M&A activity picking up, with foreign and local investors looking at metallurgy and agriculture.
With merger and acquisition activity picking up as investors move on assets at a fraction of their pre-crisis levels, the latest prize attracting interest in Ukraine is Zaporizhstal steel mill, the country’s fifth largest.
South Korea’s POSCO, Asia’s third largest steelmaker, looks set to bid for Zaporizhstal, possibly in partnership with Ukrainian steel group Metinvest, itself majority owned by Ukraine’s richest man, Rinat Akhmetov.
The move would bring another large multinational alongside ArcelorMittal into Ukraine’s oligarch-dominated steel sector, and is likely part of a growing M&A trend.
Max Nefyodov, director of investment banking at Kyiv-based investment bank Dragon Capital, says the case of Zaporizhstal is an example of the global trend for consolidation in metallurgy, where the size of a company guarantees its flexibility on the markets. And Ukraine holds strong potential for this.
As one of the top 10 global steel exporters, and home to the world’s fourth largest ore deposits, “Ukraine will remain interesting for foreign steel holdings as well as local business groups that also have potential for growth and mergers,” he added.
Ukraine has already seen the buyout of a steel holding earlier this year. In a purchase valued by market insiders at $1 billion, a 50 percent stake in top-30 international steel maker Industrial Union of Donbass (a.k.a. ISD Group) was sold to Russian tycoons. Alexander Katunin (along with partners) took a 25 percent stake, and unnamed Russians bought out the interest from Ukrainian billionaires. ISD controls Ukraine’s modernized Alchevsk Metallurgical Plant, along with another Ukrainian mill, and factories in Hungary and Poland.
It is unclear whether POSCO will bid alone or with local steel groups to acquire Zaporizhstal – valued at over $1 billion – from a group led by Canada-based Alex Shnaider and Eduard Shifrin, two Soviet-born businessmen.
Metinvest, Ukraine’s largest vertically integrated steel group controlled by businessman Vadim Novinsky along with Akhmetov, has been linked with a move for Zaporizhstal. The two companies signed an agreement last year to cooperate on the Ukrainian market.
When asked whether Metinvest was mulling the purchase of Zaporizhstal together with POSCO or separately, Novinsky said: “We are studying all possibilities. We could buy it together, or separately.”
M&A activity in the steel sector is part of a wider trend that has seen investors returning to the country with more cash to spend and more confidence in the country’s stability after President Viktor Yanukovych formed a loyal government in March.
According to Astrum investment bank, there have been a total of 11 M&A deals since the beginning of the year worth $1.6 billion, already exceeding the total of $1.3 billion from 32 deals in 2009.
“If last year most deals were the emergency buyouts of distressed assets, this year we can see more classic M&A deals supported by cash,” said Elena Malitskaya, director of investment banking at Astrum.
Another significant part of new-wave M&A action is taking place in the nation’s promising agriculture sector. The most recent example of that is the acquisition of Altera, a corn-producer based in Cherkasy Region, by the world’s largest corn-producer Gruma, which operates in the United States, Mexico, and major European countries.
As most transactions are not publicly disclosed, exact estimates of their value are hard to come by. But, the big names that have already changed hands this year speak for themselves.
Ukrainian oligarch Ihor Kolomoisky got hold of 1+1 and a few less important Ukrainian television channels for $300 million; Ukrainian agro major Allseeds Group was snapped up by bigger domestic rival Kernel Group for $42 million; and Russian-British petrol conglomerate TNK-BP has purchased a string of gasoline stations for an estimated price of $50 million.
Experts say there have been two major shifts in M&A activity. First, investors are switching from speculative capital to the real sector of the economy and, second, business is striving to get a hold of tangible assets, like production of raw materials.
“Everybody is preparing for the global food crisis,” which could spark demand for agribusiness assets, says Alexander Pochkun, managing partner ofBaker TillyUkraine, an audit and business advisory firm.
During the 2005-2008 M&A boom that was triggered by the Orange Revolution, the top-selling Ukrainian assets were banks, stocks in real estate and development companies, retail and speculative stocks of energy companies. Now the preferences of buyers have changed.
Alongside metallurgy and agriculture, on the radar screen of potential investors are food processing, dairy and meat manufacturers, pharmaceuticals and other “business to consumer” companies. Retail, media and real estate assets are in less demand.
According to market insiders, Ukraine’s leading alcohol producer Nemiroff and major non-alcohol beverage manufacturer Rosynka are seeking new owners.
Dragon Capital’s Nefyodov says that most likely buyers of Ukrainian metals and mining assets will come from within the country, because they are more optimistic about the future and are better-equipped to handle specific risks. The most active foreign buyers will come from Russia.
“Western investors are interested but cautious,” added Nefyodov.
Speaking about their preferences, western companies would buy food processing or production, while Ukrainian investors are more interested in land management, production and supply of raw materials for food.
“Strategic investors and private equity funds show equal interest in the market but look for different business profiles,” said Adam Mycyk, managing partner of the Kyiv office of international law firm CMSCameron McKenna.
“Private equity funds operating in the region are often better aware of the local business and investment climate in the region and strategic investors look decades ahead, but many Ukrainian businesses prefer to be sold to a strategic investor, rather than to a private equity fund,” he added.
Olga Gnativ can be reached at [email protected].
