I OVERVIEW OF M&A ACTIVITY
According to the World Bank's Doing Business Report 2019, Romania is ranked 52nd worldwide on the aggregate ease of doing business index, seven positions lower than the previous year. However, Romania ranks first in the European and Central Asia areas with regards to the ease of doing business across borders, and is well above the average rankings of the region in areas such as getting credit, paying taxes and enforcing contracts.2
From an economic perspective, Romania was again one of the fastest-growing economies. According to estimates published by the Romanian National Institute of Statistics, the economy rose by 4.1 per cent year on year as compared to 2017 (compared with 7 per cent year on year the previous year).3 As compared to 2017, there was a slight decrease in M&A activity after a particularly active 2017 characterised by a significant number of high-value deals. However, M&A activity seen in 2018 represents the evolution of a year of economic growth. Investment activity was broadly spread across the telecoms and IT, real estate and construction, manufacturing and education and healthcare services sectors.
In 2018, there were approximately 130 transactions totalling approximately €1.9 billion only including transactions with a listed value, while the value of all transactions, including unlisted ones, is approximated at between €3.8 and €4.3 billion. Of the 130 transactions in 2018, 26 deals were in the telecoms and IT sector, 24 in the real estate and construction sector, 23 in manufacturing, 11 in education and healthcare services, nine in wholesale and retail, eight in the services sector, six in the finance and insurance sector, five in the agriculture and farming sector, and 18 in other sectors.4
Ii GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The general framework for M&A activity in Romania is mainly governed by the Civil Code and Company Law, as republished and further amended and supplemented (Company Law).5 The Civil Code provides the general legal framework governing legal entities as well as the general principles applicable to mergers and demergers. The Company Law provides the applicable rules for the sale and purchase of shareholdings in Romanian companies, as well as those applicable for share capital increases, mergers and spin-offs.
On a more practical note, registrations with the Trade Registry (which is the method for publicising operations of companies) follow the rules established by Trade Registry Law,6 as republished and further amended and supplemented, in addition to ancillary regulations. Depending on the business activity of the target company, the following sector regulations may also be applicable:
- for public companies, the Capital Markets Law7 and various secondary enactments likely apply, as will Regulation 1/2006 on Issuers and Securities Operations, as further amended and supplemented, in particular by Law No. 24/2017. Public companies come under the supervision of the Financial Supervisory Authority (FSA);
- for insurance companies, the general framework is set forth in Law No. 237/2015 on the authorisation and functioning of insurance and reinsurance activities, and the supervision of the FSA also applies; and
- for banks, the main legislative framework is set forth by Government Emergency Ordinance No. 99/2006 on credit institutions and Regulation No. 5/2013 of the National Bank of Romania (NBR), and the supervision of the NBR also applies. Investors doing business in Europe may find Romanian regulations somewhat familiar, as they are the product of the implementation of EU directives into Romanian law.
Law No. 137/2002 is the main piece of legislation governing company privatisations, which continue to be of interest to many major companies that are still state-owned.
Competition law is also relevant in the M&A field, as economic concentrations between companies must be controlled and competition must remain fair at all times. The Competition Law,8 as republished and further amended and supplemented, is related to regulations and EU competition law, and contains provisions on notifications to the Competition Council and the European Commission, and the related requirements and thresholds.
In addition to the above, other legal provisions applicable to the particularities of each transaction may become relevant. These include, for example, environmental law, employment law and insolvency law.
iiI DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND
i Insurance, capital markets and pensions
Following the entry into force of Law No. 24/2017 regarding issuers of financial instruments and market operations, the FSA issued Regulation No. 5/2018 regarding issuers of financial instruments and market operations in order to align the legal framework in the capital markets sector.
In 2018, another significant legislative novelty entered into force, namely Law No. 126/2018 on markets in financial instruments, implementing MiFID II9 in Romania.10 Law No. 126/2018 applies to investment firms, market operators, data reporting service providers, central depositaries, central counterparties and investment firms from other Member States operating in Romania, directly or through a branch, and to companies from third countries providing investment services or carrying out other investment activities in Romania through a branch. According to Law No. 126/2018, the competent supervisory authority is the FSA; however, the NBR has special supervisory powers related to the investment services carried out by Romanian credit institutions as well as by the Romanian branches of credit institutions authorised in other Member States.
At the end of 2018, Government Emergency Ordinance 114/2018 (GEO 114) introduced several tax and regulatory measures for various major industries, including the energy sector. In this respect, the main amendments for the energy sector are as follows:
- the applicability of the tax on the exploitation of natural resources is to be extended until 31 December 2021;
- capping natural gas prices: from 1 May 2019 to 28 February 2022, producers, including their subsidiaries and affiliates belonging to the same economic interest group, carrying out both extraction activities and sales activities of natural gas extracted from the territory of Romania, have the obligation to sell at a price of 68 lei per MWh the natural gas resulting from current domestic production activities to the suppliers of natural gas for household customers, and natural gas for heat producers used for the production of heat in cogeneration plants and thermal plants serving public consumption;
- a 2 per cent tax on turnover to be charged to licence holders in the sector of electricity and thermal energy produced in cogeneration and in the natural gas sector (with the exception of coal-based power generation capacities and electric and thermal energy cogeneration plants); and
- household customers will benefit from regulated electricity prices between 1 March 2019 and 28 February 2022; household customers were also granted the right to return to regulated electricity prices.
Notwithstanding the above, it is important to note that there is significant opposition from the business environment with respect to GEO 114. There are currently ongoing discussions between the business environment and public authorities to discuss the provisions of GEO 114, which can be further amended through the law that has to approve GEO 114.
In addition, the law for promoting eco-friendly transportation entered into force in January 2018. Under this law, 30 per cent of public transportation purchased by local authorities must be green technology vehicles, such as electric, hybrid, hybrid plug-in, hydrogen (FCV), compressed natural gas propulsion engines, liquefied natural gas propulsion engines and biogas engines. In addition, starting from 2020, private transportation companies (including taxi companies) must purchase electric vehicles in proportion of at least 30 per cent of their fleet.
iii Tax and tariffs
As further detailed in Section VIII, there have been numerous amendments to the tax legislation, the most important of which are as follows:
- Government Emergency Ordinance No. 114/2018 on the introduction of measures in the field of public investments and fiscal measures, the amendment and completion of some normative acts and the extension of certain deadlines, introduced significant measures affecting several sectors, as follows:
- tax exemptions with respect to personal income tax for employees in the construction sector;
- health insurance contributions for dividend income; and
- the application of the VAT reverse charge mechanism has been prolonged for several sectors;
- through Government Emergency Ordinance No. 89/2018 regarding certain fiscal-budgetary measures and amending and completing certain normative acts, a 5 per cent VAT reduction was implemented with respect to several categories of transport services; and
- Government Emergency Ordinance No. 25/2018 for the repeal of certain legal provisions in the field of publicly funded investments introduces the following amendments:
- borrowing costs that are higher than the deductible threshold of €1 million are deductible for the period in which they were incurred up to 30 per cent of the calculation base;
- ending the public listing of individual bad debtors;
- a VAT adjustment for bad debts can be performed starting from the moment when the bankruptcy procedure is opened, based on a judge's decision.
iv FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
According to the NBR balance of payments and external debt information for December 2018, foreign direct investment in Romania amounted to approximately €4.9 billion in 2018, as compared €4.8 in 2017.11
The industrial, telecoms and IT and real estate and construction sectors attract the largest share of foreign direct investment. Other attractive sectors, including consumer goods, agribusiness, retail and energy, have also attracted investors. In terms of geographical regions, the areas that attract the most foreign capital are (in order of importance) Bucharest, the centre and the south.12
Romania has numerous advantages for foreign investors: in addition to a large domestic market, the country has a strong industrial tradition coupled with low labour costs and taxes (among the lowest in the European Union).
In this respect, it is clear that Romania actively seeks foreign direct investment, and has taken steps to strengthen tax administration, enhance transparency and create legal means to resolve contract disputes expeditiously. However, the pace of privatisation and restructuring of state-owned enterprises has slowed, yielding mixed results in this respect.
v SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
According to merger market reports, in 2018 there were several transactions in Romania valued at over €100 million. The most attractive sectors for investors in 2018 were energy, manufacturing, IT, banking and financial services, and pharmaceuticals and healthcare.
ArcelorMittal, the world's largest steel producer, sold steel plants in several European countries, including in Romania, to Liberty House for an undisclosed amount. ArcelorMittal Galati is the largest iron-processing plant in Romania. In recent years, ArcelorMittal Galaţi has recorded average production of approximately 2 million tonnes of steel per year and employs about 7,000 people. The Liberty House Group is headquartered in London and is engaged in metal recycling, steel and aluminium processing, and is part of GFG Alliance, a global group of companies in the energy, mining, metallurgy, engineering, logistics and financial services. GFC Alliance is present in about 30 countries, with an annual turnover of over €13 billion.
Damen Shipyards Group NV completed its acquisition of the Mangalia shipyard. In 2017, a Netherlands-based company engaged in shipbuilding and related maintenance and repair activities, agreed to acquire a 51 per cent stake in Daewoo-Mangalia Heavy Industries SA, a Romania-based shipbuilder and repair services company, from Daewoo Shipbuilding & Marine Engineering Co, Ltd, a listed South Korea-based shipbuilding and offshore company, for a total consideration of €22 million. The Mangalia shipyard, located on the Black Sea, has three drydocks and was a joint venture between Daewoo Shipbuilding & Marine Engineering (DSME) and the Romanian government in 1997. In 2018, the Romanian government informed DSME to exercise its preemption rights over the target sale, and Damen Shipyards Group entered into negotiations with the government regarding the Mangalia shipyard.
Unilever completed the acquisition of Betty Ice, the Competition Council approving the transaction on the basis of voluntary commitments by the Anglo–Dutch giant. Betty Ice was founded in 1994, and is the most important local ice cream producer in Romania with a total turnover of €30 million. The company owns a factory in Suceava and has over 180 ice cream kiosks open during the summer. Unilever is one of the world's leading consumer goods companies, selling around 400 brands in over 190 countries.
ii Real estate
The largest transaction registered in 2018 was Dedeman's acquisition of The Bridge office project from Forte Partners for an amount of more than €150 million. Dedeman is a resident group of companies that had a turnover of approximately €1.37 billion in 2017, and is one of the largest Romanian employers with more than 10,000 employees, and the largest retail network, including 48 DIY stores, two logistics centres and a private car park. The group was also active in previous years acquiring, among other things, a 50 per cent stake in Cemacon, a Romanian brick manufacturer, and over 23 per cent of Alro Slatina, the only producer of primary aluminium and alloys in Romania.
Lion's Head Investments, a joint venture between Old Mutual (South African) and AG Capital (Bulgarian), acquired the Oregon Park office project developed by Portland Trust and Ares Management LP. The transaction had a value of approximately €135 million. Lion's Head is a long-term real estate investor focused on value-added properties in Southeastern Europe already present in Sofia. The Oregon Park project has an area of 35,000m2 that is leased entirely to multinational companies. AG Capital is a regional investment fund made up of investment and real estate development, consulting and asset management companies. Old Mutual Property is one of the most important South African investors with more than 40 years of experience, being part of the Old Mutual Group.
iii Banking and finance
Romanian investment fund SIF Oltenia has signed a deal for the sale of its 6.29 per cent stake in Banca Comerciala Romana (BCR) to Austria's Erste Group for €141.7 million. BCR, a member of the Erste Group, is the most important financial group in Romania, considering the operations of the universal bank (retail, corporate and investment banking, treasury and capital markets), as well as companies in the leasing market, private pensions and housing banks. BCR is the No. 1 bank in Romania by asset value (over €15 billion), the No. 1 bank by number of clients and the No. 1 bank on the saving and lending segments.
Leumi Bank has completed negotiations for the sale of its operation in Romania to Argo Financials Fund Limited, an investment fund of Argo Group Limited for an amount of €110 million. Argo Group Limited specialises in investing in emerging markets through the funds it manages. Currently, Argo Group Limited manages several funds investing in instruments with fixed income, non-performing loans and real estate.
Advent International, one of the largest and most experienced global private equity investors, completed its acquisition of Zentiva, including Zentiva Romania SA, Sanofi's European generics business for €1.9 billion. Advent is one of the largest and most experienced global private equity investors active in the healthcare sector. This transaction is part of Sanofi's plans to simplify and reshape the company by removing non-core businesses.
The Phoenix group has acquired the Romanian pharmaceutical wholesaler Farmexim SA and the Help Net Farma SA nationwide pharmacy chain. Farmexim is one of the largest pharmaceutical wholesalers in the country, with 800 employees and 10 national distribution centres, while the pharmacy chain Help Net operates approximately 220 pharmacies and has 1,600 employees. German group Phoenix is one of the world's largest pharmaceutical companies with annual business of over €20 billion, and is present in 26 countries. In total, Phoenix operates over 2,000 pharmacies in 26 states across Europe.
v Telecoms and IT
The largest transaction of 2018 was the sale of Liberty Global's European assets to Vodafone. Liberty Global, the world's largest international cable business, sold its European assets to Vodafone for an amount of €18.4 billion. The transaction included the sale of Liberty's Unity media business in Germany, as well as its UPC brand businesses across the Czech Republic, Hungary and Romania. The deal is part of Vodafone's push to become the leading next generation network owner in Europe. Vodafone Romania is Romania's second-largest mobile provider, while UPC Romania is the second-largest next generation network operator in Romania.
Cognizant Technology Solutions acquired Softvision, a privately held digital engineering and consulting company focused on the agile development of innovative software solutions and platforms, for an estimated amount of €478.2 million. Cognizant Technology Solutions is an IT solutions provider and one of Fortune 500's fastest-growing companies.
UiPath, a leading enterprise robotic process automation (RPA) software company, has raised more than €131 million in Series B funding following a year of record growth. The company eclipses €942 million in terms of valuation, and validates RPA as a strategic imperative for digital transformation and the path towards artificial intelligence. This latest round was led by previous backer Accel, along with participation from new investors CapitalG (one of Google's investment vehicles) and Kleiner Perkins Caulfield & Byers, as well as previous investors Earlybird, Credo Ventures and Seedcamp.
Al Dahra Holding took over Agricost Braila, the largest agricultural producer in Romania, in a deal estimated at over €225 million. Al Dahra is part of Al Ain Holding, controlled by Sheikh Hamdan Bin Zayed Al Nahyan, former Deputy Prime Minister of the United Arab Emirates. The group operates in more than 20 countries, owns and operates an area of more than 200,000 hectares, eight forage presses and production, four rice milling units and two flour grinders. The investment fund intends to purchase additional agricultural land in Romania, and will invest in modernising the existing portfolio of agricultural machinery and technologies.
vii Transportation & Logistics
Private equity fund Mid Europa Partners acquired Urgent Cargus, Romania's second-largest courier operator, from Abris Capital Partners for €120 million. Urgent Cargus operates a fleet of over 2,600 vehicles, with about 2,900 employees and collaborators and a national network of 72 centres and warehouses. In 2017, Urgent Cargus reported turnover of €80 million and net profits of €0.44 million. Mid Europa Partners is among the largest private investors in Central and Eastern Europe, with approximately €5.1 billion of managed assets.
vI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
In 2018, the theoretical indebtedness capacity in transactions was estimated at €1.5 billion, 75 per cent of it being financed by equity sources. However, the banks are proving increasingly willing to finance transactions. As such, more mixed financing is expected to be seen in the future through credits and private financing.
Pursuant to NBR data, in 2018, credit standards continued the trend of marginal tightening recorded in the previous period. For 2019, banks expect credit standards to tighten further for all categories of companies, both for long-term and short-term loans. While there has been a moderate increase in credit requests from large companies, small and medium-sized enterprises' requests for short-term loans have increased significantly, while the number of requests for long-term loans has increased only marginally.
In addition to the above, EU membership enables potential investors to seek financial support through EU structural and cohesion funds. Such financing mostly comes in the form of development grants. A variety of investment incentives are available to applicants active in different economic sectors, in particular to small and medium-sized enterprises, an area with significant potential in Romania. The most relevant programmes for investors are:
- the Sectoral Operational Programme 'Increase of Economic Competitiveness' (POS CCE);
- the Regional Operational Programme (POR);
- the Sectoral Operational Programme 'Human Resources Development' (POS DRU); and
- the National Programme for Rural Development (PNDR).
viI EMPLOYMENT LAW
From an M&A perspective, the rules governing the transfer of employees in an asset deal, set out by the Law on Safeguarding Employees' Rights in the Event of Transfers of Undertakings, Businesses or Parts of Undertakings or Businesses (TUPE Law),13 which transposes EU Directive 2001/23/EC, should be considered.
Under the TUPE Law, in order to protect employees, every time a transfer of an undertaking (or a part thereof) occurs, all of the transferred undertaking's employees are transferred automatically by operation of law (no consent is required from the transferor, the transferee or the employees), and no cherry-picking is allowed. The purchaser must observe all rights and obligations resulting from existing employment contracts at the time of the transfer, and has the obligation to honour all rights until the relevant contracts expire or are terminated. However, the purchaser has the opportunity to renegotiate the collective agreement with the employees' representatives one year after the transfer date.
In general, share deals do not impact employment relations at the target level (or at the subsidiary level), as the identity of the employer remains the same. Romanian legislation does, however, set out general employee-related information and consultation requirements in the context of M&A transactions, but they only apply if a proposed share deal significantly impacts working conditions. Even if the law provides that a consultation should be carried out regarding decisions that could significantly affect employees, there is no express obligation to accept employees' proposals or to sign any related agreements. However, failure to comply with the information and consultation requirements may be sanctioned with fines.
In addition, in the case of a voluntary takeover of a public company, the target's board must inform its employees of the terms of the takeover and the board's position on the attempted takeover, as set out in FSA Regulation No.5/2018. The target's employees may issue a written opinion on the matter to be provided to the bidder, the shareholders and the market.
As regards recent developments from an employment law perspective, these have been limited, and the more material ones are tax-related (as further detailed in Section VIII). In addition, the following legislation was enacted:
- Law No. 176/2018 implementing more restrictive regulations for employers who organise internships;
- GEO No. 26/2019 establishing new provisions on various labour areas, such as setting up a special register for day-to-day workers, additional annual leave for employees following in vitro fertilisation procedures;
- Government Decision No. 584/2018 regulating additional employee protection from risks related to the presence of chemical agents;
- GEO No. 60/2018 implementing additional facilities for employers who hire unemployed people, or conclude apprenticeship contracts or traineeship contracts;
- Law No. 165/2018, creating a unitary framework for the following types of tickets: gift vouchers, meal vouchers, crèche tickets, cultural vouchers and holiday vouchers that can be issued both on paper and on electronic support. The amounts corresponding to these tickets provided by an employer are deductible for the purposes of income tax; and
- Government Decision No. 937/2018 providing the new minimum wage in Romania (i.e., approximately €443 per month).
viiI TAX LAW
On 29 December 2018, Government Emergency Ordinance No. 114/2018 on the introduction of measures in the field of public investments and fiscal measures, the amendment and completion of some normative acts and the extension of certain deadlines, which adopted significant measures affecting several sectors, was published in the Official Gazette and has entered into force, and introduce the following key tax amendments:
- tax exemptions for employees in the construction sector:
- the exemption will apply if at least 80 per cent of the employer's turnover is derived from the above-mentioned activities. The turnover will be determined from the beginning of the year, including the month when the exemption is applied;
- to be able to apply for this exemption, individuals must have gross income of between approximately €638 and €6,380 received on the basis of an employment agreement; and
- this law also impacts the labour insurance contribution due by employers, which has been reduced to approximately 0.34 per cent;
- a health insurance contribution for dividend income. Any income from dividends taken into consideration for the calculation of a health insurance contribution is the income distributed and received as of 2018. Dividends distributed before 2018 but received in 2018 are excluded; and
- a VAT reverse charge mechanism. The application of the VAT reverse charge mechanism has been extended until 30 June 2022 for the following: supplies of cereals and industrial crops, transfers of allowances to emit greenhouse gases, supplies of electricity, green certificates, mobile telephones, integrated circuit devices, game consoles, tablet PCs and laptops.
Government Emergency Ordinance No. 89/2018 regarding certain fiscal-budgetary measures and amending and completing some normative acts sets forth a 5 per cent VAT that started on 13 January 2019 applicable to the following transport services:
- train or historic steam vehicles on narrow lines used for tourism or leisure;
- cable installations (cable cars, chairs or ski lifts) used for tourism or leisure;
- vehicles having animal traction used for tourism or leisure; and
- boats used for tourism or leisure.
Pursuant to Government Emergency Ordinance No. 25/2018 for the repeal of certain legal provisions in the field of publicly funded investments, starting 1 January 2019 (or the first day of the fiscal year), borrowing costs that are higher than the deductible threshold of €1 million are deductible for the period in which they were incurred up to 30 per cent of the calculation base. Furthermore, the Emergency Ordinance put an end to tax collection agency ANAF's obligation to publish online a list of taxpayers with outstanding tax liabilities exceeding approximately €21,246 in the case of individuals carrying on independent activities, and approximately €3,187 in the case of other individuals; and allows a VAT adjustment for bad debts to be performed starting from the moment when a bankruptcy procedure is opened, based on a judge's decision (and not only after a definitive decision is issued by a judge for closing the bankruptcy procedure of a debtor). If a bankruptcy procedure has begun and is not yet finalised, the VAT adjustment can also be applied beginning 1 January 2019.
Ix COMPETITION LAW
There was limited development of competition legislation in Romania during the past year. In this respect, the Romanian Competition Council published new guidelines regarding the individualisation of sanctions for contraventions set forth in Article 55 of the Competition Law, which brings further clarity to the terms and conditions under which companies are sanctioned by the authority for breaches of competition law. Furthermore, it clarifies the turnover to be considered for sanctioning purposes in the case of a non-resident, referring to the group turnover generated within the territory of Romania.
After four favourable years, specialists estimate that the Romanian M&A market will continue its positive trend, despite a degree of slowdown in the market. The record transactions of previous years have opened the gate for similar deals, and Romania appears to be on the radar of big investors. Technology start-ups are also expected to grow and attract investors keen on tapping into the potential of entrepreneurs. In addition, local entrepreneurs, taking advantage of the constant economic growth and improved financial situations, seem to be waiting for the right moment or offer to make their exit, thus attracting foreign companies and investment funds in the market.
The telecoms and IT sector has proven to be the star of the M&A market, and is predicted to further generate a greater number of high-value transactions. In this regard, the cybersecurity groups Bitdefender and UiPath are the most eminent examples, and have also generated some of the biggest transaction yet seen in Romania.
The combination of strong and constant economic growth, the desire and need to modernise a variety of public services and the political will to work with the private sector will lead to increasing investments in Romanian infrastructure. With 16 large public–private partnerships approved for the next two to four years in 2018 alone, this positive trend is due to continue and generate further transactions on the market.
Looking forward, we also expect increased interest in domestic M&A transactions of local companies that will want to consolidate the segments in which they operate or enter new sectors. Romania has seen a number of local companies that have successfully become national champions capable of international expansion and strong economic growth, which makes Romanian investment more possible in the region.
Overall, 2019 also seems bright for the Romanian M&A market, which has good macroeconomic prospects where companies, whether local or foreign, have more funds available for investment, generating high hopes for increased dynamism.
1 Horea Popescu is a partner and Claudia Nagy is a senior associate at CMS Romania.
4 Emerging Europe M&A Report 2018/189, CMS in cooperation with EMIS.
5 Company Law No. 31/1990.
6 Trade Registry Law No. 26/1990.
7 Law No. 297/2004 on capital markets.
8 Competition Law No. 21/1996.
9 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
10 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.
12 InvestingRomania.com reports based on the following sources of information: AGERPRES news, analysis and estimates of financial analysts, current and periodic reports submitted to the Bucharest Stock Exchange, and news coming from listed companies.
13 Law No. 67/2006 on Safeguarding Employees' Rights in the Event of Transfers of Undertakings, Businesses or Parts of Undertakings or Businesses.