22/03/2007
EU Full of Eastern Promise
The continued expansion of the EU into Central and Eastern Europe and the consequent liberalisation of certain markets is creating both opportunities and challenges for investors. On the positive side, it is throwing up attractive prospects, most notably in sectors such as banking, oil, building and telecoms. However, enthusiasm for this is being tempered by greater government activism, a development that calls for careful monitoring by investors.
The broadening of the European Union brings many benefits, not least an increase in trade and investment. This in turn boosts the whole regional economy. As the EU develops further into the east, with the latest expansion leading to the inclusion of Bulgaria and Romania, many companies in core Europe have identified the opportunities this creates.
Among those who have moved quickly to profit from the opportunities this trend presents have been the Greek banks. They have been particularly acquisitive in the Balkan region, benefiting from their close geographical proximity to these states. It is estimated that around 25% of the Bulgarian market alone is now controlled by Greek financials. National Bank of Greece (NBG), the country's largest bank, has been particularly active. In addition to controlling around 21% of the loans market in Greece, and holding a 36% market share of deposits, t he bank's exposure to developing Europe means that 30% of its business is now generated outside Greece, with a target that will rise to 45% by 2009.
Among the other companies that are well-placed to benefit from the admission of new members are those in the building and oil sectors. Austria's OMV is the leading oil and gas group in central Europe. Since buying the state-owned oil company Petrom from the Romanian government in 2004, it has undertaken investment in Bulgaria and is planning further expansion of its refining and marketing business in the EU accession states over the next few years. OMV offers investors attractive prospects, as it should benefit from its exploration activities in Romania.
Telecom companies in other parts of the EU have already started to take advantage of the development potential presented by the inclusion of Bulgaria and Romania. A condition of their accession was the opening up of their markets to operators from elsewhere, who are now free to compete with the incumbent providers. Several companies in core Europe are already gaining business on the back of this greater freedom. Telekom Austria, for example, now owns the Bulgarian mobile operator Mobiltel, while Cosmote, the Greek mobile telecoms company is now building a presence in regions such as Albania, Bulgaria, Macedonia and Romania.
Other companies that have benefited from expansion include Fresenius Medical Care, which is the dominant manager of dialysis clinics in the US and is increasing it presence in the growth area of Eastern Europe
There are signs of a growing trend to consider politically inspired changes and prevention of mutual champions.
The Austrian government underwent change in January of this year when Alfred Gusenbauer was sworn in as chancellor, while the Swedish people are still coming to terms with the change stemming from last October's election. Meanwhile, the administration in Italy remains weak and France is gearing up for presidential elections in April. All of these issues have implications for economic policy.
In addition, there is lack of clarity in government response to M&A. The more relaxed tone of governments, that has allowed commercial forces to take their course, has reversed recently and has seen them tinkering in the commercial logic of some deals.
The French government, in particular, has resisted overseas buyouts in areas of the market it sees as particularly sensitive. It first intervened last year in a possible bid for Danone by Pepsico. EU regulators also criticised France for allegedly influencing a merger between Suez and Gaz de France, to thwart a bid by the Italian company Enel.
There was also some controversy when the Spanish government intervened in an attempt to engineer a domestic merger for the energy company Endesa, which was a target for E.on of Germany. This prompted a reaction from EU regulators, who stated that this would breach the conditions stipulated by Spain's government and hinder the free movement of capital.
Overall, prospects among European companies are positive. They are becoming better run, have healthy balance sheets and are enjoying high levels of cash generation. In addition, there is clear evidence that European companies are giving greater consideration to how they use capital, although this differs across sectors. Many companies are now viewing acquisitions as an alternative to capital investment, which remains low for this stage of the cycle. Much of the M&A activity has focused on utilities and financials although stocks in other sectors are also likely to become targets in the coming months.
Stan Pearson, Head of European Equities, Standard Life Investments
First published in Fund Strategy Quarterly Market Review in March 2007.
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