On July 29, the U.S.-Ukraine Business Council, in partnership with KPMG Ukraine, hosted an online event forecasting investment trends in Ukraine’s exports.
The event was moderated by the M&A principal of KPMG, Ilya Segeda. He was joined by the director of Risoil-Kherson, Vladyslav Talakh; head of the Export Promotion Office of Ukraine, Tatiana Miskova; Transaction Services head Svitlana Shcerbatyuk and Vadim Miroshnichenko, head of Ukraine’s commercial department for Cargill.
The COVID-19 pandemic has severely harmed investment and M&A activities, both in Ukraine and around the world.
Shcerbatyuk began the event by giving a general overview of the global M&A situation. According to research by KPMG, there had been a significant contraction in the value and volume of deals over the course of the pandemic. The total value of deals decreased by a staggering 53%, or $900 billion globally. The volume of deals fell by 32%, with only 6,900 deals recorded during the period. Equally, the average value of deals fell by 30% to $294 million.
In Ukraine, the drop was even bleaker. The value of deals in Ukraine fell by a record 79% to $159 million and only one significant deal over $100 million was recorded, namely Epicenter K’s acquisition of Khmelnytsk-Agro.
Deals with foreign investors were still happening, Shcerbatyuk assured, but there was now a longer timeline for deals and buyers needed extra time for due diligence and scrutinizing issues relating to the supply chain. Some industries effectively negated the fallout from the COVID-19 pandemic. Two-thirds of the value of M&A was in the agricultural sector, which remained largely unaffected by the crisis. One of the other industries that braved the crisis was the information-technology sector, which continued to innovate with remote working solutions and food delivery technology.
To begin the discussion on the activities directly relating to export-related investments, Talakh highlighted the fact that there had been two big deals in the areas around the Kherson port. The reason for this, he ascertained, was that investors were starting to look beyond the crisis to prepare for economic recovery. In a recovering market, he added, it was easier to gain new clients. Given that Ukraine is still not providing long term funding to both commodity producers and transporters, foreign investors are in a better position to invest in new infrastructure projects.
This sentiment was echoed by Miroshnichenko who stated that Ukraine’s agricultural sector was ripe for investment, especially in connecting agricultural centers to transportation hubs. Now, in a time of crisis, Ukraine may now be a big investment opportunity. Crisis leads to distressed assets, he stated, and distressed assets are always popular amongst investors. In commodities exports, Ukraine is full of greenfield and brownfield opportunities.
Miskova detailed the current export market in Ukraine, highlighting future investment areas for the future. She told the audience that around 85% of exporters in Ukraine were small or medium enterprises, which were starting to target new markets in Europe and further abroad. M&A activities had certainly declined in the export sector, with fewer deals occurring and mostly internal acquisitions taking place. Ukraine is a reliable exporter of commodities to Europe; however, Miskova was keen to promote Ukraine’s efforts to shift away from the perception of being ‘just a commodities exporter.’
Ukraine has a chequered past with value-added products.
Many finished products from Ukraine have ended up on the shelves of European supermarkets, the moderator Ilya Segeda added, but the brand visibility of Ukrainian products was poor, and products were often sold to specific retailers with limited exposure. Miskova highlighted the need for the export sector to diversify into new niche value-added products. Organic foods, pre-packaged snacks and confectionery products were in surplus and ready to export, however current travel restrictions meant that it had been difficult to find new partners abroad. These relationships would take time to develop, but she stated that KPMG was hopeful that the economic recovery would bring with it new opportunities for exports.
According to data produced by KPMG, in the first half of 2019, Ukraine made large advances in new fields of exports. Value-added products such as confectionery and furniture were becoming increasingly popular. Ukraine was also exporting increasingly more pharmaceutical and IT products to Europe, Asia, and North America. The Ukrainian government needed to work to reduce tariffs on its products and negotiate new trade deals to facilitate exports, she added, but viewed Ukraine as an interesting new prospect for manufacturing and exporting.
The COVID-19 pandemic has highlighted to many investors and large companies that East Asia is too far away for when external factors impact the supply chain. As such, investors are now looking to relocate production to Eastern Europe and Western Asia. Ukraine already has a reputation as a ‘last hope supplier’ in case of logistical issues in the far east and Ukraine needed to capitalize on this, Tatiana stated. Ukraine has many of the same desirable qualities as East Asia, including cheap labor and good maritime access. To attract these potential investments in export-oriented production, it would be necessary to create favorable conditions. These included: Enshrining the rule of law, ensuring the independence of the central bank and prudent fiscal policy. Ukraine should also play to its strengths, she added. Regions required specialization, so as to encourage production in areas with deep-rooted industrial traditions and expertise.
In a question submitted by the Kyiv Post, Shcerbatyuk addressed the impact of increasing due diligence and compliance on M&A activities in exports. While before the COVID-19 crisis due diligence activities were not started until the signing of a bill of intent, investors were now carrying out due diligence investigations much earlier. Leverage in M&A was now moving from the sellers to the buyers, which allowed, at least, for more negotiating powers for buyers. Less reliance on comparative evaluation and new deal structures were a challenge for Ukraine but were not expected to be a challenge in the future.
