It's the one sector that gives almost everyone hope for the nation.
The mergers and acquisition market is picking up and agriculture, one of the country’s most promising sectors, may be spearheading the trend.
Despite a poor global economic climate, experts say that 2012 could see a boom in deals involving one of Ukraine’s most prized assets – it’s incredibly fertile land.
Global trends in the merger and acquisitions market are not uplifting. According to the Big Four auditor Ernst & Young, global M&As fell 26 percent in the first three months of the year compared to the same period last year.
But this doesn’t mean that 2012 will be a slow year. Global companies are sitting on near-record piles of cash, a buffer built up after the 2009 financial crisis, and many are looking to restructure their assets, picking up any bargains they find along the way.
Meanwhile, low returns in developed markets are prompting more and more investors to look at emerging markets like Ukraine.
Nor does a modest slowdown necessarily spell disaster for Ukraine. Barring significant shocks, 2012 should be at least as good as 2011, which saw the market pick up to almost $5 billion from around $3.5 billion in 2010.
“The activity of foreign investors is now largely focused on emerging markets, including Ukraine, and, providing that no global shocks occur, the M&A market volumes may well be at the level of the previous year,” said Vladyslav Ostapenko, who heads the M&A department at Ernst & Young.
Agriculture has historically trailed other sectors in terms of M&A volumes, representing just 2.4 percent of all transactions in the decade up to April 2011, according to Mergermarket, an intelligence service provider.
One reason for this, however, is that related deals are often reclassified. For instance, two of 2011’s biggest deals – the purchase of domestic fertilizer producers by billionaire Dmytro Firtash’s holdings for $1.3 billion – were classified under chemicals. Moreover, agriculture itself is undergoing a technical and professional transformation.
The activity of foreign investors is now largely focused on emerging markets, including Ukraine, and, providing that no global shocks occur, the M&A market volumes may well be at the level of the previous year
– Vladyslav Ostapenko, head the M&A department at Ernst & Young
“The three main trends this year will be the consolidation of agricultural sector, increasing appetite from local investors and selling off non-core assets,” said Oleksiy Demyanenko from the law firm Asters, referring to M&A prospects for 2012.
Two major deals were inked already in March this year. Singapore-listed global commodities trader Noble bought Belgravia, which runs grain elevators, while its peer Glencore purchased the sunflower producer Kolos.
Local operators are also exhibiting a growing appetite.
Among others, French-owned Agrogeneration, listed on the New York Euronext Stock Exchange, is seeking to boosts its assets.
The company’s chief executive Charles Vilgrain said the objective was to double Agrogeneration’s land bank to around 100,000 hectares. Part of this will come from organic growth. The farms through which the company operates grow by around 10 percent annually.
Yet the bulk of Agrogeneration’s expansion should come from two planned acquisitions.
While the exact timing of the purchases has not been set yet, Vilgrain informed, the current situation generally favors buyers.
Though not quite as low as in 2010, he said, prices are much more reasonable now than in speculation-driven 2007-2008. This is particularly true in the case of troubled, cheaper companies to turn around.
“We are looking for companies with a strong prospect of improvement. It’s less expensive and offers a better chance to create value,” Vilgrain explained.
This coincides with the broader trend, according to Demyanenko. “In the beginning of this year we saw a lot of interest in acquisition of debt-burdened producers. It is possible to negotiate a good price, but risks are higher,” he said.
One of these risks is the yet unclear prospects for land legislation. Previous draft laws aimed to create an agricultural land market in Ukraine have raised concerns among investors.
Among others, major companies balked at the recent inclusion of a limit on the land a single company could manage in a given region. This provision has since been removed, but worries remain over property rights and corruption, a constant headache in Ukraine.
“Yes we agree that there needs to be a law, but we need a stable environment. We have made significant investments, and if there is a risk that in a year or two we will lose everything, we won’t invest anymore. And I think this is true for both foreign and Ukrainian companies,” Vilgrain said.
Plans to hold initial public offerings, frozen since last August’s market collapse, are now resurfacing. Warsaw Stock Exchange – already home to 11 companies operating in Ukraine including seven from the agribusiness sector – seems set to be the top destination.
Brian Best, managing partner at Kyiv-based investment bank Dragon Capital, told the business daily Parkiet that 10 to 15 Ukrainian firms, mainly agribusiness, may debut on the Polish exchange in the near future.
Other estimates are more conservative, but nonetheless reveal the makings of a boom year.
According to Vadim Brailovskyi, head of financial consulting group European Capital Management, around five Ukrainian companies will appear on the Warsaw Stock Exchange in 2012.
Big names include agricultural holdings Loture-Agro and Stiomi Holding, vegetable oil producer Vioil, and the agro corporation Svarog West Group.
Brailovskyi said he expected the minimum stake in the latter would be 25 percent, out of a reported value of $350 million.
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
