Sofia-based Еurohold, listed on the Bulgarian and Warsaw Stock Exchanges, recently completed the acquisition of 7 subsidiaries of Czech energy group CEZ in Bulgaria for 335 million euro. As a result of the transaction, Еurohold, through its wholly owned subsidiary Eastern European Electric Company B. V., acquired a majority stake in CEZ Distribution Bulgaria the largest distributor of electricity in Bulgaria and CEZ Electro Bulgaria – the largest power supplier in Bulgaria, as well as 100% of the shares of CEZ Trade Bulgaria – the largest electricity trader in Bulgaria. Еurohold, led by its M&A and investment banking arm Euro-Finance AD, financed the acquisition through a combination of a capital increase via a new share issue, a strategic structured investment and a senior syndicated loan subscribed by leading commercial and multilateral development banks.
What benefits and risks could investors expect after the deal with CEZ Group and what will be your top priorities going ahead?
This transaction has ensured an inflow of over 500 million euro in the Bulgarian economy if we estimate the total value of the deal, including the price of the acquisition, the mandatory tender offer to the TOP 100 INSURERS/interview minority shareholders and the investment programme of the acquired companies. The acquisition will generate a lot of potential synergies, optimisations and cross-selling opportunities and it will provide our investors with higher stability and predictability regarding the holding company’s earnings and cash flows, as well as opportunities for sustainable growth and good risk-adjusted returns. More importantly, this step will secure the long-term growth outlook for our holding company even in periods of lower economic growth, making our business model much more resistant to economic shocks and protecting our shareholders from recessions and market fluctuations.
Our group will focus on insurance and energy, aiming to build a leading holding company in Central, East and Southeast Europe (CESEE) in these two sectors. Eurohold has already proven its capabilities to turn a company into a leader across the region as we have already done it in the insurance market. We have developed a top insurance group, operating across the CESEE markets, which provides insurance services to over 4 million clients. We are well positioned to grow on a market valued at 40 billion euro annually, which still remains largely unpenetrated and has a huge potential for growth.
By integrating CEZ Group’s assets, we are adding the largest supplier and distributor of electricity in Bulgaria, serving nearly 3 million customers nationwide, including the most populated southwestern part of the country and the capital Sofia. Additionally, we have retained most of CEZ Bulgaria’s management team in order to secure the in-depth expertise that has been gained through the years, while at the same time inviting new members to join the board, each of whom with over 25 years of experience in the sector at leading positions in energy companies operating across Eastern Europe. The combination of our insurance and energy business will significantly improve the holding company’s model and profile, generating considerable growth of operating cash flows. This year the total assets and revenue of the combined company are expected to exceed 1.5 billion euro, while its EBITDA is forecast to reach around 120 million euro. Еurohold serves to over 7 million customers and employs approximately 6,000 people in 14 countries in CESEE and FSU. Looking ahead, Еurohold expects to generate revenue and EBITDA of almost 2 billion euro and 200 million euro per annum by 2025, respectively. This will make us large enough to list our shares on a larger stock exchange. This is the next big thing in our upcoming timeline.
Following the successful integration of CEZ Group’s subsidiaries in Bulgaria, Eurohold aims to improve the current capital expenditure and investment programmes of the acquired companies and focus on network upgrade and maintenance, innovations, technology and digitalisation, renewable energy and energy efficiency as well as customer service and satisfaction. We have secured the required financing for this purpose in partnership with our partners in the banking sector. Our long-term goal is to develop Eastern European Electric Company as one of the leading utility services providers in CESEE. We’ll look for opportunities for further development in the energy sector at a regional level and expanding our electricity supply business towards neighbouring countries
To what extent does this deal put the financial stability of the holding company at excessive risk due to the high leveraged nature of the transaction?
Firstly, the debt proportion in the financing structure was within the range that is quite typical for such acquisitions and none of the parties engaged in the transaction saw any excessive risk in this regard. Moreover, we have raised 24% more own funds than the equity required for the acquisition deal which automatically reduced the proportion of the debt. We have successfully completed more than 30 acquisitions in our 20-year history. Our team, including our M&A and investment arm Euro-Finance, is quite experienced and perfectly well knows how to structure and finance such landmark transactions. Over the years, we have acquired numerous subsidiaries of major international players in the insurance sector and we have built a successful acquisition record, as well as a solid track record of equity and debt capital raises on international capital markets.
Secondly, if you read carefully the major credit rating agencies’ reports on our deal with CEZ, you will see they are actually quite positive about Eurohold in the medium to long term due to the predictability and stability of the holding company’s earnings and cash flows I mentioned in the beginning. Furthermore, this deal will over time improve the group’s credit profile.
How do you plan to develop the other segments in your business and what are your ambitions in the insurance market after a decade of expansion and acquisitions?
With the objective to focus our future development on two pillars – energy and insurance, we are divesting now our interests in leasing and car sales. We have recently agreed on the sale of our subsidiary N Auto Sofia EAD, the main dealer of Nissan vehicles in Bulgaria and the majority shareholder of Espace Auto, the largest distributor of Renault and Dacia auto brands in Bulgaria. We have initiated other transactions in this segment too.
Regarding the insurance business, we will rely predominantly on organic growth in the next few years and aim at improving our profitability in our current regions of operations. Our international expansion in the insurance sector will be more focused from now on. Euroins is among the top three non-life insurers in Romania and Bulgaria and we will aim to maintain our strong positions, diversifying our product portfolio in non-motor segments such as health, property and others, launching new direct and online distribution channels. We are glad that the EBRD has become our partner and decided to invest up to 30 million euro in the development of our insurance group, acquiring a minority stake in the company.