In this Kyiv Post interview, Maksym Cherkasenko, partner in Ukraine at the Arzinger law firm, said that Ukraine I very unlikely to experience an investment and M&A boom in the next year or so due to domestic and global concerns.
Kyiv Post: Do you see the Ukrainian M&A market to recover to pre-crisis levels? If so, when and what sectors will be most attractive?
Maksym Cherkasenko: I suppose it is very unlikely in the next year and a half. This is connected with the overall situation in the global economy as well as poor conjuncture of the Ukrainian market formed due to internal political processes and risks related there within.
Even though we do not expect the M&A market volumes to recover to their pre-crisis level, we do foresee further minor growth in certain types of transactions. Thus, if the aggregate value of M&A transactions increases, it will be rather a slight increase. It will depend a lot on the results of privatization in the energy sector as well as chemical industry (particularly as regards to Odesa portside plant). While trying to determine the M&A transactions volume, the non-transparency of Ukrainian market should be taken into due consideration. By saying non-transparent market we mean that major processes of business assets redistribution take place in favor of new owners being shady and not subject to accounting and evaluation.
The agrarian sector remains one of the most attractive markets in Ukraine. It is connected with a big growth potential and low level of market consolidation. Liberalization of the land market can serve as an impulse too. Telecommunication sector along with pharmaceutics and retail will also remain attractive.
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?
MC: At the moment and in the nearest future Ukrainian financial and industrial groups and large companies, seeking further consolidation of their markets and earning/strengthening leadership positions, will become the main buyers of assets. Western investors do not show great interest in Ukraine and will unlikely become active players on our market in the nearest perspective.
On the contrary, Russian business has been demonstrating high activity in the past few years and presumably will be as active in 2012-2013, particularly after parliamentary elections in case there are no essential changes in Ukrainian internal political situation.
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?
MC: Now it is not the best time for sellers to sell due to complicated economic conditions for business development, observed in the past periods, which obstructed the majority to show high financial results and which are fundamental for estimation of value of business for sale. For some of them the reason mentioned above in addition to unfavorable conjuncture on external markets urged to reconsider their plans for entering external capital markets in 2012.
Also the number of business sellers is much higher than the number of potential buyers, which also has a negative impact on assets’ value.
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?
MC: In terms of value of assets for potential buyers it is a good time now because the financial resources deficit, debt load, reinforcement of administrative pressure on businesses, absence of effective mechanisms of judicial protection of their rights and investments force more and more business owners to come up with a decision to sell out.
We all know that as the number of offers grows, the prices fall. At the same time only few foreign investors are ready to buy assets in Ukraine knowing the risks they may face in such case. Lately in our practice there were cases when western investors refused from closing transactions on purchase of assets in Ukraine due to worsening of conditions for business development and protection of rights and interests in Ukraine. Unfortunately there are too many negative examples proving increase of risks in conducting business.
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?
MC: For the majority the main strategy set at increase of business capitalization remains the complex business restructuring aiming optimization of:
– Corporate structure (creation of holding schemes in foreign jurisdictions allowing to effectively settle relations between business owners);
– Assets structure (withdrawal of non-core and illiquid assets)
– Taxation (legal minimization of taxation burden over revenue, generated in course of business activity in Ukraine. Implementation of international standards of accounting and reporting)
– Corporate governance (implementation of the best corporate practices adopted in developed countries)
– Risk management systems (identification of key risks and development of mechanisms of their minimization. For example, transfer of risks connected with operation activity from companies, owners of assets, on to the operation companies)
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?
1) Risks related to the loss of assets due to defects in seller’s title,
2) Risks of sanctions being applied by state authorities, related to the company’s activity in the past (due to violation of tax, monetary, antimonopoly, nature protection laws, etc. ),
3) Risks related to the neglected claims of the creditors,
4) Risks related to the loss of assets due to raiders’ attacks, fraud on the part of business partners and racket on the part of governmental authorities (corruption)
5) Risks related to the inconsistency of judicial protection in Ukraine Risks, specified in points 1 through 4 are minimized with the help of profound legal analysis (Legal due diligence) to be performed prior to entering the contemplated transaction, as well as proper structuring of the transaction (using SPV and holding structures in foreign jurisdictions, applying foreign law). As a safety net in order to solve the problem with judicial protection, investors should resort to international arbitration for dispute resolution between the buyers and sellers as well as between business co-owners in future. Such arbitration clause is usually included in the sale and purchase transactions and also in the shareholders’ agreements, governed by foreign law.
