Austria has been something of a showcase for a reforming government in western Europe since the turn of the century. In 1998, it had the highest general government debt among AAA rated EU sovereigns and an unwieldy, expensive public sector. Its debt burden may still be large in absolute terms but it has instituted a remarkable turnaround through the implementation of responsible macroeconomic policies and modernising microeconomic reforms.
The restructuring of tax, pension and healthcare systems, and privatisation efforts have created a wealthy, diversified and competitive economy, and supported solid productivity growth. After two years of strong growth, averaging 3.4% in 2006-07, the economy is forecast to cool down, but 2.1% in 2008-11 is still respectable. Government debt is on a solid downward trend – dropping from 66% of gross domestic product in 2002 to less than 60% last year – and analysts expect this kind of policy prudence to continue.
It is impossible to look at Austria’s success in isolation, however. Through a mixture of geographical luck, historic ties and bold opportunism, the country’s fortunes are inextricably linked with the success of its central and eastern European (CEE) neighbours. And, if Austria has already been one of the prime beneficiaries of CEE’s economic dynamism, most people believe that this region is still where Austria’s greatest opportunities lie.
“For the past decade, Austrian companies’ biggest advantage has been in CEE and it will continue to be so for the foreseeable future. That is where real growth will come from,” says Franz Hochstrasser, head of global markets and treasury, and a member of the management board at Erste Bank.
Wolfgang Putschek, head of mergers and acquisitions (M&A) in CEE/the Commonwealth of Independent States (CIS) at RZB, agrees that is where activity will be. “Eighty per cent of our volume is coming from [client acquisitions in] CEE and south-eastern Europe,” he says. “Activity across sectors is being driven by consolidation and, for listed companies, buying growth to underpin the equity story.”
CEE revenues
At Strabag, Austria’s largest and Europe’s fifth-largest construction company, more than a third of revenues come from CEE. The company expects this to increase rapidly, particularly following the decision by Russia’s second richest man, Oleg Deripasker, to take a 30% stake in the company for €1.2bn in April 2007. Strabag CEO Hans-Peter Haselsteiner told a press conference in Vienna: “Whoever is number one in Russia will be number one in Europe.”
The company’s planned initial public offering (IPO) was called off after the surprise deal with Mr Deripasker but was finally concluded in October 2007. The €1.4bn listing – which was 10 times oversubscribed at the height of the subprime crisis – was targeted at international and Russian investors to bolster Strabag’s expansion plans in Russia.
In the energy sector, Austrian oil and gas company OMV has built itself into a major CEE player through the acquisition of stakes in various European assets, including a 51% stake in Romania’s Petrom in 2004. In September last year, OMV took a 20% stake in Hungarian oil company MOL with the explicit objective of increasing the stake to a 50% voting share and a proposed merger. However, the proposal was viewed as a hostile takeover bid by MOL’s management, and the Hungarian government and the plans were stopped in their tracks. An EU anti-trust review is expected to conclude in July.
Home market
Austria’s largest banks, such as Bank Austria/UniCredit, Erste Bank and Raiffeisen, have grasped the same growth opportunities. They have become such CEE powerhouses that they no longer differentiate between Austria, CEE and the CIS in terms of what is “domestic”. “They are all, in effect, our ‘home’ market,” says Patrick Butler, head of global treasury and global markets and a member of the managing board at Raiffeisen Zentralbank.
This is borne out by RZB’s figures. CEE and the CIS are a huge proportion of group revenues: only 21.7% of 2007’s €1.48bn profit before tax was derived from RZB’s Austrian business; central Europe accounted for 27.1%, south-eastern Europe (SEE) for 27.6% and CIS for 24%.
It has also been a case of “needs must”, adds Mr Butler. “Austria is and will always be a small mature market, so Austrian companies have to look elsewhere for growth. It doesn’t take a rocket scientist to see where that growth will come from.”
| Klaus Requat, co-head of investment banking EMEA at Bank Austria/ UniCredit, agrees that Austria’s natural limitations in terms of size and maturity will continue to shape its investment banking and capital market activity, as well as the actions of its companies. “With only eight million people, Austria will never be a huge market for banks. Plus industry [ownership] is relatively stable; this is not good for banks, which thrive on change,” he says. |
“Over the past couple of years, while private equity has been driving M&A activity, this [ownership pattern] has constrained deal flow because it prevented private equity from making real inroads into the Austrian market. And the few private equity deals that came up were overpriced because of their rarity value. Currently, M&A volumes are not brilliant, but okay: a few small privatisations; maybe a few deals in energy; telecoms; credit cards,” says Mr Requat.
Deal flow
Outside of Austria, there seems to be plenty of deal flow, particularly in the mid-sized transaction space. “On the M&A side, we are protected to some degree [from the downturn in western Europe and the US] by our multi-country platform,” says Mr Requat. “There are plenty of deals in CEE and CIS. For example, Poland is booming, especially in the €50m to €200m sweetspot. In Russia there are deals in the pipeline in the engineering, metals, telecoms and transportation sectors. In Hungary there are a lot of transportation and infrastructure deals, and in Turkey there is an energy privatisation finally starting.”
Many of the deals are comparatively small, which may be one reason why flow in SEE and the CEE is less affected than in western Europe and the US, where megadeals are off the cards.
In any case, says Mr Putschek, the subprime and credit crises have yet to hit volumes seriously – and RZB is busy. “In 2007, we completed 41 transactions with a value of €10bn. We are currently working on 160 projects with a total value of nearly €40bn,” he says.
Austrian banks have emerged relatively unscathed from the credit and subprime crises, but jitters about contagion and fear of a US recession have hit the Austrian equity markets. Although most Austrian companies presented good 2007 results, dismal news about the US economy in mid-January and further turmoil in the financial sector sent the Vienna Stock Exchange’s leading index, the ATX, down by more than 20% in the first quarter.
“The equity market in Austria is almost dormant,” says Mr Requat. “Although companies look quite good in terms of fundamentals and have pretty good valuations, the Austrian market will not be able to buck the international equity market trend.”
And the market will not be host to the sorts of real estate-related transactions that took place last year, says Mr Requat. According to Thomson Financial, 11 out of the 20 top equity capital markets deals in Austria last year were real estate transactions. “Last year was excellent for real estate as long as you did your deals early enough; this year the market is dead,” says Mr Requat.
Equities activity
There are some signs of life. Erste Bank helped to reopen the equity market in May as joint lead co-ordinator of a €1.14bn issue for Vienna Insurance Group (Wiener Stadtische). “It was an at-market rights issue [as opposed to recent discounted rights issues that have been part of several banks’ recapitalisation efforts] to refinance a transaction, but it was not being launched into an easy market,” says Johannes Kinsky, head of investment banking and a member of the management board at Erste Bank.
“Essentially, it is a good growth story – but the market was saying that it wasn’t interested in a growth story. But we had a bit of luck and launched into a market rally and the deal ended up oversubscribed.”
Austrian banks may not have subprime to worry about, but their shares have been hit by fears that they are overexposed to CEE and SEE economies that face a growing risk of a hard landing as the global financial crisis continues to spread. The ramifications for Austrian companies that rely on the lifeblood of those regions to fuel their growth are also clear.
The IMF’s Global Financial Stability report, published in April, highlighted the potential knock-on effects for Austrian, Scandinavian and Italian banks that have lent heavily in the region. At the heart of the IMF’s concerns are the large current account deficits being run in certain CEE and SEE countries, including Bulgaria and Romania.
Positive perception
Erste Bank’s Mr Hochstrasser says the bank is not overly concerned, and stresses that CEE cannot be treated as a single entity in a slowdown. “You have to distinguish between economies,” he says. “I don’t see a slowdown in Russia just yet. Its economy is underpinned by commodity prices, which are still high, its current account is healthy and it has a budget surplus. The Czech Republic and Slovakia are in excellent shape and their currencies are appreciating on a yearly basis. Poland is doing much better than it was, and Croatia is in fairly good shape.”
Of more concern, perhaps, are Romania and Hungary, which are vulnerable because of their large current account deficits. But even there the bank is pretty positive, Mr Hochstrasser says. “Romania, for example, is an important country in the region. It is rich in agricultural and natural resources and we think it will continue to attract significant foreign direct investment flows. These will offset the deficit and be the main driver of economic growth.”
In some cases, a slowdown may be a blessing in disguise, says RZB’s Mr Butler. “Some countries looked like they were overheating, and a slowdown will do the job that would otherwise have had to be done by their central banks,” he says.
As for the Austrian outlook, Mr Butler says the country is better positioned than most. “There are three key risks to an economy when times get tougher: that its banking system, its consumers or its government is overleveraged. None of these applies to Austria so, structurally, it is well placed to sit out a storm.”
