10 years of crisis

Smaller but unreformed corporate economy

April 2019

PwC

Executive summary

• The onslaught of the crisis in 2008 increased sovereign and consequently corporate risk to levels inhibiting investment and trading. Firms became smaller and weaker in capital terms. The production base of the economy shifted away from services towards industry and towards lower value added

• Despite the strengthening of the funding capacity of the firms, the institutional funding of the corporate economy weakened and was partly substituted by trade funding

• The investment process has been dislodged creating a huge gap between corporate investment needs, in order to maintain and enhance market position and competitiveness, and the ability and willingness to fund them

• A disproportionate number of Zombies continue to trade undermining market equilibrium. The targeted elimination of all Zombies would result in a 13% increase in the revenue of all other companies

• Nonetheless, coming out of the crisis there are about 2,100 investible companies, with total annual revenues of about € 110bn, with their own growth strategies

PwC

The longest and the deepest crisis in recent history in the western world left its marks on Greece…

3

10 64 98752 3

75747474

76

74

105

75 74

8282

102100

89

91

96100

90

86

United StatesGreece

Source: Ameco, U.S. Bureau of Economic Analysis

Greek vs U.S. GDP evolution during crisis years (normalised)

Start of Crisis2008 for Greece1929 for U.S.

Crisis years

1933: New Deal 2013: Inflexion year of the Greek economy

6061

58

30

17

72

2008 2009 2010 2011 2012 2013 2014 2015 2016

€ 41bn

58

63

21

5758

3328

36

2725

62

19

3440

55 58

16

58

21

32

50

Source: Reuters

Value loss in € bn

*Equity value=EBITDA* sectoral multiple – Net DebtMarket capitalisation (ASE) excluding financial institutions

In 2018 Greece officially exited the longest and deepest crisis that has been recorded in the Western world. Eight years of constant drop of economic activity, one could imagine that the productive fabric of the country has been destroyed.

There was a huge value loss in the corporate economy, as company valuations recorded a 72% decline, but after 2012 recovered

Market CapEquity value**Equity

4

… however, nothing much has changed in the corporate economy

The Top 10 in terms of revenue non financial sector companies remained almost the same during the crisis

2009 2016Rank Company name Revenues

(in € bn)Company name Revenues

(in € bn)2009 Rank

1 HELPE 6,76 HELPE 6,61 1

2 CCHBC Group 6,54 Motor Oil Group 6,36 6

3 PPC Group 6,03 CCHBC Group 6,22 2

4 OTE Group 5,96 PPC Group 5,17 3

5 OPAP Group 5,44 OPAP Group 4,23 5

6 Motor Oil Group 3,94 OTE Group 3,91 4

7 Viohalco Group 2,30 Viohalco Group 3,11 7

8 Ellaktor Group 2,27 Alfa-Beta Vassilopoulos S.A. 2,18 10

9 Marinopoulos S.A. 1,93 Ellaktor Group 1,94 8

10 Alfa-Beta Vassilopoulos S.A. 1,39 Titan Group 1,51 11

Few things changed in the structure of the economy as a result of the crisis. Even though the top companies in all sectors shrank in size, most of them remained in the same position while there were no new market share contenders.

Entry Exit

4

The impact of the crisis on firms

5

The economic model of Greece, the way it has been developed during the crisis, is incompatible with systematic growth. It is not driven by consumption, as exports cannot be financed. Not driven by investment either, with companies not willing to invest or unable to integrate innovation. Not supported by the state, which does not invest, does not facilitate private economy and consumes more resources than it should.

The economy did not transform as a result of the economic shock. Instead, it mostly retained its structure, resisted change, drained from investment, its technological base weakened and lost value added.

swift cost adjustment

Costs swiftly reduced by 11%and average EBIDTA margin returned to pre-crisis levels (9.7%)

lack of investment

No replacement of assetsNo new technologiesNo R&DProductivity continued to go down

a marked change in funding

Debt decreased by €10bnThe cost of funding increased and remained at high levelsOverall funding became shorter term

less complexity and value added

Revenue value added shrunk by 7ppsExports rose during the crisis, but their relative value added dropped (-11pps)

Companies swiftly compressed operating costs to adjust to the drop of demand

Demand shrunk, profits dropped and then recovered by suppressing their operating costs

Profitability initially collapsed, but rebounded as a result of cost cutting

What has really happened?

The crisis caused losses in the demand within the Greek economy, reaching a 12% decline compared to 2009. Under this pressure, Greek companies contained their operating costs by 11% and focused on operating profitability to counterbalance the loss

As a result, their profitability, in terms of Return on Equity and Capital Employed, crumbled in the first years of crisis, but later recovered to almost before-crisis levels

2013201220112009 2010 201620152014

135.0

9.2

131.0

8.9

144.5139.7

8.6

132.9135.8

118.0

12.7

128.8

9.7

124.0118.0

10.9

130.5Revenue

Operating costs

EBITDA

144.8

8.7

133.0 135.0

15.4

148.6

126.0

201120102009 20132012 20162014 2015

4.3%2.4%

-4.5%

2.0%

-2.3%

1.8%

-1.5%

1.5%0.6%

6.8%4.8%

3.6%

6.8%

6.1%

9.7%

-0.6%

ROCEROE

6

The production base of the economy shifted away from services towards industry and towards lower value added

Revenues dropped by 12%, but value added recorded a decline of 21%Revenues and value added (in € bn)

101.3

44.4

126.1

14.7

1.315.1

0.7 1.4 2.2

18.1

57.8

0.7

2016 Revenues

130.5

30.6

2016 Value

Added*

2.011.8

148.6

0.9

20.6

2.7

41.2

64.2

2009 Revenues

17.3

26.3

17.5

2.2 1.814.0

1.6

50.7

2009 Value Added

0.9

43.9

Source: OECD, PwC Analysis*2015 added value coefficients used

ConstructionServices

Investment CompaniesTourism

CommerceIndustryInfrastructure

** Value Added Ratio(Value Added/ Revenue)

85% 78%

90%

74%

88%

86%

82%

90%

99%

88%

60%

85%

84%

76%

89%

98%

Economic activity moved from services and construction towards industry and tourism, and thus to lower added value and less embedded technology Export volumes rose during the crisis by €12bn, trying to balance the loss of domestic demand, but value added, as a proportion of exports declined by 11pps. The expansion to new markets was largely based on low-value products

VAR**2009

VAR2016

7

-21%

7%

-16%

-20%

-35%

42%

-18%

-23%

-14%

-19%

-22%

-39%

39%

-19%

Δ(%)‘09-‘16

Δ(%)‘09-‘16

-2pps

-14pps

-3pps

-2pps

-6pps

-1pps

-1pps

Δ‘09-‘16

13.6 13.5

2016

+21%16.3-1%

2009 2013

2.9

2009 2013

-78%

2016

13.4

-3.5

12(19%)

7(12%)

65

45(69%)

2009 2013

12(22%)

33(59%)

10(18%)

56

10(18%)

34(63%)

11(19%)

-2%-14%

2016

54

Systematic deleveraging and the elimination of working capital led gradually to the accumulation of cash

Corporates during the crisis accumulated cash in their balance sheetCash (in € bn)

Systematic deleveragingGross Debt (in € bn)

Working Capital evaporatedWorking Capital (in € bn)

-220%

DebtTrapped Debt Refinanceable Debt

How did business respond to the crisis?

Corporates cut down their credit exposure, contained their working capital needs, and accumulated cash by € 3bn during the crisis.

Corporate debt has been reduced by € 11bn since the beginning of the crisis (€ 54mn in 2016), of which 30% was unsustainable. Despite this deleveraging, unsustainable debt remained almost stable.

About € 8.7bn of debt is trapped in Zombie companies

Working capital turned negative as receivables and stocks followed the drop in demand, but payables did not decline

8

02468

10121416182022

2014 201620122010 2015201320112009

The survival of the Zombies has contributed to the maintenance of high capital costs and has distorted the market due to unfair competition

Persisting Zombies

There were in total 905 Zombies/Almost Zombies in 2009 and 745 in 2016. Out of them 312 companies were Zombies/Almost Zombies in 2009 and in 2016

Zombie & Almost Zombie companies account for 26% of the total and "survived" with around € 15bn of loans trapped in their balance sheet and an additional € 10bn owed to third parties

Receivables and payables reflected difficult trading conditions, as well as the resilience of Zombies

Since the beginning of the crisis 312 companies, deemed to be Zombies, remained in the same position. “Persisting Zombies” generated roughly the same revenues and owed the same amount of debt and payables to their suppliers. Their presence distorts the market due to the unfair competition and drains liquidity

0

10

20

30

40

50

60

70

80

20142010 20152012 2016201320112009

Revenues (in € bn)

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014 2015 2016

Gross Debt (in € bn)

Payables (in € bn)

Persisting ZombiesStars and Almost StarsGreys

Zombies and Almost Zombies

9

The crisis led to a substantial and permanent increase in the cost of capital for the firms…

Source: Thomson Reuters, Damodaran Database (NYU), OECD, PwC Analysis

Liquidity plays an important role for a company to grow and to implement its strategic plans. During the crisis in Greece, corporates faced a climate of increased cost of funding.Τhe state’s inefficiency to finance itself and the banks’ inadequacies pushed capital costs to unsustainable levels

The return on capital employed is systematically and considerably below the corresponding cost of capital creating a huge obstacle for companies to make large and long term investments

Cost of Capital

10

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Cost of Equity (%) Cost of Debt (%)Risk-Free Rate (%) RoE (%)RoCE (%) WACC (%)

* Weighted Average Cost of Capital

*

... leading to low investment, despite the fact that the funding capacity of the companies seems to have recovered

Investment collapsedInvestment (in € bn)

-81%

2016

+25%

2010 20152013

1.9

1.0

2.0

2011

5.3

2.4

2009 2012

5.1

2014

0.4

3.6

16161512121314

220

24

5

26

8

1

-6

26

111

42

32

23

40

201620102009 20122011 2015201420131

1

-9

001

14

-4

0

7

5

13

9

Source: Eurostat, PwC analysis*Borrowing capacity=5*EBITDA – Net Debt**Total funding capacity=Cash + Borrowing capacity

Investment lost

Investment loopFunding/Borrowing capacity (in € bn)

Investment loop

The reduction in investment during the crisis has been dramatic with a direct negative impact on technology integration and undermining the potential for expansion with new products and new markets

It is estimated that around €45bn of extra investments could have been funded by the Greek companies in the period 2013-2016, but they did not materialise

This distortion is now systemic and while 74% of the companies can attract capital, having increased their debt service capabilities at pre-crisis levels, the investment rate is at 45% of the 2009 levels

Borrowing capacity*

CashTotal funding capacity**Corporate R&D expenditure

Investment

11

There are two value creation strategies for companies coming out of the crisis

What matters most and for whom?

The crisis prompted many corporates to restrain their long term plans to accumulate cash, trim costs, and become cautious to large investments. Coming out of the crisis, Greek corporates should decide which strategy to follow, in order to increase value for their shareholders.

We have statistically analysed 2,817 companies in 17 sectors to examine the sensitivity of equity value: an increase of 1% in revenue leads to 0.7-1.1% increase in equity value. Revenue growth

drives equity value consistently, across sectors long term EBITDA margin increases of 1% generate between 0% and 13.5% more equity

value. The effect of operating profitability on equity value changed during the crisis in a non homogeneous manner with some sectors being highly driven by profitability

a reduction in Net Debt/EBITDA ratio of 1%, adds no equity value when the company can service debt but it can provide an extra 0.1-0.2% if it is stretched

The cost of capital plays an important role in deciding a strategy.When capital costs are high, strategies that expand margins outweigh those that accelerate growth. Debt sustainability adds little or no value to the company according to our findings. Each company faces a different trade- off between growth and profitability. Ιn some industries, like Food & Beverage and Constructions, focusing on boosting growth will generate higher returns than improving margins. Other industries, like Tourism or health, should mainly focus on cutting costs before adopting growth strategies

Improve Debt sustainability

Accelerate Growth

ImproveOperating Margins

|1 2

1.10%

12%

0.85%

0.80%

8%

1.20%

1.15%

1.05%

0.95%

0.90%

1.25%

1.00%

0.75%

0.70%

14%0.60%

10%4%0%

0.65%

6%2%

Percentage change in equity value to:Profitability

Other Retail

Light IndustryInvestment Companies

Utilities

Percentage change in equity value to:Growth

Professional Services

Energy

Telecoms

Logistics

Entertainment

Transport

Heavy Industry

Pharmaceuticals

Tourism

Health

Fuel Retail

Food & Beverage

Construction

To set in motion and fund growth, corporates need to identify projects with returns in excess of the long term cost of equity

Cost cutting 21% of the companies, the smaller ones

Could keep tightening costs, improving processes and re-optimising operations making very little investment

New markets/ products

26% of the companies, the largest in size

May focus on expanding market share in existing market or turning into new ones with a sizeable investment potential

Re-configuration

13% of the companies, large ones

Could expand by acquiring less strong competitors and by reconfiguring themselves, depending on external funding, but this amounts to little investment

Low responsiveness

39% of the companies typically of medium size

Slow to respond, particularly if they have no access to funding, with no significant investment in sight

Borrowing Capacity (Stars & Greys)

New Markets/Products Re-configuration

Low Responsiveness Cost Cutting

Average 4.74%

Average 0.94%

€47.8bn / 533 / €90mn/ € 27.2bn

€ 13.1bn / 222 / € 59mn/ €5.3bn

€16.9bn / 423 / €40mn/ €11.1bn

€30.1bn / 739 / €41mn/ €13.8bn

Total Revenue / No. of Stars & Greys / Average Firm Size/ Funding Capacity

Strategies

13

Without a policy shock, the dynamics of the economy will not change

Unaided individual corporate strategies are unlikely to set in motion high and sustainable growth across the economyThree broad policies must be implemented simultaneously aiming at reinstituting conditions which are conducive to longer term planning and investment and to the mobilization of resources across economy First, the corporate landscape must be cleared of Zombies at a fast pace. Comprehensive

liquidation processes are instrumental to transferring demand to Star and Grey companies, to releasing assets back to the productive economy, whilst improving trading liquidity. At the same time, the banking system must be cleared from NPLs, which absorb regulatory capital, so as to resume lending to the economy

Second, a well orchestrated trust building effort with a clear and convincing plan for the future has to be initiated. This will help reduce sovereign risk and will bring in international strategic investors to consider Greek corporates, which not only survived the worst crisis, but also improved their own competitiveness

Third, as a result of investment, the economy will be rebalanced to higher value added services and products and expand into new markets. Coherent sectoral public policies promoting size, concessionary funding towards last stage R&D, demand and supply aggregation and clustering are necessary in facilitating this shift

The legacy of the crisis is heavy, but well hidden, and gradually is forming Greece into a more primitive physical production base with less services output, fed with little investment and starved of innovation

www.pwc.com

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries withmore than 250,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

© 2019 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

15