Central Europe Special Report: Czechered careering
1 December 2008
The glory days of major privatisations might be over in the Czech Republic, but the government is still the hottest client to have in Prague.
For a decade after the collapse of the communist regime in 1989, frequent privatisations provided law firms with a stream of projects to work on. In communist Czechoslovakia, nationalisation had gone further than in other East European countries and the private sector accounted for only 4 per cent of GDP at the end of the 1980s.
Law firms that opened early and cultivated government contacts, such as Kocian Solc Balastik in 1990 and Weil Gotshal & Manges in 1992, benefited from 10 years in which the government completed CHF1.5tr (£817.7bn) worth of privatisation transactions.
Fortunately, the state’s retreat from the economy has been accompanied by rapid growth in the number of entrepreneurs needing legal advice. By 2002 the private sector formed four-fifths of the Czech economy and the number of registered businesses had grown from fewer than 19,000 in 1990 to more than two-million.
But as the sun sets on privatisations, Czech lawyers now have bigger problems on the horizon. The credit crunch is coming and there is uncertainty in the market as to just how much an effect it will have.
The big international firms have been leaving the market. Dewey Ballantine and Hogan & Hartson were the high-profile closures of 2005, and 2003 witnessed the withdrawal of Freshfields Bruckhaus Deringer and Skadden Arps Slate Meagher & Flom. This year Linklaters withdrew from Prague, creating spin-off firm Kinstellar.
“The Anglo-Saxon firms came to this country very early and were established even before the domestic firms came into view,” says Martin Kriz, a partner at Czech firm Procházka Randl Kubr. “But now these markets are too small to sustain a magic circle firm that wants to do magic circle work at magic circle rates and profits. I’m sure the economy will somehow be affected and GDP growth is already slowing. It might not be all bad.
“Our impression is that [the credit crunch] is good for us as a law firm. It seems that Central and Eastern Europe is a more attractive investment for people now than traditional markets like the US.”
The shape of things to come
The consensus seems to be that the market in the Czech Republic is holding up well in the face of the credit crunch. But that does not quell fears for the future.
“The big Czech energy company CEZ Group is one of the major privatisation deals that’s left to be done,” explains Peter Valert, managing partner of DLA Piper’s Prague office. “The credit crunch is happening, but we haven’t seen a direct hit yet. If you’re a good firm there’s still a lot of business to be done in areas like restructuring and regulation. Surprisingly, the Czech Republic is still hot, but I think it may slow down a bit in the near future.”
Valert adds that the government will continue to be a major driver of work for law firms. “Another thing that we’re focused on at the moment is government-led arbitration,” he says. “Government work is still big. There are still tenders out there. We’ve just won a tender to represent the Czech Ministry of Finance. I think there’s going to be more as well. The government’s going to be looking more at public-private partnerships in things like transport.”
Jason Mogg, managing partner at Kinstellar, sees even sees more privatisations on the horizon. “There’s the long-awaited privatisation of Prague Airport, on and off several times, and delayed because of both the local political situation and the global economy,” he says. “Next in row are the privatisations of Czech Airlines, the cargo business of Czech Railways and Budejovický Budvar, the Czech original Budweiser brewery. Only further down the road would be projects like Czech Post and in the distant future maybe CEZ.
“The Czech market’s not been all about privatisations for some years. There’s much more M&A activity beyond this level, genuine local transactional work, market consolidation, private equity investments and buyouts, infrastructure projects and real estate work, mostly structured as share deals.
“But we of course see the impact of the credit crunch to some extent also in the Czech market. Leveraged transactions are mostly put on hold. But due to the global economic situation there’s an increased need for advice on restructuring, both credits and corporate structures, on financing and raising capital and a continued need to find solutions for infrastructure projects – and, of course, any financial downturn also evokes opportunities for interesting investments and acquisitions.”
The Czech market may be facing an uncertain future, but with tight management and a focus on active sectors, such as the government-funded PPP deals and arbitrations, law firms will be able to maintain a course for success in Prague.