The M&A market slowed in 2023 due to higher interest rates, inflation, geopolitical uncertainty and diverging price expectations between buyers and sellers. However, we still saw a number of large transactions in the country, particularly in the telecoms, semiconductor and logistics sectors. How was 2023 from the perspective of our Financial Advisory team's leadership and what lies ahead in 2024?

We asked these questions to the heads of the financial advisory departments of our Czech and Slovak offices. We interviewed Miroslav Linhart (M.L.), Cluster business leader Ivana Lorencovicova (I.L.), Corporate Finance partner Jan Brabec (J.B.), Transaction Services director Pavel Piskáček (P.P.) and Valuations and Modeling partner Roman Lux (R.L.).

Miroslav, how do you assess the M&A activity in the Czech market in 2023 in general?

M.L.: "M&A activity was rather subdued last year. The factors behind this situation are obvious: rising interest rates, elevated inflation levels and uncertainty about corporate performance. Many sectors are currently facing enormous pressure due to rising costs which are not necessarily matched by revenues, which in turn has a negative impact on profits. This discrepancy leads to diverging price expectations between sellers and buyers. Sellers seek to secure a price based on the previous year's results. However, the economic downturn in the interim period is reflected in deteriorating results and thus depresses the sale price."

What role will cross-border M&A play in the Czech market in 2024? How do foreign investors perceive the Czech market as an investment destination?

M.L.: "Last year, foreign investors focused mainly on large investment opportunities, with fewer smaller cross-border transactions due mainly to persistent geopolitical risks. On the other hand, we have seen an increase in transactions by Czech companies to cross-border locations. Larger entities, for which the Czech market is relatively small, are directing their investments abroad, as seen last year with CSG, CZ Colt Group, KKCG and many others. This trend is expected to continue, and new opportunities are emerging as companies look for foreign investors to help bolster their financial strength and further cooperation."

What are the main trends in residential and commercial real estate? Are any new asset classes or investment strategies being pursued?

M.L.: "The problem of housing affordability will persist in the residential market because financing will still be relatively expensive. And even if interest rates fall slightly, nothing will change dramatically. That's why I foresee a relatively large development of rental housing. Developers are now considering selling a large part of their new projects to various institutional investors as rental housing, and some commercial investors will also be moving into the residential market, and what they used to invest in offices will now be invested in a portfolio of residential properties."

What are the main risks and opportunities for investors in the Czech real estate market in 2024?

M.L.: "I still think we have a relatively rich economy, even from the perspective of real estate investors. The interest will be mainly in the residential sector, especially in Prague and big cities. In my opinion, this is a segment that can really develop, especially thanks to the trend of people moving to bigger cities and the surrounding area for work. I don't think the Czech Republic has any specific risks, the whole European real estate sector is currently in decline due to higher interest rates. ESG will definitely have a big impact in the future, projects will be more expensive in the coming years and will be built to A standard to produce the least emissions and tenants will have to be prepared to pay a higher price. We know the regulations and the changes that are coming, but no one knows exactly what that will do to the market, and it's possible that some things will eventually have to be relaxed."

How do you assess the M&A activity in the Czech market in 2023, Honza?

J.B.: "Although it was not a record year in terms of volume and number of transactions, I believe that we witnessed a number of very significant transactions, such as the sale of Packeta or Nej.cz. The biggest transaction last year was the sale of Meopta Optika, which was also one of the biggest transactions in the last 30 years. In terms of significant transactions, 2023 was therefore a very attractive year. Of course, due to higher interest rates, inflation and partly geopolitical uncertainty, there is a significant difference in the perceptions of sellers and buyers. Although there is still plenty of cash among financial and strategic investors in particular, the impact of the factors already mentioned (especially more expensive acquisition financing) is reflected in reduced volumes and number of transactions. I expect this trend to continue this year, but let's not paint black scenarios. There are still plenty of companies for which investors are willing to pay a premium price, and I think many of them will be for sale this year."

What are the possible catalysts for M&A activity this year?

J.B.: "The continued decline in inflation and interest rates will be reflected in a reduction in the cost of external (especially bank) financing and may strengthen the appetite of financial investors in particular. However, company valuations will remain at similar levels to last year. The recovery in capital markets will allow a number of companies to raise new capital, which should also be reflected in increased M&A activity. Once again, funds that have raised capital in recent years will actively seek acquisition opportunities."

What are the new trends in financing and structuring transactions?

J.B.: "The rise in interest rates and the generally more cautious approach of foreign banks to finance acquisitions by global financial investors from London has led to some global private equity funds using acquisition financing from local banks. I believe that this trend will be reinforced in future acquisitions in the Czech or Central European market. Czech banks are not only in very good shape, but they also perceive the risk of Czech companies in the context of the domestic market, not in terms of the distant EU market. Furthermore, in general, higher interest costs are forcing investors to increase the equity ratio of their intended investments. This factor is then reflected in lower valuations in completed transactions."

Can you share success stories from 2023 where Deloitte has helped clients execute transactions or mitigate risk in a challenging market?

J.B.: "Last year we successfully completed a number of transactions in several sectors, including engineering, e-commerce, sports, telecommunications and semiconductors. I would highlight the sale of Meopta Optics. This was one of the largest transactions in the last 30 years. The company was owned by the Rausnitz family, which has historical roots in the Czech Republic and which bought the company after the revolution as part of privatisation. Investors from all over the world, both strategic and financial, were very interested in Meopta. The winner of the sale process was the private equity fund Carlyle."

Ivana, how are PE firms adapting their investment strategies to the current market environment? What are their key areas and investment sectors for 2024?

I.L: "PE firms are constantly adjusting their investment strategies to respond to the evolving market environment. Key themes are digital transformation, growth and new markets, efficiency, sustainability and regulation. This year, we expect increased activity in infrastructure projects, energy transformation and healthcare."

What insights can Deloitte share from its global network regarding current trends and best practices in M&A?

I.L: "An example of current trends in M&A is the increased emphasis on integration and technology. M&A outcomes are highly dependent on effective planning, maximizing synergies and executing integration/transformation, with executives now focusing more on integration early in the process than in previous years. The second trend is that technology is playing an increasing role in improving the efficiency and effectiveness of business processes, such as identifying an acquisition target."

The next question is for you, Pavel - how is Deloitte preparing for the future of M&A? What investments and initiatives are underway to ensure that Deloitte remains a leading advisor in the Czech market?

P.P.: "We are investing in automating and facilitating parts of the due diligence process - from initial data processing, to assisting with identifying findings, to facilitating the preparation of our reports. The human factor can never be replaced, but we expect these tools to improve quality and increase efficiency, especially in the routine areas of our work. I would also like to add that I am very pleased that we in the Czech Republic are among the countries leading these initiatives."

Can you share success stories from 2023 where Deloitte has helped clients execute transactions or mitigate risk in a challenging market?

P.P.: "We had a number of successful transactions in 2023, even though they were usually deals negotiated in the previous year. One of the most important transactions was the sale of Nej.cz, the largest Czech Internet provider excluding mobile operators, which was eventually won by CETIN among dozens of bidders from the Czech Republic and abroad. I would also like to mention the acquisition of Hello Bank's portfolio by Česká spořitelna, which was negotiated on and off for almost two years, where we provided integrated advisory services in the areas of valuation, finance, legal and tax. At the same time, we have helped our clients expand abroad, such as the recently announced acquisition of the largest power plant in Vietnam by Sev.en Group or the recently announced acquisition of Avenga, a Germany-based IT company operating in Europe and America, by KKCG."

Roman, how has the local FinTech sector changed in the last year and what is its position within the Czech financial market?

R.L.: "The FinTech sector itself is still showing very interesting trends, especially in terms of revenue growth. The financial results for 2023 are not yet available, but we can expect the growth rate of the entire sector to be similar to 2022, when we recorded revenue growth of more than a third for the companies we monitored. The most significant change in the market is the partial cooling off of some investors, which has been accelerated mainly by the rise in interest rates in recent years and thus the overall cost of financing. In general, this has increased pressure to meet both revenue targets and required profitability, which has been reflected, among other things, in divestures or accounting impairments."

What were the most important valuation trends in 2023?

R.L.: "The past years have been quite turbulent and the newly gained experience is reflected in greater caution on the part of investors. Their decisions are of course influenced by the current cost of money, but also by the recent increase in operating costs due to extraordinary inflation or further cooling on the demand side in most sectors. For these reasons, investors are considerably more prudent than in previous years and are devoting a greater amount of resources and energy to assessing new opportunities. This does not mean that the market is "frozen". On the contrary, a number of interesting opportunities have opened up for savvy investors."

Can you share success stories from 2023 where Deloitte has helped clients execute transactions or mitigate risk in a challenging market?

R.L.: "One of the most interesting projects last year was advising Česká spořitelna on the acquisition of the loan portfolio of Hello bank! (i.e. the Czech branch of the French bank BNP Paribas, specifically BNP Paribas Personal Finance SA, a spin-off). This is another piece of the ongoing consolidation of the local financial market. The banking sector is inherently highly capital-intensive with regard to so-called scaling, due to increasing regulatory or capital requirements. Thus, it does not make economic sense for smaller players to operate in some markets, which was probably the main reason for the exit in this case as well.

For Česká spořitelna, this was the fourth acquisition in recent years and its team was very professional and well-coordinated. From our side, we perceived positively especially the benefits resulting from the combination of knowledge and experience from " within" the banking world with an external consulting team. At the same time, it is not so common for a client to know exactly what they need, to be able to listen to our insights, but at the same time ask complex questions and want to understand the implications of the transaction in all respects.

There is no room for error in M&A, and this transaction also proved that careful preparation, the right mix of resources and know-how, and of course maximum consistency throughout the project always pays off."