M&A Report 2024: Romania

The Romanian M&A environment remains volatile. A number of smaller deals are happening, but there are few big projects, and limited expectations for the remainder of 2024. This reserved trend is accentuated by the Ukraine war, and 2024 being an election year not only in Romania but also for the European Parliament and in the US, circumstances that appear to have tempered investors' appetite for the time being.

In terms of hot topics, the foreign direct investment (FDI) regime implemented in Romania is one to mention. Romania has taken an overreaching approach to FDI, which has resulted in the majority of cross-border deals requiring FDI authorisation, irrespective of whether investors are from the EU or a third country. This adds costs and time to almost all local deals, adding to existing transactional risks that investors have to face.

Business-wise, the banking sector appears to be one to watch during 2024, if the consolidation trend evidenced by 2023 continues. Rumours have emerged that BRD GSG is exploring an exit from the Romanian market. Similarly, BT Group (still a member of Banca Transilvania), announced early in 2024 that it would take over BRD's pension division.

The market remains clearly driven by private M&A transactions. However, this is not something new for 2023–24, and has been the trend for years in Romania, where public M&A deals have generally taken a far-behind second place.

This can be explained by a mix of causes, from the reduced size of targets and a market in the process of maturation, to a lack of familiarity with regulatory demands applicable to public M&A. While the Bucharest Stock Exchange pushes for an increase in public M&A, private M&A will remain the driving factor locally.

Based on public information, the Romanian M&A market recorded 241 deals in 2023, with an estimated total value of $7.1 billion. This represents an increase of 6.1% compared with the estimated value in 2022 ($6.6 billion) but a decrease of 6.2% in the number of deals compared with 2022 (257). The figures are, however, only marginally representative of an upward trend, as there were several big-ticket deals in 2023 that are not repeatable on a yearly basis (e.g., Hidroelectrica–Fondul Proprietatea, Profi–Delhaize, and Enel–PPC).

The prospects for an increased deal flow in 2024 are quite limited. While the market remains unpredictable, it is difficult to believe that a year with elections in Romania, the US, and Russia will bring superior results to 2023 or previous years.

Romania has traditionally been known as an inbound market, with foreign investors coming in, rather than local investors expanding outside Romania. Against such a background, however, Romania remains an excellent opportunity for M&A deals, with many ICT, real estate, agriculture, pharma, and energy-related businesses worth acquiring or investing in. These will not be big-ticket deals, but the risks will also be proportionally reduced, which is very important for an investor in the current, challenging climate.

Financing appears to be more expensive than it has been for a decade and this higher cost of capital has put downward pressure on valuations. Also, the wider macroeconomic and geopolitical landscape remains uncertain, and has resulted in further indemnities, longer earn-out periods, and generally more protections requested by investors when coming in.

Public sources show the majority of deals on the Romanian market are still made by strategic investors, looking for long-term growth opportunities. For the time being, financial investors have played a less influential role in the market, but this may change in the current difficult economic context, which may create opportunities for acquisitions of distressed assets.

Acquisitions of private companies are generally structured as share deals, and more rarely as asset or business transfers. These deals are subject to general rules on contracts as set forth by the Romanian Civil Code. Except for some regulatory clearances – which may be necessary, depending on the circumstances – these deals are not supervised and parties have significant contractual freedom.

Acquisitions of public companies require market operations, and are supervised by the Romanian Financial Services Authority, which has responsibility for the approval of all prospectuses and offerings.

The Romanian Competition Council, which is responsible for competition compliance at the local level, and the Commission for the Assessment of Foreign Direct Investments recently became the key bodies generally involved in the closing process of any local M&A deal in terms of regulatory clearances, the latter overviewing the majority of M&A deals in Romania as they require FDI screening.

The most notable change for 2023 was the enlargement of the scope on the approval of FDI in Romania, to cover EU and non-EU investments. Since 2023, in addition to foreign investors, EU investors intending to invest over €2 million in Romania, through a greenfield investment or through an expansion of an existing investment that is active in a number of loosely identified sectors under Romanian law, also need to obtain prior approval from the Commission for the Assessment of Foreign Direct Investments.

The legislative climate is relatively stable and predictable in terms of M&A deals. However, as mentioned earlier, non-EU and EU investors should keep an eye on their compliance with the Romanian FDI rules, as these procedures have an impact on the timetable of any deal or future investment, and default triggers substantial fines.

A popular misconception is that Romanian law and jurisdiction may not be an adequate choice for M&A deals. With abundant practice, there are many advantages in choosing Romanian law and jurisdiction in cases where enforcement will be carried out in Romania. After performing a comparative analysis between English and Romanian law, issues and solutions pertaining to M&A deals appear to be relatively similar.

The most often-asked questions relate to how a court of law/arbitration panel will apply Romanian law to an M&A deal. Each of the seller and buyer is particularly concerned about:

• The extent of its liability;

• The effects of carrying out due diligence against the liability of the seller;

• The extent of the indemnification the buyer may receive for a breach of warranties and indemnities by the seller;

• If any limitation clauses are enforceable;

• What is the meaning of fraud, or intent;

• Whether fraud still exists when information is only partially disclosed in the virtual data room (VDR);

• The number of cases that end up being analysed by an insurer; and

• The means to effectively enforce, and the effects of an enforcement carried out, in Romania.

Especially for foreign investors used to specific standards under foreign law, understanding the differences under Romanian law is essential in negotiating sale and purchase agreements, representations and warranties insurance, and related protection. However, M&A deals have been going on for decades in the jurisdiction, so the process is generally well understood and well planned.

Technology plays an important role in the dealmaking process. A VDR is the backbone of any M&A deal, streamlining disclosure workflows between the parties. AI review of VDR documents is also a new trend aimed at reducing the time spent reviewing documents.

AI is developing and can provide good high-level feedback, and be used to flag key elements of interest, or assist with the automation of manual or laborious and repetitive tasks, leaving more time for interpretation and decision making.

Lastly, data analytics, especially for operational and financial matters, is a next step in measuring key performance indicators of the target, in trying to identify hidden patterns in data that may be missed by human review.

So while lawyer review remains indispensable, technology is becoming increasingly effective at optimising the dealmaking process and, as such, essential for delivering a timely, sophisticated product.

Several factors are involved in obtaining control locally:

• Company valuation, and the availability of the bidder to offer a control premium; i.e. a price well in excess of the regulated offer price;

• The ability to evidence readily available funds for the purpose of payment of the offering price;

• Availability to carry out a takeover bid and subsequently a squeeze-out, if that is the case; and

• The bidder's ability to obtain necessary regulatory clearances (from the Romanian Financial Services Authority, from the Romanian Competition Council, where applicable, or under FDI regulations).

Romania does not have a takeover code. However, there are rules governing takeovers, including mandatory takeovers, for public companies, which are in line with EU regulations (particularly, Directive 2004/25/EC on takeover bids). Essentially, in the case of public companies, the takeover bid has to be addressed to all shareholders and for all their shares. The takeover may be friendly or hostile. Also, the breakthrough rule (Article 11 of Directive 2004/25/EC on takeover bids) has been implemented under local law, but companies have to opt in to it.

Mandatory takeover bids are triggered when specific ownership thresholds are exceeded (usually, over 33% of the voting rights, but there are exceptions). In such cases, the bidder has to launch a takeover bid as soon as possible, but in any event not later than two months from the date the exceeding position was reached. Until the time of the bid, voting rights attached to the exceeding position are suspended.

A squeeze-out is also permitted if the bidder that has launched a takeover offer has acquired more than 95% of the shares and voting rights in the company, or more than 90% of the shares and voting rights during the takeover.

The bidder is liable for all damages caused to the company that is the subject of the takeover bid if it is proven that the bid was launched exclusively for the purpose of stopping the company from not taking certain economic measures or carrying out operations.

The local market is aligned with international practice. Especially in this volatile environment, sellers push for locked-box mechanics, while buyers push for completion accounts with payments held in escrow; in some cases, even post completion.

Medium- to long-term earn-out mechanics are also used in cases where the seller holds a key role in the business, and the buyer wishes to ensure a certain performance post closing, pending transition, during the earn-out period. These are, however, a bit rarer, with completion account approaches being prevalent.

Warranty and indemnity (W&I) insurance has become more common locally, with sellers increasingly requiring buyers to acquire such protection. Local brokers have also become very familiar with the product, so taking W&I insurance in Romania is relatively easy.

Takeovers are not specifically regulated for private companies. In these cases, the general rules in private M&A deals apply.

Foreign-law M&A deals are common, especially in cases where buyers have deemed the foreign law to provide additional protection to that of Romanian law. Where a foreign-law deal is implemented, a short-form Romanian law is also generally concluded for filing purposes.

The majority of exits happen through trade sales, with strategic investors. Deals are made under general rules in private M&A.

The most notable IPO in 2023 was the sale of the entire 19.94% stake owned by Fondul Proprietatea in Hidroelectrica, the Romanian energy provider, for €1.9 billion, the largest cash sale in the history of the Romanian energy market.

Romania remains vulnerable to external fluctuations, such as rising inflation, increases in the prices of energy, and the conflict in Ukraine. It is difficult to make a meaningful prediction regarding the Romanian market, especially given the situation in Ukraine and 2024 being an election year in Romania, Europe, and the US. In any event, business lawyers will find solutions to any issues a transaction may run into, even in this context.