Renaissance Capital’s Peter Vanhecke reflects on the state of mergers and acquisitions market, says his company will keep advisory fees high.
Peter Vanhecke is the CEO of Renaissance Capital Ukraine, part of the Moscow-headquartered Renaissance Capital, a full-service investment bank group which focuses on emerging markets in the ex-Soviet and sub-Saharan Africa regions.
The Renaissance Capital group has been one of the active advisers on mergers and acquisitions, handling deals valued nearly $4 billion since 2004. Vanhecke holds a master’s in business administration from Columbia University and has about 15 years of mergers and acquisitions experience in Kyiv, Moscow, London, Paris and Frankfurt.
In this Kyiv Post interview, Vanhecke discusses the impact of the crisis on the M&A landscape in Ukraine.
KP: How has M&A activity been in Ukraine during recent years and how is the economic recession affecting M&A activity?
PV: Despite the crisis, 2008 was the best M&A year in Ukraine’s history, both in the value of deals and volume of transactions. The M&A market grew by 20 percent, with about $9.2 billion worth of deals conducted. In contrast, we saw substantially less transactions closed in the first quarter of 2009, compared to the first quarter of last year. But this doesn’t necessarily mean this trend will not be reversed later in the year. There are many M&A dialogues ongoing and the necessity to sell or restructure businesses is more pressing because of the crisis environment, which is putting a lot of pressure on some companies. I expect that by the end of this year the number of transactions will actually be quite good while the average deal value will be lower than 2008.
KP: Why do you expect so many M&A deals during the crisis?
PV: A crisis environment actually supports a certain category of M&A activity. Before the crisis, mergers and acquisitions were driven by foreign investment into Ukraine, which was seen as a promising emerging market. Now, M&A activity is more focused on distressed companies or companies with liquidity needs but no access to the debt and equity markets. This M&A activity also tends to be more domestic than foreign. In short, a crisis situation typically forces the business community to think harder about M&A options as a strategic tool to solve challenges, than a bull market does.
KP: Are there many M&A deals in the works right now, and in what sectors?
PV: Absolutely. I see a lot of M&A activity right now for the aforementioned reasons. The activity is broad based. But I can point out some examples. The banking sector is clearly an area of activity due to the current recapitalization needs. High levels of leverage are forcing parts of retail sector to restructure. Overall, consumer sectors will remain active for the simple reason that hryvnia devaluation is making most imports unsustainable. Companies with substantial imported goods before the crisis might look to buy production in Ukraine to avoid the currency volatility. Finally, given that Ukraine’s agriculture sector is doing reasonably well, I expect continuing investment in this sector this year.
KP: The valuations for Ukrainian assets, like many across the globe, have plunged. How seriously? How much of a bubble was there building up in recent years?
PV: Valuations have clearly taken a beating. The drop is driven by both the global environment and sector specific elements. In the financial sector, for example, valuations have dropped 70 to 80 percent. For consumer companies, it’s probably closer to 30-40 percent. Personally, I think that Ukrainian valuations in the middle of 2008 were inflated, probably by 30 percent. It was a premium which was not justifiable by the underlying drivers or structure of the Ukrainian economy at that time. Investors underestimated or ignored the structural weaknesses of the economy, the lack of political unity and weak infrastructure.
KP: What is your advice to investors during the crisis: invest or wait?
PV: The economic crisis is the time for investors who are interested in Ukraine from a strategic point of view to invest. There are obviously risks but valuations are lower and assets are more available. At the same time, the mid-term prospects for Ukraine remain strong. In the near term, valuations will go up, in particular for those companies that will come out of the crisis stronger and especially after the global economy picks up, and when the elections are over.
KP: What sectors should they focus on?
PV: I would advise to invest in sectors that are less export-oriented and in those companies that are Ukrainian-focused. I would look at sectors where companies have steady cash flows and low debt levels.
KP: Who are the leading advisers for M&A deals in Ukraine?
PV: The Ukrainian M&A advisory market is still very much developing with few committed teams. In general, we see mainly London-based banks with small operations or no operations in Kyiv and a number of local players with a business model historically built on a brokerage approach. Renaissance Capital is uniquely positioned between these two groups. We have a large dedicated team based in Ukraine with most of them having significant deal experience on international markets.
KP: Are you willing to give a discount to clients during the crisis? How has the crisis affected advisory fees?
PV: While discounting is a strategy applied by some consultants, especially if they have difficulties in this environment, it is not a strategy that we feel is appropriate. Our clients work with us on the basis of the quality of our advice rather than on basis of the price level. We also tend to share the transaction risks with them.
Speaking about the market in general, there is a broad variety of fee structures that are applied. Besides discounting, other trends are appearing. Last year, fees were more linked to the valuations that could be achieved. Now, more fee structures tend to have a fixed-fee component. Overall, M&A fees in Ukraine are in line with mature markets, or comparable emerging markets.
