in terms of global / European geopolitical factors as well as economic developments. How have these aspects influenced the actual dealmaking? Let’s wrap up briefly below.

Worldwide dealmaking picture

Financial Times [1] made the following commentary on the 2023 worldwide M&A climate: „Europe showed the sharpest drop (in volume of deals), down 28 per cent annually, while the Asia-Pacific region was 25 per cent lower and the US 6 per cent.“

Reuters [2] complemented: „Total M&A volumes fell 18% to about $3 trillion, according to the most recent data from Dialogic, the lowest since 2013 when deal volumes were at $2.8 trillion. M&A volumes in the United States - the world's largest investment banking market - declined 8% to $1.42 trillion. Volumes in Europe and Asia Pacific declined more sharply, by 32%and 20% respectively.“

In a nutshell, both sources tag 2023 as the weakest year in the last decade, while the European M&A market was hit the most and experienced a y-o-y decline of ca. 30%.

M&A activity in the Czech Republic

The Mergermarket d-base reported the following number of deals fulfilling the criteria: a) deal announced (i.e. not necessarily closed) from 1 January to 23 December of each year, (ii) target company’s country is Czechia:

Number of deals>

2020 = 138; 2021 = 161 (+16.7%); 2022 = 150 (-6.8%); 2023 = 97 (-35.3%).  [3]

The data imply that  the domestic M&A market, similarly to the overall European picture, experienced a significant downwards y-o-y drop. Since the record year 2021, the Czech M&A market activity has decreased by circa 40%.  What are the main reasons for such a correction? The answer is not that difficult. It is natural and anticipated by theory [4] that the M&A activity tends to proliferate in times of (i) economic prosperity, (ii) low level of uncertainties and (iii) low interest rates. Neither of the three has, however, showed positive characteristics in 2023. In addition, the years 2021 and 2022 might be considered the record entries from the long run perspective.

Per Mergermarket, the most M&A active Czech sectors in 2023 were as follows: B2B production, IT / Tech, Consumer, B2B services. Energy, Construction.

M&A activity in the Czech Republic: Mazars perspective

The year 2023 was overall calmer (as measured by number of received requests for proposal), at least in the SME transactions segment. We performed y-o-y similar number of Due Diligence projects that were, however, smaller in terms of their average size. The DD stream activity was complemented by two Corporate Finance assistances (both sell and buy sides), respectively projects covering strategic / IFRS angles as well as disputes over the acquisition price adjustment.

The sectors we served were as follows (in order of frequency): Media & advertising (3x), Energy & related, Healthcare, B2B services, Industrial production, Retail, B2C services, Financial services and Construction (1x).

Selected trends we have observed in the 2023 M&A market included the following:

• The dealmaking has slightly shifted to intercountry deals, i.e. both a seller and a buyer from the Czech Republic. 
• PE funds and Family Offices have been still quite active looking for suitable targets and making deals. Secondary PE buyouts continued to proliferate.
• After a long period, acquisitions by the public sector have returned (N4G – gas transmission, gas storage infrastructure, Robin Oil – petrol stations).
• Number of distressed assets analyzed by our team slightly increased. Problematic FCFF profiles are reported namely in segments subjected to increased energy prices (e.g. heavy production) and/or falling consumer demand (especially on-line retailers). In addition, we have observed FCFF healthy targets with excessive debt including “impressively” leveraged past acquisition situations.
• Number of deals requiring earn-out / staged acquisitions / asset deal approach has generally increased.

2024 outlook

As far as the next year 2024 is concerned, let me once again have a look at my crystal ball and suggest the following.

Overall background

1. The current worldwide geopolitical climate remains uneasy.
2. Strategic / economic position of the European union in the worldwide context seems to be quite suboptimal (ownership of / access to strategic commodities and goods, demographic curves, innovation / competitiveness vs. regulation priorities, economies stagnation – or even stagflation scenarios, incoherent Eurozone members profile, fiscal and defense challenges…).
3. Czechia is currently underperforming its EU peers in multiple economic measures (consumer demand, energy prices / inflation levels, public sector primary deficit).

M&A activity in the Czech Republic: Key factors

Considering the aspects introduced at the beginning of this article – (i) economic prosperity, (ii) low level of uncertainties and (iii) low interest rates – let me suggest the following 2024 outlook:

(i) Economic prosperity: Analysts suggest we might return to a slow growth. Y-o-y inflation patterns have potential to stabilize, namely in the second half of the year.

(ii) Level of uncertainties: The current geopolitical context will remain uneasy and fragile.

(iii) Low interest rates: Following the inflation stabilizing, further REPO / PRIBOR rate cuts are expected in the market. However, return to an annual CPI of 2% and base rates below 4% seems unlikely in 2024.

M&A activity in the Czech Republic: Opportunities

On the other hand, there are certainly factors that might boost the Czech M&A activity comprising namely:

Supply side (sellers):

• Succession scenarios remain a highly relevant topic.
• Changes in personal income tax legislation (termination of unlimited time test exemption on shareholding sales) might stir hesitating company owners to proceed with a divestment.
• Following potential return to the macroeconomic normal, company valuations might stabilize across a wider range of sectors.

Demand side (buyers):

• The domestic dry powder will further seek its placement.
• Borrowing costs are likely to see y-o-y reductions.
• Czech citizens unique know-how driven companies will always be attractive to a broad investors audience.

Consequently, let me anticipate that the bottom of the Czech M&A activity has been reached and we will see a slight to moderate M&A activity ramp-up in 2024.

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Let me wish you all the best in 2024!

Lukas

[1] FT, Ivan Levingston, 28 December 2023, London, “Global dealmaking drops below $3tn for first time since 2013” (on-line)

[2] Reuters, Anirban Sen and Anousha Sakoui, 21 December 2023, New York, “Dealmakers see rebound after global M&A volumes hit decade-low” (on-line)

[3] During 2023, Mergermarket d-base has switched to a new AI datamining platform. As such, the figures are not comparable with the previous editions of my mailing as generally more deals are captured. It shall be noted that data on announced deals are updated regularly even for past periods. Consequently, namely 2023 data might be subject to even material ex post updates. 

[4] For more information you might read my article (in Czech only) - Hruboň L. (2022): “M&A transactions: Introduction, role of valuation”, Valuation bulletin - Oceňování, no. 3/2022, ISSN 1803-0785.