Experts from companies specializing in mergers and acquisitions expect a good year, despite a slow start.
There is an abundance of distressed assets around the world, and company valuations are way down, all courtesy of the world economic crisis.
Fresh off a record year with almost $9 billion in merger and acquisition deals closed, Ukraine is no exception.
Gone are the recent years of astronomical valuations, allowing a select group of Ukrainian businesspeople with good timing to sell banks and other assets to foreign bidders for top dollar. The seller’s market has quickly morphed into a buyer’s market, opening opportunities for cash-rich multinationals and investment funds. Ukraine is today flush with bargains for promising assets, be it steel mills, retail businesses or real estate.
What started as a bad year for many financially distressed companies could turn out to be a busy year for investment bankers, advisers and lawyers specializing on mergers & acquisitions deals. With so many Ukrainian companies desperate for cash, and their owners eager to divest, M&A advisers are gearing up for another big year.
Investment bankers say they are witnessing an unprecedented growth in the number of owners who want to put their businesses up for sale. So far, they outnumber prospective buyers in the current climate. And while many deals are on hold – victims of prevailing mood of caution – a flurry of transactions are expected in the second half of 2009.
“The M&A market in Ukraine is quiet for the moment, but definitely not dead,” said Andrew Mac, partner and head of the M&A and corporate practice at Magisters, a leading Ukrainian law firm. “In the last couple months, we have seen a pickup in activity as the world’s financial markets begin to recover and Ukraine’s currency remains stable.”
The aim in recent years was to get huge valuations. Today, sellers are just trying to stay afloat.
“We saw outrageous valuations over the past several years – banks selling five, six or seven times book value,” said Brian Best, head of investment banking at Dragon Capital. “Today banks would be lucky to get their book value.”
“In 2006-2008, sellers dictated the rules on the market. Money was cheap. Now we see a market of buyers who dictate the rules,” added Vladyslav Ostapenko, head of investment banking at Sokrat, a Ukrainian investment bank.
M&A activity surged in Ukraine after the 2004 Orange Revolution slapped the country onto the radar screen of many news investors. Many had previously not taken a close look at Ukraine, which was overshadowed by its bigger neighbor to the north, Russia.
The biggest acquisition deal still remains the $4.8 billion re-privatization of Kryvorizhstal, Ukraine’s largest steel mill. It was bought in 2005 by the world’s largest steel group, Mittal Steel, which has since merged with rival Kryvorizhstal bidder Arcelor, forming ArcelorMittal. Before the Orange Revolution, far less than $1 billion in M&A deals were reported annually. By 2008, the total value of M&A deals conducted yearly in Ukraine surged to some $9 billion.
As the volume of annual M&A deals mounted, so did interest in Ukraine, pushing the companies’ values to yet more unsustainable highs.
“Ukraine was just another cog in the wheel of the global asset bubble. It was just another emerging market that was benefiting from large amount of investment dollars chasing high returns,” said Dragon’s Best.
Food, consumer goods, media, industrial and energy sectors were the most popular assets to be bought and sold, in terms of the number of deals. But it was the banking sector, with a handful of banks selling for $1 billion and more, that drove up M&A deals in Ukraine dollar-wise. It was during these high flier years that Victor Pinchuk, son-in-law to ex-president Leonid Kuchma, cashed in big time on some of the assets he snapped up years earlier. Today a multi-billionaire, Pinchuk sold one of Ukraine’s largest banks, Ukrsotsbank, for a whopping $2 billion. He acquire it years earlier from another businessman for about $100 million, sources said.
One of the biggest deals in 2008 was the sale of Pravex Bank, the last big bank to be sold right before the crisis, for $750 million. It formerly belonged to Kyiv Mayor Leonid Chernovetsky. “It was 7.5 times the book value,” recalled Best.
But the crazy days are replaced with market corrections and many believe the bottom hasn’t been hit yet. “The dead time was in first quarter of 2009,” Ostapenko said. “Now we see much more confidence and willingness to move forward.”
Buyers are, however, still expressing hesitation.
“The main variable our clients are interested in is not the political situation or upcoming presidential elections, but rather the short and medium-term stability of the currency. At this time, it appears that most clients are worried that the hryvnia is subject to further fluctuations and, as such, are hesitating on making investments. To that extent, the recent announcement – the International Monetary Fund releasing the next tranche for Ukraine – was a key factor in keeping their interest in Ukrainian assets high. But most will likely wait to see if the currency remains stable through the fall,” Mac said.
So what big assets could change hands soon?
With the sharp global downturn, the spirit of consolidation is in the air. Some of Ukraine’s smaller steel barons could merge or sell out to bigger fish, such as the larger steel groups in Ukraine, Russia or from further abroad.
Astrum Investment Management suggests that steel mills Illycha and Zaporizhstal are two potential candidates for sale. Among the main domestic contenders are large industrial conglomerates in Ukraine, including Metinvest, owned by Ukraine’s richest man, Rinat Akhmetov; and Russia’s Evraz. Bidders from China and India could also pop up.
Seriously shaken up by the global financial crisis, many of Ukraine’s 180-plus banks need to either merger into more solvent financial institutions, or get bought up by bigger ones, or simply go out of business. Best said it might not be easy to find investors for many of these deeply troubled banks.
“For Western banks that are also facing liquidity problems to take a leap of faith and invest in Ukrainian market is going to be difficult,” he said.
Activity is also expected in the retail and insurance sectors. Best said Ukraine’s retailers grew rapidly by borrowing heavily from Western lenders in recent years. With consumer sales plunging, many find it difficult to service rising piles of debt.
Apart from the valuations and types of M&A deals, the crisis has changed the profile of buyers. Big private equity funds used to be the most aggressive players on the market, but lately they have taken the sideline, making a way for strategic investors.
“The buyers are mostly Western strategic [companies] with sufficient cash reserves to acquire assets without the need for finance. Leveraged buyouts, although theoretically possible, are quite rare and without a Western parent guarantee almost impossible,” Mac said.
No matter how many deals or how much they are worth, advisers on M&A deals are going to take pay cuts along with most everyone else – perhaps a 15-20 percent drop in advisory fees. Those fees came to $40-$70 million annually in the 2007-2008 boom times, according to Best.
