In this Kyiv Post interview, Marc Lewis, partner in Financial Advisory Services department of Deloitte, said interest in Ukrainian assets remains far below pre-crisis levels.
Kyiv Post: Do you see the Ukrainian M&A market recovering to pre-crisis levels? If so, when and what sectors will be most attractive?
Marc Lewis: There is evidence that the Ukrainian M&A increased activity in the last half of 2011, though interest in Ukrainian assets remains far below pre-crisis levels. Q1 2012 activity has been impacted by the Eurozone crisis, which saw some interest in Ukrainian M&A/corporate finance transactions postponed. Interest in Q2 seems to be regaining momentum.
There remains a cautious attitude among most investors, and valuations reflect that caution. In addition, many sectors experienced mixed financial results in 2011, meaning that sellers going to market at the moment are often receiving lower valued offers than they might find attractive. Fast-moving consumer goods, agriculture and retail are likely to remain in focus.
M&A activity is expected to be sporadic through 2012, impacted by the upcoming election and uncertainty about the strength of the hryvnia. Assuming calm acceptance of election results and a useful understanding of the hryvnia exchange rate, we expect to M&A to increase by Q2 2013. Still, pre-crisis levels are not expected to be reached by then, and will not likely reach pre-crisis levels anytime within the next three years.
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?
ML: Private equity remains the most active interested investor group, though interest from European strategic investors is expected to increase. Interest has been shown in consumer oriented industries and that is likely to continue. Many European strategic investors are predicting flat or negative growth in their traditional markets, and some are now looking for manageable growth from emerging markets. In addition to Russia, Ukraine is receiving some of this interest.
Russian investors remain a probable source of interest in Ukrainian assets, though there has been increased activity from Asia and the Middle East, primarily for agriculture and natural resource assets.
KP: For the selling side, is now an optimal time for a Ukrainian business owner to sell? Or would it be best to wait a year or two?
ML: Valuations can be challenging now for reasons previously mentioned. From the point of view of absolute valuation, if a business is well run and can continue to operate effectively in the near future, it may well be the case to seek a sale next year or later.
That said a well-planned and executed strategic growth plan might be able to take advantage of cheaper assets and less pressure from both domestic and international competitors.
So, there is no absolute answer. It comes down to strategy, execution and the underlying mathematics. Raising growth capital now could prove very rewarding. I have some clients selling equity now, and other clients looking to sell later. Both are correct for their circumstances.
KP: For the buying side, is now an optimal time to for a foreign investors to buy an asset in Ukraine, or would it be best to wait a year or two?
ML: This really depends on the specific opportunity. While purchase prices are in almost all instances are lower than three years ago, this is reflective of the uncertainty in Ukrainian macroeconomics, politics, the state of the Eurozone and world markets in general.
So, an investor will have to calculate whether the price appropriately reflects the risk. That said, there are certain targets that, if available, would likely produce investor interest mainly because of their strategic value. As always, the answer lies in the details.
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?
ML: There is no question that investors respond to clean business operations, (no tax avoidance practices and an organized ownership structure), reliable financial information, efficient operations, a sound strategy, and an impressive management team. The stronger a company looks on these points the better off they will be.
Management needs to convince investors (strategic, private and public) that they are good at what they do, have a well thought out plan, and are fully capable of executing their objectives and fully grasp the concept of shareholder rights. An audit is always the basis of reliable financial information.
If a company isn’t audited, the IPO option is delayed until the audit requirements are satisfied. In private transactions a due diligence can substitute for an audit (if a transaction is contemplated, but the company hasn’t been audited), but an audit is a better starting point.
Get clean title (declared ownership) of assets, define clear development strategy (use a consultant if you have to), and make sure you and your investor have a clear understanding of the objectives for the company, and how those objectives will be carried out.
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?
ML: The top risks are country risk, (which in Ukraine is generally comprises macroeconomic and political risks), and institutional risk (the risk that the company invested in doesn’t execute the development plan properly, or worse, turns against the investor. Economic and political risk, such as they can be calculated must be priced into every transaction.
There is little the investor or the target company can do to mitigate them. Institutional risk can and is managed by investors. Issues include tax avoidance, financial controls and reporting, title to assets, strength of contracts and agreements, and most of all, proficiency and reliability of management.
To mitigate these risks investors will seek control where possible, (some investors will not invest without it), obtain clear representations and warranties in the sale & purchase agreements, establish transaction escrow accounts, and structure transactions, to the extent possible, where the seller’s income is tied to the results of the company, at least for a reasonable period of time.
