Merger and acquisition activity is still far from pre-crisis levels, when transactions boomed in the years running up to the 2009 global recession, generating big earnings for Ukraine’s law firms and consulting service providers.
But it is picking up, albeit at a much slower than expected pace.
The value of mergers and acquisitions so far this year already exceeds 2009 by 30 percent, according to Kyiv-based investment bank Phoenix Capital. From the beginning of the year, the total value of transactions stands at $2-2.5 billion, up from $1.3 billion in 2009.
Sectors that were hit the hardest by the crisis, like banking and real estate, don’t see a much interest from potential investors. Tastes have switched to the agriculture and food processing industries, telecommunication, fast moving consumable goods and, traditionally, towards the lucrative steel, mining and energy sectors.
The face of potential buyers of Ukrainian assets has also changed. If before the crisis European and U.S. investors were leaders, now cash-rich Russian businesses are seeking to snap up distressed Ukrainian assets at bargain prices.
Agriculture, food
Investment experts say the consumer sector that includes agriculture and food processing industries was among the least affected be the crisis and remains among the most attractive, especially for Western investors.
“The agriculture sector is currently going through a stage of consolidation while larger players are seeking to acquire the maximum amount of smaller enterprises in an attempt to increase their land banks,” said Vladyslava Grudova, senior associate of investment banking at Phoenix Capital.
A larger number of companies in consumer industries have already entered the phase of growth and are recovering from the crisis, which is an excellent time for international players to enter the market or increase their presence, Grudova added.
“There are many good and big food processing companies in Ukraine in sectors such as dairy and food production, which may be interesting to investors,” said Olena Malitska, director of investment banking at Astrum, another Kyiv-based investment bank.
Banking and finance
The only sector of economy where the share of foreign capital exceeds 50 percent, the banking sector is suffering the most from the lack of activity. In the years heading into the 2009 recession, European banks rushed to snap up banking operations in Ukraine, then seen as a promising market. The new European arrivals often paid more than $1 billion for domestic banks only to see them nearly go bust during the recession. Now they are struggling to clean up billion-dollar piles of bad debts.
“The expectations for the banking business were largely overestimated. It was easier to give loans than now to get them back,” said Mykhaylo Ilayshev, a managing partner at law firm Ilyashev & Partners.
According to Ilyashev, most merger or acquisition deals in this sector will be done as a rescue measure from debts. The demand for bank assets is very low and many of them have reached the lowest price level since the boom in 2005-2008. For some investors is may be a good time to buy.
“There are some signs of a revival of the banking business while the prices remain low. This situation gives room for promising investments,” said Maksym Uslystyi, a senior associate at Paritet law firm.
“In the third quarter of 2011 we may see a lot of bank purchases,” Uslystyi predicted.
Energy, heavy industry
Heavy industry has, so far, had the biggest number of merger and acquisition deals this year. Earlier this year, Ukraine’s fifth largest steel mill Zaporizhstal – valued at more than $1 billion – was sold to Russian investors represented by the Russian government controlled Vnesheconombank by two Soviet-born businessmen Alex Shnaider and Eduard Shifrin, who now live in Canada and the UK, respectively. Earlier in the year, the same Russian group, also represented by Russian businessman Alexander Katunin, snapped up 50 percent control over a leading Ukrainian steel group, Industrial Union of Donbass.
Meanwhile, Metinvest, the largest of Ukraine’s steel groups controlled by Ukraine’s richest man Rinat Akhmetov, has purchased a 75-percent stake in another of the country’s largest steel mills, Illyich Steel and Iron Works in Mariupol (MMK Illyich).
When major consolidation of the heavy industry is done, more deals could be made if privatization picks up, foremost in the energy sector, says Phoenix Capital’s Grudova.
“There is potential on the market for mid-size independent energy companies,” said Myron Rabij, a partner at Salans, an international law firm with an office in Kyiv. As the most recent example, he talked about the $45 million purchase of a 70 percent share of KUB-Gas, a private producer of natural gas in Ukraine, by Kulczyk Oil Ventures, a Polish oil and gas company.
What to expect
The combination of changes in political relations and economic circumstances has resulted into a bigger interest for Ukrainian assets from Russian capital. While Western investors show less interest for acquisitions in various sectors of the economy, apart from agriculture, Russians are eager to buy, experts say.
Thanks to strong Russian government support, they have access to “loans … and also have bigger interest and more understanding of the Ukrainian market” to begin with, said Astrum’s Malitska.
Despite the fact that a slow recovery is the general global trend, industry experts are convinced that some changes and activity can come to Ukraine sooner, if government creates an investment friendly environment.
“The climate may be boosted if the government keeps its promises, for example, by approving a business friendly tax code and further cutting the number of licenses for operating businesses in Ukraine,” said Rabij from Salans.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected]
