The past few years indicate that the availability of capital and low interest rates on the international capital market contributed to M&A activity on a global level. In Croatia, the steady growth in foreign investments was stimulated by the successful carrying out of market reforms, by a relatively steady rate of inflation, stable currency and investments in infrastructure development that have further fuelled this progress.
The Southeastern Europe (SEE) Report of Roland Berger Strategy Consultants shows that Croatia recorded 97 takeovers worth €7 billion in the period from 2000 to 2008, while Croatian companies performed 50 takeovers, however, with the overall value of only €609 million. In comparison to 2007, the volume of mergers and acquisitions in 2008, in the entire SEE region decreased by 46% which is almost twice as high as the European activities decrease.
Transactions and landmarks
Ina
One of the largest deals by volume in Croatia in 2008 was the acquisition of 22.15% of the Croatian oil company INA for €870 million by the Hungarian oil company MOL.
MOL instigated the transaction by announcing its voluntary public offer for the takeover of INA. At that time, MOL already held 25% plus one share in INA, which was acquired in the privatisation procedure in 2003 for $505 million. In this offer it acted jointly with the Croatian Government (under the Shareholder Agreement from 2003) which held 44.83% of the shares in INA. Thus the offer was given by the shareholders jointly holding 69.83 %. MOL was also active in the Croatian market in 2007, when it acquired 100% shares in TIFON, the company for retail and wholesale of fuel in Croatia.
Pliva
Apart from MOL's acquisition of INA, two other significant takeovers in contemporary Croatian economic history occurred in 2006. The first takeover was the result of the takeover battle for Pliva, one of the leading pharmaceutical companies in central and eastern Europe. Both, the Icelandic company Actavis and the US company Barr Pharmaceuticals showed interest for Pliva. Barr Pharmaceuticals initiated the formal takeover process by announcing its offer for the purchase of all of the shares of Pliva. The Icelandic generic pharmaceutical company Actavis submitted a competing offer for Pliva. The result was Barr Pharmaceuticals acquisition of 91.74% shares in Pliva for €1.9 billion. This transaction is also considered as the first important takeover of a publicly-traded Croatian corporation. Pliva is part of Teva Pharmaceutical Industries today as result of the Teva's acquisition of Barr Pharmaceuticals.
HVB Splitska banka
The second important takeover in 2006 occurred when Societe General took over 99.74% shares of HVB Splitska banka from Bank Austria Creditanstalt AG for €1 billion.
The sale resulted from the decision of the Croatian National Bank declaring the unacceptability of the concentration in the Croatian banking market resulting from the merger of UniCredito and HVB on the global level and instructing UniCredito to dispose either of shares held in Zagrebacka banka or HVB Splitska banka. UniCredito was also instructed to dispose of all shares in the building and loan associations Wüstenrot stambena stedionica or Prva stambena stedionica.
Since UniCredito was the majority shareholder of Zagrebacka banka and by the acquisition of HVB indirectly acquired Bank Austria Creditanstalt AG and its shareholding in HVB Splitska banka and its Croatian building and loan association, the Croatian National Bank decided against the merger holding it a threat to the market competition, and further stating that if both, Zagrebacka banka and HVB Splitska banka as well as Wüstenrot stambena stedionica and Prva stambena stedionica were owned by the same entity, this would have created a dominant market position.
Other landmarks
In 2007, the Croatian capital market achieved the largest annual share turnover (22 billion kunas) and the CROBEX index reached the largest value.
The merger of the Varazdin stock exchange to the Zagreb stock exchange marked the year 2007. It was an important moment for the Croatian capital market which further strengthened the position of the Zagreb stock exchange as the central place of securities trading in the Republic of Croatia and contributed to a dramatic increase of sale volumes at the time. At the end of the year a new trade system OMX was successfully introduced, enabling the Zagreb stock exchange to support a larger number of transactions and trade with financial derivatives. The year 2007 was the year of continuing growth and development of the Croatian capital market, but it comes as no surprise that the global financial market turmoil caused the decrease of the market performance and increasing volatility in 2008.
The other landmarks of 2007 were numerous public bids of shares in the form of initial public offerings. The one to be singled out is the bid of shares of T-Hrvatski Telekom. It attracted a number of small investors to the Croatian market which previously had not been market participants.
Legislation
Takeover Act
The regulatory framework applying to M&A has been changing as Croatia's accession to the EU is conditioned by the harmonisation of its legal system with the acquis communautaire.
At the end of 2007, the Takeover Act was introduced into practice. It forms the legal framework for the implementation of the takeover process, harmonised with the provisions outlined in the Directive 2004/25/EC of the European Parliament and of the council regulating takeover bids. In comparison to the 2002 Takeover Act, not to mention the first Croatian Takeover Act from 1997, this one defines the legal and economic aspects of takeover and protection of shareholders in more detail.
The Act has already had an impact on foreign investments; such as the 2008 MOL transaction where the newly introduced voluntary offer provisions were applied. It regulates the conditions for submitting offers for takeover of target companies, the takeover process, the rights and obligations of participants in the takeover process and the supervision of the process of takeover of target companies, and it sets firm rules regarding the consideration payable in a takeover bid, the joint action, the content of the offer document, the publication of the takeover bid and the report on takeover.
The Act prohibits conditional financing and the bidder has to deposit the whole sum required for the purchases of shares with the bank or obtain an unconditional bank guarantee in favour of shareholders that would deposit their shares in accordance with the tender procedure.
In addition, the bidder has to provide for the notary costs in relation to the tender offer and the charges of the Central Depository and Clearing Company.
Although public-tender offers have to be unconditional, two exceptions have been introduced into the Act. Mandatory and voluntary takeover bids can be limited to the purchase of only unencumbered shares and voluntary may be additionally conditioned with the success of acquiring at least the majority of voting rights in the target.
Furthermore, the Act contains inter alia, provisions on the squeeze-out and the right of sale for minority shareholders following a successful takeover bid, but the entry into force of these provisions has been postponed until the date of Croatia's entry into the EU.
Regardless of the postponement prescribed, squeeze-out can still be performed under the rules of the Companies Act but can be prolonged due to the minority shareholders' right to challenge the general assembly's decision on the squeeze-out in court proceedings while the Takeover Act provisions eliminate such risk by not conditioning the performance of the squeeze-out by the general assembly's decision.
The Act also introduced new rights and offered a role to employees of the target companies in public takeovers. It obliged the bidders to express their position in relation to the goals and intentions regarding the target company, its employees and management. The Act also entrusts the employees with the right to be informed about the content of the bid. Furthermore, it entitles them to express their opinion on the bid and it must be announced together with the opinion of the management.
Companies Act
In 2007 the Parliament passed amendments to the Companies Act which introduced new solutions concerning cross-border mergers, reserves in companies, financial statements, the abolishment of bearer shares. However, major interest of the business public was attracted by the newly-introduced possibility for joint-stock companies to opt between a one-tier or two-tier system. The application of the provisions on cross-border mergers and acquisitions, introduced by amendments, has been deferred until the day of Croatia's accession to the EU, but the Croatian Companies Act, as one of the pillars of economy, has been appraised as having reached a good level of alignment with EU directives.
Capital Market Act
Another change of regulations relating to M&A's occurred with the enactment of the new Capital Market Act on January 1 2009, reflecting EU standards and changing the existing capital market regulations.
Primarily, it aims to establish a more competitive and transparent market, but also to introduce new areas of trade, such as a multilateral trading and systematic internalisers, to raise investment service standards and to provide a higher protection level to smaller investors. Investment companies are obliged to adjust their capital to meet higher minimal share capital requirements, issuers have to submit reports to the Croatian Financial Services Supervisory Agency more frequently, the responsibility of persons in charge of the information contained in a prospectus is specified in more detail, a few new thresholds of shareholding triggering the obligation to notify the Agency have been added and the concept of accepted market practices has been included.
As the Act has only been in application for several months, its overall effects on the Croatian capital market are yet to be seen.
Competition Act
In the HVB Splitska banka transaction the issue of concentration played a pivotal role. The particularity of that case is that it concerns a bank, and the protection of market competition is regulated by the Banking Act and its bylaws prescribing criteria for the evaluation of the market disruption and competition in the banking services market as well as measures ensuring free-market competition. The difference, when banks are concerned, lies in the authority competent for the protection of competition, which for the banking sector is entrusted to the Croatian National Bank.
Although separately regulated, within banking regulations reference and application of the Competition Act is frequent. Thus, for example, the dominant position of UniCredito following the merger with HVB has been determined in accordance with Article 15 of the Competition Act which defines the dominant position as a position, when due to its market power, the undertaking can, to a great extent, act in the relevant market independently of its competitors, consumers, buyers or suppliers. In accordance with Paragraph 2 of the same Article, an undertaking is presumed to be in a dominant position when it holds more than 40% of the market share in the relevant market although the provision represents a rebuttable presumption.
The Croatian National Bank passed its decision in the UniCredito case despite the fact that the merger of these two banks in Croatia would have put them in the position to hold 35% of the domestic market, which is less than the legal threshold of 40%, but the threshold would have been exceeded in certain segments of the bank industry, such as building association savings or loans approved to the state and companies.
However, the application of Article 15, Paragraph 3 under which it is presumed that more undertakings are in a dominant position when three or fewer undertakings hold more than 60% of the common market share in the relevant market or five or fewer undertakings hold more than 80% of the common-market share in the relevant market, and when applied to the transaction showed that if the intended concentration is realised, the first three banks will hold a common-market share of 64.2%, while the first five banks will hold a common market share of 85.4%, which points to a creation and strengthening of dominant position of several banks as a group.
The Competition Act has been in force since 2003. It has entrusted the Croatian Competition Agency with the protection of competition in Croatia. The Act incorporates all fundamental provisions of the EU competition law and has not been amended since 2003. Nevertheless, Croatia has obligated itself towards further harmonisation of the competition legislation, including M&A transactions, with current EU legislation.
In cases of M&A, the article of the Competition Act that should be considered is Article 19, defining a concentration of undertakings as (i) merger association of undertakings (ii) acquisition of control or prevailing influence over another undertaking, that is, of more undertakings or a part of an undertaking by: acquisition of the majority of shares or share capital; or obtaining the majority of voting rights; or in any other way in compliance with the provisions of the Companies Act and other regulations.
The parties to a concentration, pursuant to Article 22 of the Act must notify the Agency of any proposed concentration of undertakings, if: (i) the total turnover of all parties to the concentration, realised by the sale of goods and/or services in the global market, amounts to at least €1 billion in the financial year preceding the concentration; (ii) the total turnover of each of at least two parties to the concentration realised by the sale of goods and/or services in the domestic market amounts to at least €100 million in the financial year preceding the concentration.
Parties to an M&A transaction are obligated to notify the CCA if and when they estimate that the intended transaction falls under the regulations of the Competition Act which mandates their involvement. Once they notify the Agency, they must refrain from further action until they obtain the CCA's approval or until the prescribed period within which the CCA is obliged to render its decision has elapsed.
The annual report of the CCA for 2007 stated a total of 29 received applications for the performance of concentration. In 2006 the CCA assessed 28 applications of concentrations between undertakings.
The year 2007 was marked by an increasing number of vertical concentrations, approximating the number of horizontal concentrations. However, horizontal concentrations continue to represent the majority of the total number of evaluated concentrations. A landmark of the year is also the increase of concentrations in retail but also in the media, primarily the printed although electronic media were represented as well.
Foreign involvement
Preliminary data published by the Croatian National Bank, which based on the mandatory reported foreign investments prepares reports on foreign investment portfolios and overviews, show that in 2008 foreign investments amounted to €2.93 billion while in the record year 2007 foreign investors had invested €3.6 million, which is an increase of 33.5% in relation to 2006.
In the last 16 years foreigners have invested a total of €20.6 billion in Croatia.
When listed per activities the above data show that the majority share of foreign investments refers to the banking sector, followed by oil derivatives production. In 2008 foreign investments into the banking sector reached €1.1 billion, but were primarily motivated by reaching the new minimum capital adequacy level, which was raised from 10% to 12% by the decision of Croatian National Bank. Investments into the oil sector were the result of MOL's abovementioned public offer for INA shares.
In the last 16 years the financial sector has preceded in foreign investments. Out of a total of €20.6 billion foreign investors have invested more than a third (€7.7 billion) into financial intermediation which does not include insurance and pension funds.
When looking at the investors' countries of origin, in 2008 the largest amount of foreign capital originated from Austria (€1.01 billion) and Hungary (€900.2 million) which is not surprising, knowing the structure of foreign ownership of Croatian banks and the public offer of Hungarian MOL for INA.
Throughout the last 16 years, Austrian investors have held the leading position in investments in Croatia, having invested €5.82 billion, followed by the Netherlands (€3.27 billion) and Germany (€2.37 billion).
Due to the global financial situation and unpredictable market dynamics, it is difficult and risky to make any predictions, but analysts expect that 2009 shall witness less mergers and acquisitions, while on the other hand mergers and acquisitions will be a survival necessity for many entities and the unavoidable result of many consolidation processes. It is also possible that in Croatia, which until now has had only one noteworthy attempt of hostile takeover, the one in relation to the acquisition of Pliva, the situation will change and M&A processes shall become more dynamic and less friendly.
The recent market developments as well as media announcements show that the retail sector is going to be very active this year in M&A. Spar Croatia reported that following the approval of the CCA as of May 2009, it would take over the management of Iperccop hypermarkets. The other potentially interesting target within the retail sector is Getro, the first cash-and-carry retail chain in Croatia. The interesting speculation in this market segment is also the possible association of three large Croatian companies in relation to the acquisition of the Slovenian company Droga Kolinska.
Together with the already expressed Croatian interest for Slovenian Mercator, this is maybe an indication that in 2009 we might witness a higher activity of Croatian companies as acquirers.
| Author biography |
Irina Jelcic
Hanzekovic, Radakovic & Partners
Irina Jelcic is a partner with wide experience in mergers and acquisitions, capital market transactions, initial public offerings and general corporate advisory work. She also advises in a broad range of financial transactions, in particular syndicated lending, acquisition finance, secured transactions and project finance. |