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Sarajevo. Sofia. Zagreb. Bucharest. Belgrade. In the past decade the last thing these storied locales brought to mind was corporate deal work. Whether they were simply struggling with the rudiments of capitalism, or mired in a protracted ethnic conflict after the fall of communism, the great cities of the Balkan Peninsula were more closely associated with civil strife and war-crime tribunals than with business opportunities. But with the arrival of NATO peacekeeping troops in 1999, a degree of normalcy began to return to the former Yugoslavia and to the region in general. And with that came the nascent stirrings of a business economy. In the past few years, the Balkans have seen a spate of privatization and foreign direct investment as the region has proceeded down the path to private markets, which most of its neighbors to the north began traveling 10 years before. With the increasing stability, Western law firms have tentatively ventured into the region. From almost no modern legal infrastructure five years ago, the Balkan states have made steady progress, often with the help of foreign legal expertise. So far, the scale of development is small compared with that of the rest of Europe, even Eastern Europe. But with cheap labor, undervalued corporate assets, and pent-up consumer demand, the Balkans have become a big enough play to attract the interest of outside corporations and law firms alike. This past September, for instance, a subsidiary of U.S. Steel completed an acquisition of Sartid a.d., Serbia’s largest steelmaker, for $23 million. In July, Croatia sold off a 25 percent stake in its state-owned oil and gas company for more than $500 million. Romania, which has the largest oil and gas reserves in the Balkans, announced that it will follow suit, with bidders lining up to acquire a stake in the state-owned petroleum company. In October, Germany’s Gruner + Jahr, a subsidiary of the Bertelsmann Group, sold its stake in several newspapers in the Balkans and central Europe to Swiss publisher Ringier AG for about $120 million. Though these deals remain small by Western European and American standards, any meaningful outside investing in the region would have seemed far-fetched in the recent past. “Ten years ago the big movement was in Central Europe,” says Willibald Plesser, a Vienna-based partner for Freshfields Bruckhaus Deringer who manages the firm’s Eastern and southern European practice and served as lead counsel for Gruner + Jahr on its newspaper sale. “Now the crowd is moving to southeastern Europe, particularly Romania, Serbia, and Croatia.” Michael Schilling, managing partner of the Bucharest office of Linklaters and head of the firm’s southeastern European practice, echoes that assessment: “If anything, these countries are moving a little faster toward a market economy than Hungary and the Czech Republic did at a similar stage.” Few are in a better position to catalogue the recent changes in the Balkans than Robert Hayhurst. Ten years ago, the Canadian native came to Eastern Europe as a lawyer in the Budapest office of Canada’s Stikeman Elliott. In 1998, he joined with two friends from law school also working in the region, Todd Robinson and Neil Berlad, to form Hayhurst Berlad Robinson. Today, the firm has about 40 lawyers and offices in Budapest, Sofia, Bucharest, and Belgrade, and has correspondent relationships with other law firms in the Balkans. “We’re the only purely regional law firm working in the area,” says Hayhurst. Why did Hayhurst make a career bet on such a volatile and undeveloped region? He says he and his partners saw it as a potentially lucrative niche play. As Bulgaria, Romania, and other Balkan states sought to privatize their economies and lure foreign investment, Hayhurst believed they’d need Western legal expertise. However, he thought the scale of the work was sufficiently small to keep big regional and national firms from establishing branch offices to compete directly with his firm. “It’s too small a percentage of their business for them to bother putting senior people in,” Hayhurst says. So far, he says, the strategy has worked fairly well. In 2003, his firm served as counsel to Hungary’s OTP Bank Ltd., in its $350 million acquisition of DSK Bank EAD, the former Bulgarian national savings bank. The deal was the largest privatization to date in Bulgaria and largely completed the privatization of the country’s once state-owned banking system. Hayhurst believes his firm’s regional presence was essential to its landing the deal. On the sell side, London’s Linklaters advised the Bank Consolidation Co. of Bulgaria, along with a local Bulgarian firm. On another regional deal, Hayhurst also worked with London’s Taylor Wessing to represent the International Finance Corp. and the European Bank for Reconstruction and Development, which acquired a 25 percent equity stake in Banca Comerciala Romana, Romania’s largest commercial bank. The firm has also teamed with the London office of Chadbourne & Parke to represent the Black Sea Trade & Development Bank and the IFC in a deal financing the development of the Galata gas field, located in the Black Sea off the coast of Bulgaria, the first pure project finance transaction done in Bulgaria. Overall, Hayhurst says, though the deal economy in the region was slowed by the global recession of the past two years, the demand for legal work remains strong enough to support the firm’s planned expansion to the south and east. Currently, Hayhurst Berlad Robinson is considering opening offices in Albania and the Ukraine, but no final decision to expand has been made. The biggest hurdle to clear, Hayhurst says, is finding enough good legal talent. “You have to take it step by step,” he says. “There’s some good raw talent around, but it’s not falling out of the trees. There’s been some trial and error.” AUSTRIAN PUSH Hayhurst and his partners may find increasing competition for that talent. One of the biggest pushes into the Balkans market is coming from firms in Austria. In many ways it makes perfect sense. Historically, the Balkans and the surrounding regions were part of the Austro-Hungarian Empire. When those ties were severed at the end of World War I, Austria remained the dominant economic force in the region. Though that dominance ended with World War II and the subsequent descent of the Iron Curtain, the demise of communism has once again opened up the region for Austrian banks and businesses. Their lawyers have followed right behind. Among the Viennese firms with the strongest interest in the region is Wolf Theiss, Austria’s largest law firm. Horst Ebhardt, a Wolf Theiss partner who has worked extensively in southeastern Europe, says Austria is naturally positioned to resume its traditional role as a gateway to the region. “There’s lots of development in these markets,” says Ebhardt of the Balkan states. “Their GDPs are growing faster than almost anywhere else in the world. We hope to be there for the long term.” Ebhardt says his firm is doing a lot of corporate M&A, such as representing Swiss pharmaceutical giant Novartis AG in its successful $800 million bid for leading Slovenian drugmaker Lek, and also is representing a number of Austrian banks interested in investing in the region. “We are the number one banking firm in Austria, and they all want to go east and buy banks in the region,” says Ebhardt. One of the firm’s clients, Bank Austria Creditanstalt AG, has already made several acquisitions in Bulgaria, Croatia, and Bosnia-Herzegovina, and is looking at acquiring Tiriac Bank in Romania. Real estate is another strong sector, Ebhardt says, particularly the direct foreign acquisition of raw land for housing and business development. In all, Ebhardt says, work in the Balkans contributes about 50 percent of Wolf Theiss’ gross revenue. Working on Balkan deals, however, often remains complicated, especially in the former Yugoslavia, where a decade of conflict and internecine warfare destroyed much of the infrastructure. In the past few years, Croatia, Serbia, and the other republics have worked hard to re-establish their economies and pass new laws and regulations to foster the private sector. But Ebhardt notes that doing deals there still presents unique challenges, such as reading the balance sheet of a former state-owned Yugoslavian bank. “Yugoslavia was one country broken up into many, and so was the banking system,” Ebhardt says. “It can be very hard to figure out the books of a target. You must see how some of the treaties and arrangements from the breakup might come back to bite you.” Much of the legal advice Wolf Theiss gives on such transactions is concerned with minimizing those risks. Where possible, Ebhardt advises his acquiring clients to secure indemnifications or warranties from the government or from multilateral institutions such as the International Finance Corp. or the World Bank, which invest in and help fund large parts of the banking system in the region. Ebhardt says complications can extend to smaller issues as well, such as certifying property titles on real estate. “This can be very important, for example, when a target bank claims to own 150 banking branches,” says Ebhardt. Despite the challenges, Ebhardt says, his clients remain bullish on the region: “It’s a good place to expand.” COMPLICATED DEAL Most of the complications Ebhardt refers to were present in a recent acquisition in the region that Samantha Hampshire, a partner in the London office of Houston’s Baker Botts, worked on. Hampshire was the lead lawyer for the Croatian government when Magyar Olajipari Rt. (MOL), Hungary’s state-owned oil and gas company, paid $505 million to acquire a 25 percent stake in INA-Industrija nafte d.d., Croatia’s largest corporation, which owns extensive oil and gas holdings as well as more than 450 service stations. Hampshire and a team of Baker Botts lawyers represented the Croatian Ministry of Economy on the deal, working in tandem with Deutsche Bank and PricewaterhouseCoopers. Hampshire says the initial challenge on the deal was sorting out who owned which pieces of INA. “It was a Zagreb-Croatian corporate entity that operates throughout the Balkans,” she says. The first phase was moving the company’s assets from the Yugoslavian communist state to the Croatian authority. Such asset transfers, Hampshire says, were accomplished by means of specific legislation for each company, but were a little tricky because the former communist government never recognized the idea of property rights. Complicating matters further was the fact that INA had substantial assets in Serbia, which during part of the time the privatization was under way, was in open conflict with Croatia. Eventually, after the shooting stopped, Serbia filed a suit claiming that it owned INA’s assets within its borders, which it is now attempting to privatize in a separate transaction. “From Day One, our asset memo made it clear to bidders that some of the company’s assets were subject to significant dispute,” says Hampshire. Despite the uncertainty, she says, three bidders emerged, with MOL outbidding Austrian rival OMV to make the deal. Hampshire says landing the deal for Baker Botts followed a fairly standard formula: “We were in a beauty parade and made a presentation to Deutsche Bank AG,” which handled the initial phases of the deal for the Croatian government. In the end, Hampshire says, the firm’s strong oil and gas expertise as well as its close ties to PricewaterhouseCoopers helped swing the deal to it. The INA deal was the first for Baker Botts in the Balkans. Hampshire hopes there will be more, but says she’s not sure there is enough work there for the firm to commit to a brick-and-mortar presence. That assessment is echoed by Freshfields partner Plesser. He says the firm is not planning on expanding into the region, preferring to establish a network of “best friend” relations with lawyers there. “We don’t want to go for the more general corporate work or basic advisory work,” says Plesser. “We just want the leading-edge transactions in project finance and multinational M&A deals.” Plesser says Freshfields is adopting the model of its American colleagues, establishing relationships with local lawyers on a deal-by-deal basis. “It’s not necessary for Freshfields to be on the ground everywhere,” he notes. Similarly, most other large law firms have, thus far, avoided setting up shop in the Balkans. An exception is London’s Linklaters, which opened an office in Romania in early 2000 that now employs about 30 lawyers. “We have the good fortune to be the only Magic Circle or New York firm in the Balkans,” says partner Schilling. Southeastern Europe, Schilling says, has been one of the firm’s fastest growing regions the past two years. In 2002 Linklaters advised the Romanian government on its $500 million privatization of Sidex, the largest steel company in the country, and it’s performing a similar role on the upcoming privatization of state-owned oil and gas giant Petrom, which is projected to net at least $1 billion by the time the bidding stops. Schilling says the Bucharest office has also advised on major transactions in Serbia, Bulgaria, Macedonia, and Greece. “Our decision to get in before September 2001 allowed us to have a dominant position now in the region,” Schilling says. Though most lawyers agree that Romania and Bulgaria, which are both on track to enter the European Union in 2007, are the most established markets in the Balkans, opinions differ about the long-term prospects for other countries in the region. For example, while Plesser of Freshfields is bullish on Serbia, Hampshire of Baker Botts remains lukewarm on its prospects. “Serbia is complicated,” she says. Plesser and Hampshire, however, are both enthusiastic about Croatia. “It’s got a whole program for privatization,” Hampshire says. Croatia is also aiming for a 2007 entry into the E.U., though it has further to go to meet that goal than do Romania or Bulgaria. Factoring in Croatia’s historic ties to Austria, and its built-in tourism draw (the best Mediterranean beaches in Europe), Hampshire thinks it should have a relatively easy time fitting in with the rest of Europe. “There’s going to be a lot of money made there,” she predicts. Other states such as Kosovo or Bosnia are still trying to resolve fundamental issues on their commercial laws. “There is still enough of a void in some places to give a serious investor pause,” says Linklater’s Schilling. “But others are taking the opportunity and accepting those risks.” Schilling says negotiating those risks puts an extra premium on good legal advice. “Lawyers are far more important in their role here than they might be in New York or London, where risks are more established and understood,” he says. Most lawyers working in the Balkans seem to agree with that assessment. Nonetheless, whether they come from small regional firms, larger regional players, or major international firms, all seem optimistic on the prospects for the Balkans. “There’s no road back for any of these countries,” says Hayhurst. “They’ve got no choice but to keep moving ahead.” Douglas McCollam is a senior reporter at The American Lawyer. This article first appeared in the magazine’s Focus Europe January supplement.

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