In this Kyiv Post interview, Oleh Malskyy, partner for Kyiv-based law group AstapovLawyers, said he does not see a lot of foreign investment behind most of the Ukraine-related M&A deals sealed last year or currently in progress.
Kyiv Post: Do you expect the Ukrainian M&A Market to recover to the pre-crisis level?
Oleh Malskyy: The Ukrainian market can recover to the pre-crisis levels under several circumstances, but the big question is when this may happen. Important circumstances are, of course, improvement of the business and regulatory environments, as well as broader market developments aimed at making Ukraine a better investment destination. When will that happen? This is a good question.
My personal suggestion is that it may happen in 3-5 years. What will be the most attractive sectors when this happens? I believe agriculture, natural resources, as well as transport related sectors are extremely interesting.
KP: If European banks were big buyers of Ukrainian assets before the crisis, who are the main buyers on the market today, who will be buying in coming years and what countries are they from?
OM: Indeed, Ukrainian banks were the biggest buyers of Ukrainian assets before the crisis. However, I don’t believe that there is much left in financial sector to be acquired and that’s not of the interest of the major players. I believe that main buyers on the market today are strategic buyers – those who understand how to manage the assets and how to expand those assets.
There are a few financial investors who believe it’s a good time to buy because the prices are down or they can consider that the targets they are acquiring will be in a rather short time resold to a major strategic players. We do not see many investors from foreign countries. Most of the investors are either local or coming from the CIS countries including Russia.
For the selling side it is not the optimal time to sell and I would of course wait for a couple of years to maximize the price. From the buying side I believe it is indeed a good time to buy because there is a good chance that in one year or two years, prices will start to rise.
KP: Could you identify the top five strategies and hands on changes domestic business owners should start adopting today to ensure they can maximize the sale price of their assets to an investor in the future?
OM: I would start with the vendor due diligence, internal due diligence to understand what risks currently the business inherits. Those maybe regulatory issues, environmental issues, compliance issues, structural issues, corporate history, assets’ history, etc. Based on that vendor Due Diligence I would undertake all needed actions to mitigate or minimize those risks, if necessary, pay the needed fines for the violation but basically close that chapter.
Second, I would definitely look into transparence structure, do necessary restructuring, understand what assets are in or outside of the scope of the potential sale, introduce a foreign holding company which may be later use as a target to sell for tax purposes.
Before the sale I would definitely do the tax ordered and invite tax authority to conduct such ordered because that will basically minimize tax risks.
I would also pay attention to compliance issues as in the couple of years they will be very important for international buyers. In addition I would consider inviting foreign CEO or international organization such as EBRD into either minority shareholder or at least a creditor because that is the sign of international standards being present in the seller company.
KP: What are the top five risks investors face when buying assets in Ukraine and what strategies and measures can they adopt to main ensure that they get a fair price for assets bought in Ukraine while minimizing risks of potential problems related to the assets?
OM: All of the risks basically relate to devaluation of the price of the acquired assets. Such risk may come from unfair disclosure, lack of such disclosure, lack of fair disclosure of current obligations of the target.
This may be hidden loans and issued bonds and other liabilities that will arise once the target passed its hands.
Devaluation of the price may result from tax liabilities, regulatory consistencies. It is not also a secret that political projects or projects involving public or political persons, politically exposed persons may be subject to some risk.
Minimizing those risks basically is limited to the holding part of the purchase price, putting it on the escrow account and giving it some time for those risks to actually develop themselves, make a price adjustments based on them. It is extremely important to have a personal guarantee of the seller secured by his personal assets if something goes wrong.
There is also a possibility to have a buy back option in case the target will turn out not to be worth the price it was paid or the price it was agreed to sell back that target to the seller and that acquisition should be maximum automatic with the security of the seller to execute such buy back option and pay the price.
