A Slovenian privatisation process involving 14 different selling entities provided Houlihan Lokey's corporate finance team with a delicate challenge when helping a potential Austrian buyer.

Slovenia has kicked off its distress privatisation programme with the sale of a majority stake in Helios, an industrial coatings manufacturer, to Austria’s Ring International Holding. The purchaser had to deal with no fewer than 14 sellers, and Houlihan Lokey, Ring’s adviser, says that buyers in future Slovenian deals may expect to do much the same.

Once the whizz kid of the Balkans, Slovenia is now in the economic doghouse. With exquisitely bad timing, it joined the eurozone in 2007, and its debt-funded boom has since turned to bust. Like other eurozone peripherals, its banks have suffered high rates of non-performing loans, now reportedly equivalent to 20% of gross domestic product (GDP), and are badly in need of recapitalisation. The state is heavily entrenched in the economy, with stakes – often majority stakes – in more than 80 companies, including the largest banks. By one estimate, 80% of the economy is in state hands.

The situation has not been improved by the country’s traditional aversion to foreign direct investment (FDI). A European Commission analysis from 2000 to 2011 shows that, among the 10 former Iron Curtain members of the EU, Slovenia persistently had the lowest FDI. Early privatisation took the form of vouchers for every citizen, followed by a phase of management buyouts, which meant firms ended up in the hands of the politically connected elite or back with the state itself.

In a rut

Today, Austria’s southern neighbour is one of only two eurozone countries (together with Cyprus) still in recession. Its GDP shrank by 2.3% last year and Slovenia’s Institute of Macroeconomic Analysis and Development believes it will fall by another 2.4% in 2013. While the government has promised €1.2bn for bank recapitalisation, Fitch has said the real cost could be €4.6bn. The government is determined to avoid an EU bailout, and it is in this context that the new privatisation plan was hatched, along with pay cuts for civil servants, VAT rises, new taxes and labour reforms to attract fresh investment.

Last year, the previous government published a list of 15 companies that would be privatised, though not all are coming to market at once. Though it did not place a value on them, independent estimates have suggested combined totals of up to €1bn (the bulk of which should come from Telekom Slovenije). After the government collapsed in February amid revelations of high-level corruption, a new coalition pressed on and the national assembly approved the scheme in June this year. Among the candidates were Adria Airways (which, it is said, the government has been trying unsuccessfully to sell for some time), Telekom Slovenije (where Citi has reportedly been named financial advisor), Aerodrom Ljubljana and ski maker Elan.

Local knowledge

Slovenia is not exactly virgin territory for Houlihan Lokey. It is an advisor to one of the troubled Slovenian banks, Abanka, on its capital increase process. It is also acting for the creditors of Mercator, the Ljubljana-based retail chain, in its debt restructuring.

The firm has been in expansionary mode. “As competitor firms have been downsizing, so we have been picking up share,” says Stephen Winningham, Houlihan Lokey’s head of corporate finance for Europe. Fifteen new merger and acquisition professionals have been hired in the past 18 months, he adds, growing the London-based corporate finance team by about one-third.

The leader of the team advising on the Ring/Helios transaction was one of those new hires. He is Sascha Kroissenbrunner, head of building materials, Europe, Middle East and Africa. Since he was previously head of the industrials group for central and eastern Europe at UniCredit, he is no stranger to the region.

Privately owned Ring, too, is well-acquainted with Slovenia, where it acquired a stationery business in 2008. It has two distinct business lines, stationery products and industrial coatings, each contributing roughly half of group turnover. Ring has grown rapidly by acquisition, boosting annual sales from €2m to €200m in the past 12 years. Nonetheless, at three-and-a-half times the size of Ring’s coatings business, Helios was something of a mouthful.

Helios’s products include car coatings and road-marking paints, and it employs 3000 people across 14 countries. Unlike some other Slovenian companies, it is in reasonable shape, which is one reason why it was chosen as a front-runner for sale. Another was that it was large enough to create awareness for the programme but – unlike, say, Telekom Slovenije – small enough not to do too much damage if things went wrong.

Ring submitted a non-binding offer for Helios at the earliest opportunity, in November 2012. Shortly afterwards it appointed Houlihan Lokey as its financial advisor, alongside Alta Invest as local advisor and Vienna’s Brandl & Talos as legal advisor.

“Ring is a very sophisticated client, with a lot of experience in acquisition and a record of successfully integrating businesses,” says Mr Kroissenbrunner. “So we were happy to support them.”

Winning over sellers

Helios is listed on the Ljubljana Stock Exchange. What was on offer was the 73% combined shareholdings of 14 individual banks and institutional investors. They were represented by BNP Paribas and a single law firm, though it was important for them to act independently or the sellers would have been obliged to make an offer to the minority shareholders.

“That was one of the key challenges,” says Mr Kroissenbrunner. “Other companies in the privatisation programme have similar shareholder structures – that’s how the government supported the Slovenian economy.”

Ring was not the only aspiring bidder. A number of financial sponsors were interested and PPG Industries of the US ($15.2bn sales in 2012) was said to be one trade buyer in the mix.

“We knew from the outset that we were up against multinational buyers with more financial flexibility and power than our client,” Mr Kroissenbrunner acknowledges. “But we also knew that they would find it more difficult to make concessions than entrepreneurs such as Ring, who can make decisions quickly.”

As a result, the strategy was to create a compelling offer that did not compete exclusively on price but included other ‘soft’ benefits. While some sellers were more interested in price, others were more concerned with social issues. So Ring emphasised that its intention was to invest in Slovenia, to keep the Helios brand and support its employees. Its object was not, it argued pointedly, to create a small subsidiary in a global empire.

The binding offer submitted in May made a number of distinct concessions to any Slovenian fear of foreigners. It promised to make Helios the headquarters and the umbrella brand of the enlarged coatings group and to centralise Ring’s coatings research and development activities in Slovenia. It also undertook to maintain or increase Helios’s employment levels and to keep its financial structure sound.

Top class investors

That was enough for Ring to win the right to exclusive negotiations, and it was able to announce the signing of a share purchase agreement in October. It paid €520 a share, valuing Helios as more than €250m. Houlihan Lokey also helped to arrange the finance for the transaction, an undisclosed sum embracing equity, hybrid capital and debt from fund managers GSO and Franklin Templeton. “It reflects very well on the management team that it was able to secure such world-class investors,” says Mr Kroissenbrunner. “At the same time, Ring has kept a sound financial structure.”

The transaction still awaits the green light from competition authorities in multiple regional jurisdictions. Helios has nine production facilities, including some in Russia, Ukraine, Serbia and Croatia, so a number of different countries are taking an interest. If all goes well, Ring hopes to be making an offer to buy out the remaining minorities during the first quarter of 2014.

Mr Kroissenbrunner advises future would-be acquirers in Slovenia to be flexible and responsive, and to choose the right partners.

“Our capital providers have been very professional and supportive through the ups and downs,” he says. “But above all be patient. There will be some issues that you don’t normally see in the sell-side process – such as 14 minority shareholders – and so decisions may take longer. But in the end you’ll get there.”

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