M&A Radar 2020: Ukraine

March 2021

KPMG in Ukraine

kpmg.ua 2 M&A Radar 2020: Ukraine M&A Radar 2020: Ukraine 3 Contents Introduction

2020: a year quite unlike any other

When we launched the 2019 edition of the Ukrainian M&A In the face of new waves and variants of COVID-19, the Radar, few could have predicted the profound impact approval of several vaccines and the rollout of vaccination COVID-19 would have on the global population, the world programmes around the world, including in Ukraine, raises economy or our daily lives in the year ahead. hopes that we may see a turning point in both the pandemic and its economic impact in 2021. With over 100 countries in full or partial lockdown by the end of March 2020, most economies around the world Investor confidence in Ukraine will to some extent depend slid into recession despite governments and international on how Ukraine resolves ongoing issues, such as the financial institutions injecting billions of dollars to tackle the dispute with the Constitutional Court of Ukraine, the Introduction Overview 2020 in review Cross-border pandemic. Ukrainian government’s near USD1 billion debt to RES M&A Dynamics producers, and protracted negotiations with the IMF over Beyond the economic impact, the pandemic has ushered the Stand-By Arrangement. These are the most immediate in long-lasting changes to our lives. Global digital concerns affecting confidence and investors will be transformation has accelerated for businesses, consumers watching to how they are handled in the months ahead. and individuals alike; remote and hybrid working has become the norm rather than the exception. Video calls for Despite these headwinds, Ukraine and the United Arab work and socialising, together with e-commerce, are now Emirates signed investment memoranda worth USD3 3 4 6 9 a mainstay of our lives. Such effects will continue to drive billion in February 2021. Such a statement of intent will not M&A as an agent for change. have gone unnoticed by others eying Ukraine's investment potential. There are reasons, therefore, to be cautiously Lockdown saw a sharp decline in human activity, leading optimistic about the outlook for Ukrainian M&A and wider to a global awakening to the negative impact mankind can investment in the country in the coming year. have on our planet. This propelled environmental, social, and corporate governance (ESG) issues up the political and We hope you will find the 2020 edition of the Ukrainian corporate agenda, putting them prominently into focus for a M&A Radar both insightful and thought provoking. wider pool of investors.

Peter Latos 2021 оutlook Sector activity Appendix Partner, Head of Consulting and Deal Advisory KPMG in Ukraine 12 18 33

The reluctance of investors to commit capital as a result of 15% 62% 44% the pandemic was evidenced by the small number of deals 69 $925 m $28 m 4.4% exceeding USD100million in value during 2020. Deal volume Deal value Average transaction value GDP Ten largest Ukrainian M&A deals in 2020

Ukrainian M&A (2013 – 2020) No. Target Sector Acquirer Vendor % Value, The economic impact of the COVID-19 acquired USDm pandemic ended three consecutive years of 2013 3,319 500 109 growth in Ukrainian M&A. 1 TIS Container Transport and DP World PLC TIS.UA 51% 130 Terminal, LLC infrastructure 2014 994 1,588 36 2 Eurozhytlogroup Real estate and Dragon Capital Not disclosed 100% 110 According to the National Bank of Ukraine (NBU), real GDP construction fell by 4.4 percent in 2020, compared with a forecast of 3.5 2015 1,011 48 percent growth at the end of 2019. 3 Khmelnytsk- Agriculture Epicentr K Svarog West Group 96.7% 100 Agro This was the largest decline in the Ukrainian economy 2016 785 55 since the 2013 – 2014 Revolution of Dignity. Considering 4 BILLA Consumer UAB Consul Trade REWE International AG 100% 70 the strong correlation between the real economy and 2017 987 67 Ukraine Ltd. markets House corporate transactions, it comes as no surprise that the value of Ukrainian M&A also experienced a swift and abrupt 5 Kaskad-Agro Agriculture Agartha Fund LP; Vitalii Khomutynnyk - 100% 70 downturn in 2020, falling by 62 percent to USD 0.9 billion. 2018 1,109 714 81 Agricultural Alexandre Garese - private investor Holding private investor The volume of activity fell back toward the level of 2017; with 2019 1,686 734 only 69 transactions announced during 2020, reflecting a 15 81 6 Volia-Cable Innovations and Datagroup; Mykhailo Kyiv Telecommunication 100% 68 percent decline on the prior year. technology Shelemba - private Networks; Telesvit 2020 925 investor; Horizon Capital The decline in the value of Ukrainian M&A was partly 69 attributable to the lower level of transparency. Deal 7 Restream service Innovations and Sapphire Ventures, Not disclosed Not 50 values were disclosed in only 48 percent of transactions Deal value (excl. Significant deals technology Insight Partners and disclosed announced in 2020, significantly below the level of significant deals) (>USD500m) other investors transparency of more mature markets. Deal volume 8 Dnipro Hotel Real estate and Smartland State Property Fund 100% 41 construction At the same time, the average transaction value fell to USD28 million. This was attributable to a combination of the 9 JKX Oil&Gas Oil and gas Bridgewater Holdings Not disclosed 19.97% 30 reluctance amongst some investors to commit capital during Corp the pandemic, the inability of some to raise finance during this period, and non-distressed sellers preferring to delay 10 EVERI Ltd. Transport and Glencore Agriculture OREXIM Group of 100% 25 deals in anticipation of achieving higher price multiples. infrastructure Limited Companies

Combined total 694

As % of total Ukrainian M&A 75%

Inbound

Domestic

Consumer spending 2020, YoY The NBU should also take credit for the success of its The economic slowdown induced by the Ukrainian M&A activity started to gather monetary policy. Despite pricing pressures building during 12.5% pandemic influenced some investors to adopt momentum in the summer and was at full- H2 2020 as a result of the pandemic, higher import prices as the Hryvnia depreciated, and the need for the Ukrainian 8.4% a more cautious approach to evaluating and speed in Q4, with a little under two-thirds of government to raise gas utility prices as part of the IMF negotiating deals in 2020. 1.4% deals announced in H2 2020. agreement, inflation remained under control; rising from 4.1 percent to 5.0 percent over the course of 2020. As This was partially attributed to easing of Ukraine’s previously a result, the NBU was able to slash its policy rate from A total of 27 deals worth USD456 million were announced severe lockdown, similar to relaxation seen in other European 13.5 percent in January to 6.0 percent by June 2020, where during H1 2020; reflecting a 40% drop in deal volume and Q1 Q2 Q3 Q4 states, and partially due to optimism generated by the it stayed for the remainder of the year. 47 drop in deal value compared to H1 2019, and the lowest announcement of agreement of a revised International The easing of lockdown restrictions and improving economic mid-year totals since H1 2015. Monetary Fund (IMF) ‘Stand-By Arrangement’ (SBA) intended climate in H2 2020 helped to fuel the recovery in Ukrainian Ukrainian M&A started slowly in 2020 and was further to advance Ukraine a USD5 billion loan for an 18-month period. M&A activity, with August really being the turning point as six depressed by the lockdown which started in March. This The Ukrainian government took further steps to support the real deals were announced worth a combined USD125 million. more measured approach to deal-making saw the volume economy and strengthen the country’s macro-financial stability 14.9% of deals announced and completed during the year fall to by cutting the prime rate, a move supported by the National Bank 74 percent, down from 88 percent in 2019, with a handful of Ukraine (NBU) and the European Bank for Reconstruction and Recovery continued in Q4 2020 with 26 deals 2020 was a rollercoaster ride for the wider consumer sector. of deals announced during 2020 actually cancelled; the first Development (EBRD) agreeing on a USD500 million FX swap. announced worth a total value of USD187 cases since 2017. The first lockdown and stagnation of nominal wage growth million, making this the most active quarter for saw consumer spending fall 14.9 percent year-on-year (YoY) Furthermore, with over USD1 billion invested during 2020, In April 2020, Regal Petroleum announced that its USD39 Ukrainian deal-making since 2014. in Q2, compared to growth of 12.5 percent YoY in Q1. Ukraine was the third-largest recipient of EBRD funds after million deal to acquire Ukrnaftinvest had lapsed and in June Turkey and Egypt. 2020 Dragon Capital terminated its proposed acquisition of Easing of lockdown restrictions helped consumer spending Idea Bank. Dragon Capital explicitly stated that its decision recover in Q3 with YoY growth of 1.4 percent, although the The most sizeable EBRD contributions were to projects However, economic headwinds were already building was largely due to the economic crisis caused by the spread of full effect of this spending (combined with the resumption related to the transport and infrastructure sector, including: before a second wave of COVID-19 forced renewed global COVID-19, both in Ukraine and around the world, significantly of low double-digit nominal wage growth, pent up demand lockdowns as 2020 came to a close. affecting the potential risks associated with the acquisition. and the forthcoming holiday season) was really only evident Issues around further IMF SBA tranche payments were in Q4; which recorded 8.4 percent YoY growth. Although most market participants focused on preserving compounded by the October decision of the Constitutional operations in order to emerge intact from the pandemic, The pandemic has undoubtedly led to structural changes in €450m Court of Ukraine to rule many of the 2014 anti-corruption some seized the chance to make opportunistic acquisitions. consumer spending behaviour and accelerated demand for reforms unconstitutional. This decision had significant Others continued to complete transactions that had been e-commerce across many categories; something companies To support Ukravtodor's renovation consequences and resulted in hesitance from the IMF to long in the making regardless of the pandemic, driven by the like the MAKEUP Group will be eager to capitalise on. of existing roads and construction fulfil its second SBA payment to Ukraine. of a bypass near Lviv to provide long-term fundamentals of the target companies. The additional failure of the Ukrainian government to meet Traditional brick-and-mortar retailers will have to evolve better access to the Trans-European Ukrenergo’s near USD1 billion obligation to RES producers their business models to meet the challenges these Transport Network (as the guaranteed buyer under laws it enacted in July 2020) Deals announced & completed changes present. Novus supermarket, owned by Lithuania’s BT Invest, virtually doubled its footprint through the also raised concerns that reinforced the IMF's doubts about USD70 million acquisition of Billa-Ukraine’s portfolio of 35 Ukraine's political will to implement suggested changes. supermarkets. Meanwhile, the home improvement retailer This inability to meet IMF targets for reform has raised % % Epicentr K is not wasting any time; in their USD1.2 billion €63m 74 88 questions over when, or even if, there will be a second 2020 2019 investment programme announced in January 2021, the To enable Ukrposhta, the state payment. The contagion of these events has inevitably led retailer unveiled plans to develop their online offering and to a slow start for Ukrainian M&A in 2021, with only six build logistics fulfillment centres. postal service, to push ahead with much needed upgrades to logistics deals announced by mid-February 2021. In May 2020, as the market began to accept the inevitable infrastructure and expand the rural period of turbulence ahead, the Belgian industrial minerals These deals included airSlate, a Ukrainian technology reach of its operating fleet group Sibelco acquired Ukrainian clay mining companies company specialising in process automation and document Euromineral and Kurdyumovsky Acid Resistant Products management solutions, closing a USD40 million round Plant. Horizon Capital’s Emerging Europe Growth Fund also of investment from Morgan Stanley Expansion Capital, acquired a significant minority stake in the MAKEUP Group; General Catalyst, and HighSage Ventures. a fast-growing leader in e-commerce and beauty. 400 Meanwhile, Qatari NEBRAS group invested in six Ukrainian wind farms and two solar power plants, and OKKO announced Purchase of 400 energy efficient acquisition of Kherson crude oil transshipment terminal. trolleybus to replace ageing fleets in 12 Ukrainian cities

While a number of M&A trends can be traced back to late 2019; the pandemic, changing consumer behaviour and concerns regarding supply security have accelerated changes that were already underway.

Digitisation: E-commerce: with digital transformation a online retail and remote key strategic goal for most services have been able to businesses, the providers take advantage of the decline of new technologies are in more traditional consumer themselves targets for acquisition. Ukraine’s IT sector has segments resulting from quarantine measures, as well as Cross-border always been highly regarded and is getting stronger with the rapid shift to remote working. Online delivery services every passing year. in particular have seen a boom in demand during the pandemic for obvious reasons. According to the State Statistics Service of Ukraine, exports of computer services increased to USD2.1 billion in the first In Ukraine, local delivery service Glovo reported growth of nine months of 2020, reflecting YoY growth of 15 percent. 40 to 50 percent ahead of budget, helping the company to This growth helped propel Ukrainian M&A in the innovation achieve breakeven despite investing millions of euros into M&A Dynamics and technology sector to USD184 million in 2020. developing its services. Deals included Restream’s USD50 million funding round Changes in supply chains: led by Sapphire Ventures and Insight Partners, after the lockdowns in China and other multiplatform live-streaming company announced 300 parts of Asia during Q4 2019 percent growth in the number of monthly views for the first caused widespread disruption seven months of 2020. to global supply chains, leading some companies to reassess their dependence on the region and look for alternative sources of supply. Pent- up demand and trade growth accelerated the process of launching new delivery routes, such as a twice-weekly rail freight service connecting European and Asian destinations via the Baltic-Black Sea transport corridor and Baltic-Black Sea transport corridor connecting the Black Sea and the Baltic. This, combined with Ukraine opening up its infrastructure to public private partnerships (PPP), saw USD164 million of deals announced in the transport and infrastructure sector.

Domestic Outbound Inbound

39% 7% 97% 67% 69% 22% $514 m 43 $7 m 1 $405 m 25 Deal value Deal volume Deal value Deal volume Deal value Deal volume

This was also the main reason for a 58 percent decline in the Domestic investment remained the dominant Following the trends of recent years, Ukrainian Despite lockdown restrictions limiting average transaction value to USD37 million (2019: USD88 force of Ukrainian M&A in 2020 investment in foreign M&A targets continued international travel, inbound M&A still accounted million); the lowest value since 2014. The transparency of inbound deals continued the declining trend of recent to decline in 2020, with just one outbound deal for over one-third of total deal volume. years, falling from 47 percent in 2019 to 44 percent in 2020 announced. Domestic M&A accounted for 55 percent of the value and (compared to a high of 69 percent in 2014). 62 percent of the volume of Ukrainian deal-making. Europe (USD135 million, 14 transactions), the Middle East Foreign investors favoured Ukraine’s innovation and Horizon Capital’s Emerging Europe Growth Fund III (EEGF (USD130 million, one transaction), and North America The largest domestic deal announced in 2020 was the technology (nine deals), agriculture (six deals), and III) invested USD7 million for the acquisition of a 6.8 (USD70 million, eight transactions) accounted for a USD110 million acquisition of Eurozhytlogroup (owners of transport and infrastructure (four deals) sectors, which percent stake in Moldova's Purcari Wineries. The Moldovan combined 83 percent of all inbound deal value and 92 101 Tower Business Centre) by Dragon Capital. accounted for just over three-quarters of all inbound deals wine company is well known to Horizon which previously percent of deal volume in 2020. in 2020. The average value of domestic transactions in 2020 invested into the business via its EEGF II fund, divesting its Investments from North America were mainly decreased by 10 percent to USD24 million; the lowest level stake by October 2019 and earning a 3.3 times cash return The 25 inbound deals announced in 2020 were attributable to private equity and venture capital funds since 2014. Meanwhile transparency, in terms of disclosed for its investors. undertaken by 21 different investors, of which one- investing in Ukrainian IT start-ups, including Restream’s deal values, fell from 67 percent in 2019 to 49 percent. third were new entrants to the Ukrainian market. While The outlook for outbound M&A remains depressed with USD50 million round of fundraising. Foreign investments European investors were the most active inbound Approximately 90 percent (USD464 million) of domestic most companies focussing on the domestic market, from Europe, meanwhile, were mainly directed towards acquirers overall, new market entrants were from the M&A spend was concentrated in four sectors in 2020. Real although continued export growth and investment into agriculture and the transport and infrastructure sector. USA (five) and France (two). estate and construction attracted USD205 million, driven infrastructure needed to get goods and people to foreign In 2020, foreign investors purchased four terminals largely by Dragon Capital’s activity in the sector, followed by markets may stimulate activity in the medium-term. Although the combined total of deals was down by 69 in Odesa, five elevators and 118,000 hectares of land agriculture at USD100 million, innovation and technologies percent on the previous year, it is important to remember banks. at USD84 million, and oil and gas at USD75 million. that Bakcell’s USD734 million acquisition of Vodafone A little over half of all domestic M&A volume was focused Ukraine accounted for almost two-thirds of inbound M&A on the same sectors: the real estate and construction sector in 2019. (nine transactions), agriculture (seven), innovations and technology (four), and oil and gas (four).

Inbound M&A deal value by region (USDm), Inbound M&A deal volume by region, 2019 vs 2020 2019 vs 2020 2019 2020 2019 2020

6% 11% 11% 17% 3% 4% 8% 32% 3% 32% 15% 64% 11% 34% 56% 64% 17% 12%

CIS Europe North America MEA CIS Europe North America MEA

If the headwinds can be addressed quickly, and the pieces of the jigsaw fall into place, there is reason to be cautiously optimistic for a modest increase in the overall value and volume of Ukrainian M&A during 2021. We predict that momentum will really start to build in the second half of the year, with a brighter outlook beyond this.

5% 3% GDP Budget deficit

This continuing uncertainty The Ukrainian government Concerns remain over the Ukraine will need to invest a Recently announced plans Changes in legislation should will likely mean that some expects GDP to rally by nearly delayed Stand-By Arrangement significant amount of money in give further reason to be help to fuel further investment investment decisions will be five percent YoY in 2021; (SBA) and the potential for shifting its power sector from optimistic about the outlook for in Ukraine, particularly in the delayed and M&A deals remain driven by a mixture of pent- a political crisis as reforms, high carbon emission coal and investment in 2021. transport and infrastructure, subdued at similar levels seen up investment and consumer required for successful heavily coal-based products to and agriculture sectors. in 2020. spending. conclusion of the IMF deal, are cleaner energy. In the short-term, the USD3 billion now in question. worth of memoranda and contracts On a more positive note, one of the signed between Ukraine and the key reforms expected this year is the With case numbers continuing to There are, of course, far too many This is a key part of future engagement United Arab Emirates in February next stage of implementing the Law on fluctuate, and the vaccination rollout in uncertainties concerning the future with the EU in order to meet ambitious The IMF has only paid USD2.1 billion 2021 during President Zelensky’s Agricultural Land Markets, passed by its infancy, it is too early to determine direction of the pandemic both in European carbon management of the USD5 billion SBA so far, holding official visit to the Emirates is a the Rada at the end of March last year. whether or not Ukraine is over the Ukraine and with the country’s major targets and which will ultimately test back the remaining USD2.9 billion clear statement of intent regarding The next phase is due to take effect on latest wave of the pandemic. If the trade partners to have any clarity at government’s commitment to the because of the Ukrainian government’s future cooperation between the two 1 July 2021 and will cancel the current pandemic can be brought under control the start of the year. Forecasts will European Green Deal. It is expected decision to regulate household gas sovereign nations. moratorium on land ownership. This inevitably change in the first half of that the EU and European investors will during Q2 2021, it will allow public and prices. The government has said will help to attract investment from 2021 as pandemic trends are better provide a large amount of investment While it remains to be seen how economic sector restrictions to be that these were forced measures domestic and foreign sources into the understood and lockdowns start to in Renewables, particularly in wind quickly this translates into capital lifted. throughout the winter period caused Ukrainian agricultural sector. ease. and solar power, assuming that the committed to the Ukrainian state Only when investors and multinational by the country’s coronavirus lockdown; This continuing uncertainty will likely stand-off over unpaid debts between enterprises and private companies Legislative changes implemented companies see verifiable evidence necessary to avoid a jump in energy mean that some investment decisions renewable energy generators and involved, this agreement (together by the Ukrainian government and of the end of the pandemic and the bills whose prices have already led to will be delayed and M&A deals remain Ukrenergo is swiftly resolved. with the possibility for creation of a lawmakers during 2020 have paved the start of a pickup in economic activity protests across the country. subdued during H1 2021. Ukrainian sovereign fund to co-invest way for implementing long overdue will there be a solid recovery in M&A Last year, the European Union While the Ukrainian government is with foreign investors) should go some and long awaited investment into the activity. This applies as equally to named Ukraine as a priority partner currently trying to convince the IMF way to restoring international investor transport and infrastructure sector. Ukraine as other European states. for implementation of the European that this temporary solution was confidence. taken in extraordinary circumstances, Hydrogen Strategy, with an eye on the despite Ukraine’s obligation to launch country’s gas transmission system to As for domestic investment, Head of market mechanisms in the natural transport green hydrogen to the EU. It Dragon Capital Tomas Fiala recently gas market as outlined in the shared remains to be seen what investment announced the group’s plan to close memorandum. this will drive in Ukraine and over what five deals in 2021. Together with time horizon. co-investors and Western funds, Ukraine is scheduled to pay back Dragon Capital envisions deal values However, investors and businesses USD5.2 billion of external debt in 2021 of about USD200 million this year, managers will be paying close attention and is also likely to run a budget deficit which would signal a return to the to what happens with Ukrenergo’s USD1 of between three and four percent of rate of investments seen before the billion debt obligation to RES producers. GDP. pandemic. A quick and decisive resolution of the issue would go some way to restoring broader investor confidence in Ukraine.

Ukraine will be in a strong position to see a revival of investor interest during the second-half of 2021, provided the pandemic is brought under control, the obligation to RES producers is not fulfilled and the IMF tranche is not delayed for too much longer.

The fundamental premise of M&A has stood the test of time. Put simply, investors believe that an asset or company M&A deals, particularly in more challenging Preparing for buyer scrutiny is a crucial will generate a higher return under their ownership than in market conditions like a pandemic, run the risk but often overlooked step. Buyers rarely the hands of its current owner. However, the realisation of of failing due to an unrealistic price expectation complete acquisitions without undertaking these higher returns requires two things. gap between the seller and the buyer. comprehensive due diligence to evaluate the risks, liabilities and potential upsides of a deal. Firstly, successful navigation of the deal process. Secondly, ensuring that the factors that Therefore, understanding the value of what you have to offer to a buyer is key. Taking time to develop a well thought Ideally, a seller will review information in detail from a create or erode value are well understood and through equity story that management buys into, one buyer’s perspective, usually with the support of external managed. One could argue that the first is an which provides a compelling basis for a buyer to invest, is advisors, in order to identify risks and latent upside art, the second is a science. essential. potential. This will include taking action to identify, cure or mitigate risks and realise upsides in advance of making any The incumbent management team must be capable of information available to buyers in the data room. As the saying goes, “time kills deals”. In reality, however, delivering the company’s strategy for growth as most buyers the failure to properly prepare for, and then manage, the will expect to retain this team in the medium-term at least. It is also crucial that management is appropriately Illya Segeda M&A process from beginning to end is what will eventually Meanwhile, projections should be underpinned by historic prepared for buyer scrutiny by dry-running management presentations, answering due diligence questions, and M&A Principal, kill a deal. performance and external market analysis. Having a realistic view of the company’s value from a buyer’s perspective is ensuring processes are in place to routinely update Deal Advisory But what are the key elements of preparing a business for key. information in a consistent manner. KPMG in Ukraine sale and how do we set about organising them? Understanding the seller’s motivation for the deal is a key first step. Rarely are deals solely predicated on maximising Identifying the right ‘buyer universe’ is equally At the end of the day, deal-making a company’s monetary value at exit. as important as defining a clear deal strategy requires assembling the right team Other important factors include the reputation of a buyer, and a compelling equity story. in the right location with the right speed of deal execution, the cleanliness of the deal (in experience and skills. KPMG has more terms of warranties, indemnities, deferred or contingent consideration, etc.), and custodianship of the business, than 50 deal professionals in Ukraine, It is important to create appropriate competitive tension in covering all aspects of the M&A management and staff post-deal. All of these different the deal process. Having access to buyers at the right level concerns influence deal strategy. is critical for this, just as it is for knowing what different process; including M&A lead advisory, buyers will attribute value to in the business for sale. valuation, due diligence (financial, tax, legal, IT, cyber and integrity), Building this understanding through initial desktop research, market soundings, and direct access to shareholders and negotiation support and SPA advisory. the management of potential buyers enables the finetuning of deal strategy, equity story and marketing materials. This will enhance the deal’s likelihood of success before formally going-to-market.

© 2021 KPMG-Ukraine Ltd. All rights reserved. © 2021 KPMG-Ukraine Ltd. All rights reserved. 16 M&A Radar 2020: Ukraine M&A Radar 2020: Ukraine 17 Deal-making: beyond the pandemic While travel restrictions imposed by the pandemic clearly impacted the ability to do deals, particularly cross-border, While the use of material adverse change the use of virtual data rooms and video conferencing had (MAC) clauses, which enable one or both The Covid-19 pandemic is likely to have already reduced the need for travel during a deal process. a long-lasting effect on deal-making. parties to terminate a deal under certain The resulting acceleration of digital Inevitably, though, there will still be a need to ‘kick the tyres’ circumstances, have been on the rise, we are and look the other side in the whites of their eyes during starting to see pandemic-related factors being transformation, disruption to traditional negotiation. business models and changes in consumer excluded from MAC clauses in some SPAs. behaviour will see a greater number of While it is difficult to replace that need with technology, smaller, distressed carve-out transactions as the use of drones and computer visioning provides a viable alternative to a physical fixed asset and inventory inspection But what does the “ordinary course of business” look companies refocus their value chains. in sectors such as agriculture, energy and natural resources, like during a time of unprecedented uncertainty, like a In turn, this will likely accelerate the adoption of new trends and transport and infrastructure. pandemic? Buyers need to carefully consider the pros and in due diligence given the need to use multiple data sources cons of a locked box, including their ability to recover any proven leakage from the seller post-factum. to validate assumptions and look beyond the financials. KPMG’s Site Surveyor is an example of how While the pandemic has resulted in an increased level of Svitlana such technology can be used in this context to uncertainty in both actual and prospective data, robust facilitate a potential deal. The choice of completion mechanism will financial analysis remains core to any deal, albeit with a shift Shcherbatyuk largely depend on the relative bargaining in emphasis. Historical underlying earnings and working Transaction Services Lead, capital analysis should be separated into pre- and post- power of each party; sellers will often favour Deal Advisory, lockdown periods, combined with run-rate analysis and Deal negotiations will often become bogged down in the certainty of a locked box, while buyers will even transaction level data, in order to isolate fundamental KPMG in Ukraine times of uncertainty due to price expectation gaps; even see that completion accounts afford greater business drivers from pandemic related noise. distressed sellers typically have a hard time accepting a price at the bottom of the cycle. In the current environment, security by adjusting for events which impact With businesses across most sectors grappling with digital more and more deals are relying on post-closing on price post-factum. Forecasts will require even greater scrutiny transformation and remote working, combined with the performance-related price mechanisms, such as earn-outs, of underlying assumptions, revenue and growth of e-commerce and direct-to-customer business as one way to bridge the price gap. models, IT and information security is of increasing The world is looking to 2021 with hope for a return to cost drivers, order-book, and market trends. However, it’s important to carefully consider how such importance when assessing the value of a company. normality or, at least, something close to it. Vaccine rollouts Augmenting the target’s financial data with mechanisms are drafted and calculated – the more complex, give expectation that the pandemic will be under control in real-time operational and external market data It is no longer sufficient to simply evaluate the and more adjustments required to say audited data, the many countries in the second half of the year. appropriateness of IT strategy, architecture, and governance more likely the risk of dispute between the parties at the will yield richer business insights to evaluate Nevertheless, M&A processes will bear the legacy of both historical and forecast information. for the business model and future growth. We are time of payout. increasingly seeing the assessment of data security and COVID-19 for some time to come. This legacy has increased Not only has the pandemic impacted the way deals are cyber resilience in the context of deal value becoming a the complexity of deal-making for the next couple of years evaluated but also the process for protecting value through mainstay of the due diligence process. at least, requiring buyers and sellers to transform their Financial and valuation models will need to become more the transaction documents, such as the share purchase approach to evaluating, negotiating, protecting and realising dynamic, able to handle a greater number of flexible input agreement (SPA). In times of uncertainty, deal negotiations the value of deals. assumptions, in order to run multiple scenarios. Use of often proceed more slowly as each party tries to find, in predictive models, in some cases using thousands of The impact of global economic shutdowns their view, a more equitable way to share risk. signals, to analyse a range of possible outcomes is likely has highlighted the importance of evaluating to increase. the target company’s supply chain pre-deal; Locked box completion mechanisms and hybrid locked For many, this will require the support understanding supplier dependency, security box mechanisms are also becoming increasingly popular of external deal advisors, like KPMG, with sellers outside of their traditional mainstay of private of supply and options for substitution is key with experience of successfully KPMG’s Signal Repository is one example of equity. Unlike the completion accounts process, a locked to mitigating business disruption post-deal. box provides greater certainty regarding the price paid but it navigating companies through deals in how structured and unstructured data can be requires a clearly defined transaction perimeter and for the previous times of uncertainty. used by organisations to significantly increase seller to operate the business on the buyer’s behalf in the the accuracy of predictions and business Furthermore, such analysis will also provide the opportunity ordinary course between signing and completion. outcomes. to identifying potential value upsides that could be secured post-deal through optimising procurement or category spend.

Real estate Similar to the previous year, Ukrainian M&A was dominated by four sectors during 2020: innovation and construction 20 and technology, agriculture, real estate and construction, and transport and infrastructure. These four sectors accounted for almost 80 percent of total spend and slightly less than 60 percent of total deal volume.

M&A in the real estate and Digital transformation of the Innovations construction sector in recent years global economy, which the 21 has been buoyed by attractive pandemic has accelerated, and technology returns on retail portfolios, fueled and disruption to traditional by consumer spending growth and business models has helped Overall Sectoral M&A Breakdown, 2020 vs 2019 increased demand for logistics and to drive demand for Ukraine’s warehouse infrastructure to meet highly regarded IT sector. the rapid growth of e-commerce. Agriculture 22 As Ukraine’s largest export Implementation of the law industry, it is unsurprising that on concessions, as well as a the agriculture sector remains growth in trade with China, the focus for both domestic Europe and the Middle East, and foreign investors, with the has also contributed to a rise Transport latter often reflecting sovereign in much-needed investment 23 efforts to address food security into Ukraine’s ageing transport and Infrastructure concerns. network and infrastructure.

M&A by sector, 2019 – 2020 Value Volume Real estate 22% 13% and construction 19% 20% Innovations 20% 19% and technology 16% 14% Agriculture 18% 19% 9% 19% Transport 18% 9% and infrastructure 3% 4% Consumer Markets 10% 7% 2% 10% Oil and gas 8% 6% 2% 4% Metals and mining 2% 10% 1% 2% Banking 1% 9% and insurence 5% Healthcare 1% 3% and pharmaceuticals 4% 7%

2019 2020

© 2021 KPMG-Ukraine Ltd. All rights reserved. © 2021 KPMG-Ukraine Ltd. All rights reserved. 20 M&A Radar 2020: Ukraine M&A Radar 2020: Ukraine 21 Real estate and construction Innovations and technology

56% 44% 3% pts 7% pts 53% 18% 4% pts 5% pts $205 m 9 22% 13% $184 m 13 20% 19% Deal value Deal volume Share of Ukrainian Share of Ukrainian Deal value Deal volume Share of Ukrainian Share of Ukrainian deal value deal volume deal value deal volume

The Ukrainian medicine search-and-delivery platform Liki24 Although investor confidence was impacted by Some industry experts estimate that e-commerce We continue to see strong interest in domestic also raised USD5 million from Horizon Capital and pre- turbulence in the retail and office segments, real requires three times more warehouse and logistics IT companies, as well as those with a solid existing investors (TA Ventures, Genesis Investments, iClub estate and construction continued to account for space than a traditional brick-and-mortar supply developer base in Ukraine. and Mission Tech). the largest share for Ukrainian M&A deal value. chain and the market certainly seems to reflect this. At the same time, domestic investors remained active in Ukrainian IT companies and start-ups. At the end of 2020, Ukraine has a well-deserved reputation as a centre Datagroup, Ukraine’s leading communications solutions Ukrainian quarantine measures, introduced in March to curb Outside of office space, however, real estate as a whole was not of excellence, which should allow it to capitalise on provider, closed a deal to acquire its well-known domestic the spread of COVID-19, placed severe restrictions on the a story of decline in 2020. The sustained growth of e-commerce accelerating developments in e-commerce that look certain competitor Volia for USD68 million with the full backing of operation of retail, restaurant and entertainment facilities. in recent years, which has only accelerated during the pandemic, to provide more opportunities for players in this sector. Horizon Capital’s EEGF II fund. has been a significant driver of demand in the warehouse and Although restrictions were eased in June, footfall remained COVID-19 measures and consumer response have also driven logistics segment of the market. depressed due to the need to maintain social distancing. a boost in online activity and a rise in the volume of M&A transactions in software, e-industries (such as e-commerce, One of the key reforms which the Ukrainian Simultaneously, the shift to remote working left many Dragon Capital, which first invested into the warehouse and government needs to adopt in the near future is offices empty or significantly underutilised, leading to some logistics segment in 2016, renewed its focus in 2020 through the e-pay, e-learning, e-gaming and e-health) and data-rich companies reconsidering their long-term needs and vacating acquisition of the Falby pharmaceutical warehouse complex (for industries (including data centres, data and cyber security, to establish a specialised taxation regime for IT rented spaces. USD5 million) and Lviv Industrial Park (deal value not disclosed). virtual conferences, and data analytics and logistics). companies and IT contractors. Vacancies, combined with an increase in supply (with Dragon Capital also went on to announce the sale of its SK The ‘new normal’, caused by businesses and governments 80,000 m2 of new office space coming to market in 2020), Omega-2 logistics complex at the end of 2020, offloading it responding to the pandemic, has changed our way of The challenge will be to strike a balance between adjusting saw Kyiv’s office vacancy rate increase from nine percent to to one of the biggest pharmaceutical distributors in Ukraine, life and our way of doing business; shifting both online the rates and types of taxes concerning IT businesses while 12.5 percent over the course of 2020, while average rental Optima Pharm. more than ever before. This trend is expected to become still maintaining an attractive market for software developers rates fell by 20 percent. permanent to some degree in the post-pandemic era, as and engineers. people and businesses see the benefits from this new Despite the sharp fall in deal value and volume, real estate We expect to see strong demand in the warehouse mode of remote living and working. The global pandemic’s acceleration of technology adoption and construction continued to attract the largest share of and logistics segment of the real estate market in and 'digital first' approaches to business has also increased investment, with USD205 million spent across nine deals in The innovation and technology sector has been a bellwether the appetite for M&A in this sector, driven by consolidation 2020. 2021, although it remains to be seen how the office of Ukrainian M&A trends this year, with 13 deals announced and vertical integration as companies look to acquire and retail segments will fare in the face of the ‘new in 2020 worth a combined USD184 million. Although the (rather than build) technology solutions in the race to stay The largest deal in the real estate sector saw Dragon Capital normal’ for remote working and e-commerce. value of deals decreased by 53 percent, the volume of competitive and relevant to customers. once again increase its portfolio of prime office space by transactions was up by 18 percent. more than 38,000 m2 through its March acquisition of Kyiv’s Although outside the methodology of the M&A Radar, it During 2020, almost 70 percent of deals (nine deals) in the 101 Tower for USD110 million; the only deal in the office Both the volume and total value of deals in the Real Estate & is worth highlighting that there were also 38 transactions innovations and technology sector were made by foreign segment in 2020. Construction sector had been rising strongly in recent years, as in the innovation and technology sector in 2020 valued at private-equity and venture-capital funds located in North less than USD5 million each. These smaller deals were In hospitality real estate, the State Property Fund of Ukraine Ukraine opened up more to investors and started to invest more America and Europe. Aside from Restream’s USD50 million collectively worth USD109 million, demonstrating the completed the country’s largest privatisation to date in in domestic infrastructure. fundraising, US based Quadient acquired YayPay, a Ukraine underlying strength of the sector. July; when Smartland won the auction of Kyiv’s landmark However, activity fell sharply as a result of the pandemic SaaS accounts receivable platform, for USD20 million. Other Dnipro Hotel with a bid of USD41 million. Smartland owner due mainly to the dramatic collapse in the market for notable deals in the sector included: Alexander Kokhanovskyy plans to invest a further USD20 office space (down from nine transactions in 2019 to one — London-based venture capital fund Hoxton Ventures million to turn the hotel into Ukraine’s first multifunctional transaction in 2020). Nonetheless, we observed activity invested USD10 million into Preply.com; a US- esports arena. in the warehouse real estate market in 2020 and at the headquartered business with its major operations based beginning of 2021, caused by the rapid development of in Ukraine and which has quickly established itself as a e-commerce and subsequent changes in supply chains. leading portal to match language tutors with clients. — Chernovetskyi Investment Group, one of the largest Taking into account the low vacancy rate in the warehouse real venture capital groups in Eastern Europe, invested USD6 estate market and new trends caused by the pandemic, we million into Zakaz.ua, a company which provides grocery believe there will be increased interest and activity in this sector delivery services to major Ukrainian supermarkets. in the coming year and beyond.

24% 13% 9% pts 108% 100% 14% pts 5% pts $170 m 13 18% 19% $164 m 6 18% 9% Deal value Deal volume Share of Ukrainian Share of Ukrainian Deal value Deal volume Share of Ukrainian Share of Ukrainian deal value deal volume deal value deal volume

Agriculture remains a powerhouse of the Land reforms have enabled The transport and infrastructure sector was January 2020 marked the dawn of public-private Ukrainian economy and a key target for domestic and foreign companies one of the most sought after sectors in 2020, partnerships (PPP) in Ukraine; something the domestic and foreign deal-makers to acquire land in Ukraine, already benefitting from both ongoing and planned country’s government had been discussing for opening up the country’s lucrative government initiatives. two decades. agriculture and food processing Significant investment into the sector over recent years by sectors to investors. both domestic and international investors has seen new These projects aim to attract private investment to The Infrastructure Ministry’s concessions for Kherson farming practices and technologies employed to drive modernise Ukraine’s ageing infrastructure and develop new and Olvia seaports attracted both Ukrainian and foreign efficiency gains and improve yields. international transport corridors. investors, with seven companies competing in the final Multinational companies are expected to invest more in tender. Risoil-Kherson, a Swiss-Georgian consortium, won However, adverse weather and an abnormal drought in 2020 2021, both to source produce for other markets and to As a result, transport and infrastructure was the fourth the 30-year concession for Kherson seaport which handles brought two consecutive years of record Ukrainian harvests process produce for the domestic market. Ukraine is already largest sector in 2020, attracting USD164 million into six both Dnieper River and Black Sea cargo. to an abrupt end. a big producer and exporter of grains but reforms should deals. Deal-making was dominated by foreign investors, QTerminals, a joint venture between Mwani Qatar and Grain was particularly badly hit, with the 65.4 million tonnes allow for greater diversification. including the USD130 million, acquisition of a 51 percent Milaha which operates Qatar’s Hamad Port, won a 35- harvested reflecting a 13 percent percent drop on the prior year. stake in the TIS Container Terminal by DP World, a Although the sector has seen a more than 40 percent year concession for Ukraine’s Olvia seaport on the Black However, despite Ukraine's main export crops of wheat and multinational logistics firm which operates 123 businesses decline in the deal volume since 2018, we anticipate that Sea. Not only do these PPPs provide income to the State corn being amongst the worst affected by the weather, Ukraine across 54 countries. deal volumes will return relatively quickly; especially as the from concession payments*, they will also enable vital remained the world’s second-largest corn exporter in 2020. land reform process continues. Although shipping volumes fell by approximately 10 percent investment to modernise the ports and local infrastructure. in 2020, mainly due to lockdown restrictions, optimism Risoil-Kherson plans to invest at least UAH216 million Although the long-awaited land reform law about growth in shipping volumes through Ukraine’s ports in recent years (up 20 percent in 2019) was instrumental in (USD7.7 million) in the first ten years of their concession, adopted by the Ukrainian government in Number of deals by segment influencing further investment. while QTerminals will invest UAH3.4 billion (USD120 million) 2020 struck a compromise among competing over the first five years of Olvia seaport’s operation. interests in the country, it may well be the first Risoil S.A., a Swiss business which already operates the largest bulk liquid terminals in the Black Sea at Odesa’s step towards a free land market. 2 Chornomorsk Merchant Sea Port, made the decision to acquire two further terminals at the beginning of the year based on expectations of further growth to come: TK Exim The law, which came into effect on 1 July 2020, relaxes Land Oil and Boconti Ukraine. Glencore Agriculture Limited land ownership rules for Ukrainian owned businesses and Grain elevators provides the opportunity for international companies to 6 likewise acquired EVERI Ltd, a terminal operator in Mykolaiv, 3 Processing plants lease land for up to 50 years. from the OREXIM Group of Companies for an undisclosed Other consideration. Over the course of 2020, agriculture accounted for almost one-tenth of the total value and one-fifth the total volume 2 of Ukrainian M&A. Land bank acquisitions accounted for six deals in the sector, including those by Epicentr K and Agartha Fund LP which were amongst the ten largest Ukrainian M&A deals of 2020. Elsewhere, SAS Investcompagnie, a little-known French company established in 2018, acquired 71,000 hectares of land held by three Ukrainian agricultural enterprises; Agrikor Holding, Agroprime Holding, and Agrovit, for an undisclosed sum. Outside of land, Cargill acquired Neptune, a Black Sea deepwater grain terminal with capacity of up to 290,000 tonnes, also for an undisclosed sum.

© 2021 KPMG-Ukraine Ltd. All rights reserved. © 2021 KPMG-Ukraine Ltd. All rights reserved. 24 M&A Radar 2020: Ukraine M&A Radar 2020: Ukraine 25 Transport and Infrastructure Infrastructure: driving economic growth After becoming one of the most sought after sectors in 2020, the outlook for Ukrainian Volodymyr Marchuk transport and infrastructure looks bright. Associate Director, Deal Advisory, Infrastructure, Ukrainian transport infrastructure has suffered from Number of deals by segment KPMG in Ukraine underinvestment for decades and needs to be improved and expanded to support the country’s ambitious economic plans. It is therefore no surprise that the Ukrainian After years of sustained neglect, Ukrainian government has confirmed that this sector is a priority for infrastructure stands before a possible tidal 1 development and one which international finance agencies wave of investment, spurred on by long awaited say they are looking to fund. regulatory changes and the commitment of Terminal operator Ukraine’s geographic location, combined with recent international finance agencies to propel the 1 Public transportation logistical developments such as a twice-weekly rail freight country toward its true economic potential Logistics company service connecting European and Asian destinations and the 4 ‘Black Sea to Baltic’ international intermodal corridor, makes the country an important transit route for trade and travel between Europe, Asia and the Middle East. There is much to be said about unlocking the potential for modern, efficient and reliable infrastructure in Ukraine. Ukraine has a viable portfolio of potential We expect that this growth in traffic, encouraged by Infrastructure is the backbone of a healthy economy; it infrastructure projects to support the country’s companies looking to Ukraine as an option to decouple powers businesses, connects cities, and enables the economic development and integration into supply chains from Asia, will drive further investment in the flow of goods and services within and beyond a country’s country’s transport and infrastructure sector. borders. Situated at the crossroads between Europe and Europe. Asia, Ukraine is well positioned to reap the benefits of The Ukrainian government and International Finance investment needed in the region to support global trade and Corporation (IFC) are launching a long-term public-private Provided the Ukrainian government continues on the path the decoupling of the supply chains. partnership programme for roads, including six pilot projects of reform, this should ensure the support of the European worth over USD1.5 billion. Public private partnership, Union and international development agencies such as the combined with plans for air, sea and river port concessions Structural changes in how we live, work and EBRD, EIB, and IFC. in 2021 and beyond, are expected to drive investment in the spend our time and money will influence future In 2021, we expect positive dynamics in terms of the sector. demand for different modes of transport. recovery of freight traffic volumes to pre-crisis levels but also expect some changes in terms of the mixed mode of transportation due to ongoing pandemic related restrictions. Add to this the desire for energy independence, food The upcoming integration of Ukraine into existing security, and efforts to de-risk global supply chains by international infrastructure and routes, specifically those in developing regional supply models, and it’s clear to see the Europe and the EU, must also take into account potential factors that will influence capital allocation into associated new environmental restrictions and policy alignment to infrastructure. harmonise with EU standards. Examples of policy alignment On top of these existing pressures, the recovery of rail include ‘carbon neutral’, road safety, and electric vehicle and air passenger traffic will depend on how the pandemic charging commitments; all of which will require additional unfolds in 2021, as well as the speed and effectiveness of infrastructure investment. the vaccination rollout.

Air transport Infrastructure: key projects PPPs are being considered for four regional airports. Lviv, Chernivtsi, Rivne, and Kherson.

These airports will collectively benefit from USD430 million worth of investment for 30-year concession deals. Ukraine's Ministry of Infrastructure In total, 13 existing regional airports have been earmarked for envisages USD20 to 25 billion of reconstruction and there are plans for a new airport to be constructed in Transcarpathia. infrastructure investment up to b Boryspil Airport will also concentrate on reconstruction of the western 2030, of which half is expected to Poland Poland border runway and benefit from total investments estimated at over EUR350 come from private investors. ahodyn Kovel M-19 Ustulug million, including a EUR270 million loan from the European Investment Lutsk Gdansk, Kyiv Bank (EIB). H-22 Rivne M-06 Gdynia S-19 Eastern v Access Zhytomyr n oad Boryspil Dry Port ort A-4 а Bass Bila Tserkva Kharkiv Rostock, Hamburg, Korczowa- Krakovets Ternopil M-03 Seaports Rotterdam Khmelnytskyi с Lviv Reshetylivka Sknyliv M-05 Poltava Air transport Mostaska Stryi GO Highway Slovakia Н-01 Railway station Kremenchuk Ivano-Frankivsk Bratislava, remenck H-31 Develop or Vienna, Prague R-2 Bass M-29 Lviv-Striy- H-10 Vinnytsya reconstruction Mukachevo- Uman railway projects Dyida Kropivnytskiy Brde over neer Dnipro Hungary hop n remenck Roads Dyida Chernivtsi d M-04 M-3 Kriviy Rih Zaporizhzhya Brde over Н-14 Moldova vdenn B Rijeka, Piraeus H-11 Genoa, Marseille Romania Mariupol Mykolaiv Berdyansk Olvia M-14 Rail Kherson Plans to increase rail infrastructure Chornomorsk Odesa Skadovsk development aim to attract investments from Bilhorod- old arc Roads both international financial institutions and Dnistrovskyi The GO Highway project: part of the Trans- private investors for the following objects: Izmail European Transport Network (TEN-T) and — Commissioning seven passenger stations on concession: Kyiv, Reni Ust- intermodal Southern Silk Road route. Dunaisk Chop, Mykolaiv, Vinnytsia, Dnipro, Kharkiv, Khmelnytskyi; Between 2023 and 2025, the Ukrainian government plans to launch — Purchase electric freight locomotives to renew Ukrzaliznytsia PPPs for toll roads with projects in Kyiv alone covering up to 1,600 km rolling stock, by 2025. Total investment: USD1.4 billion; and requiring up to USD3 billion of investment. — Kyiv Urban Electric Train development, to 2025. Total investment: Construction, reconstruction and capital repair of 1,746 km of USD298 million; Seaports road infrastructure from Odesa (Ukraine) to Gdansk (Poland). Total investment: +USD2.3 billion. — Railway infrastructure development and regional reconstruction Following successful tenders for projects (2021 – 2024). Total investment: USD106 million;* concessions of the Kherson and Kyiv Ring Road reconstruction (between M-05 and M-06). Total Olvia seaports, the government plans investment: +USD400 million. — Transport hub development in Kovel and Chop; one of the key portconcessions for Chornomorsk, Western crossings in Ukraine. Total investment:USD32 million.** Repair of 10 key road sections, including 6 pilot road PPPs supported Odesa, Berdyansk, Mariupol, Reni, Izmail, as well as the by the International Finance Corporation (IFCS). Total investment: privatisation of stevedoring companies in the ports of: Bilhorod- USD1.5 billion. *Includes: Dnistrovskyi, Ust-Dunaisk and Skadovsk. (a) construction of a ‘Dry Port’ logistics hub on the Polish Border in the Lviv region named Kremenchuk bypass road development, M-22 Poltava - Oleksandriya In total, 13 concessions are expected to draw USD1.8 billion in ‘Mostyska 2’, (b)reconstruction and electrification of the ‘Kovel-Yahodyn-Poland border’ railway in route reconstruction, Dnieper River bridge (total length: 35 km). Total the Volyn region, (c)reconstruction of the ‘Mostaska-Sknyliv’ railway, (d)development of a railway private investment in the period to 2038, according to a new bridge for the ‘Kryvyi Rih and Kryvyi Rih-Western Line’; investment: USD720 million. Seaports Development Strategy approved by the Cabinet of ** This development of the ‘East-West Gate’ will enable transport links with Slovakia and Pivdennyi Buh bridge, Mykolaiv. Total investment: +USD2 billion. Hungary via the Hungarian rail terminal in Fényeslitke (currently under construction). Ministers.

the state. A so-called ‘investment nanny’ will also be provided While 2020 was turbulent and unpredictable to investors to support them at all stages of the project. Apart from the important legislative There has been significant currency for businesses, the Ukrainian government developments last year, Ukraine also presented liberalisation over the last two years but there and lawmakers spent the year preparing The inland water transport major infrastructure programmes covering still remain some key restrictions preventing law was finally adopted after a infrastructure projects and developing a decade of debate, contributing railway, aviation, maritime and road projects. completely free cross-border capital flow. legislative basis for their implementation. to the development of a truly multimodal transport system for Given the duration and complexity of infrastructure Ukraine and beyond. However, there are still challenges that need to be A proper legal framework, one that ensures greater projects, the limitations on settlements under export- addressed for these projects to succeed. Among those import transactions still create obstacles to implementation. certainty and transparency, is crucial for bringing investors While attracting some criticism from various stakeholders, impacting the most sectors are: The inability to properly hedge FX risks plays an important into the country and unlocking financing for private and PPP this development is nevertheless an important step for role for an investor in deciding whether to proceed with a projects. Key legislative highlights that will have a significant A proper state budgeting process revitalising Ukrainian rivers as one of the cheapest and most project. impact on infrastructure investment include: environmentally-friendly means of transporting freight. for implementing PPP projects Coming into effect in January 2022, the law is expected to must be in place to enable a public Although the new Capital Markets Law has introduced important concepts for developing derivatives and repo State support for large private boost river freight traffic (currently only one percent of all partner to meet its long-term markets in Ukraine (master agreements, close-out netting, investment projects has now freight traffic) and attract more investment in this sector. obligations, given that the average etc.), the full-scale use of FX derivatives to hedge currency been proposed for both foreign term of presented projects is The inevitable capital market risk will only happen after various by-laws are adopted and and domestic investors as part of around 20 years. revolution resulting from the new the remaining currency control restrictions are lifted. Ukraine’s investment promotion Capital Markets Law is expected This is one of the key aspects that any private partner agenda. to be a turning point for many considers when assessing a country’s ability to guarantee sectors, including infrastructure. financial performance of a PPP project. A recent draft While there is a lot yet to be done to improve the New infrastructure investment projects of EUR20 million law introduced changes to the currently existing three- The law creates a new comprehensive legal framework for legal framework, state authorities already have or more with a 5-year implementation horizon will now be year budgeting principle, allowing the state to undertake the proper functioning of capital markets and introduces sufficient discretion under the law to ensure eligible for support. long-term obligations within the PPP framework. When new instruments, including infrastructure bonds, for state successful infrastructure projects. adopted, this law will create the necessary conditions for authorities and/or private investors to finance projects This will come in the form of tax- or land-related benefits or implementing large PPP infrastructure projects and boost (including via PPP). This law should solve one of the major construction of project infrastructure facilities at the expense of investment. causes behind the low number of infrastructure projects. Ensuring road-use regulations It is therefore a question of Ukraine’s readiness to exercise (speed limits, maximum cargo its political will, coupled with invaluable support from Industry expert opinion from CMS Cameron McKenna Nabarro Olswang, a law firm which KPMG in Ukraine has prior weight etc.) are properly enforced international and local partners, that will be key for the experience of partnering with on selected projects. is a major issue that must success of infrastructure projects in the country. be addressed to successfully implement road projects. Current regulations seem to only exist on paper which poses a big question: would any investor assume liability to maintain roads to the required standard if there is no viable mechanism to ensure users comply with regulations that directly affect the condition of said roads? The operation of weigh-in-motion systems was regulated in 2019 and several pilot systems have already been launched. However, the rights and level of control that a private partner has regarding road users following required regulations, as well as the impact this has on contractual obligations, is an issue that must be solved by amending concession/PPP legislation.

Tetyana Dovgan Kateryna Chechulina Partner, CMS Cameron McKenna Counsel, CMS Cameron McKenna Nabarro Olswang Nabarro Olswang

Other sectors Consumer Markets

145% 37% 8% pts 3% pts $93 m 5 10% 7% Deal value Deal volume Share of Ukrainian Share of Ukrainian Consumer Markets 31 deal value deal volume Oil and Gas Oil and Gas 31 32% 33% 6% pts 2% pts $75 m 4 8% 6% Metals and Mining Deal value Deal volume Share of Ukrainian Share of Ukrainian 31 deal value deal volume

Banking and Insurance 32 Metals and Mining

Healthcare and 46% 250% 1% pts 8% pts Pharmaceuticals 32 $19 m 7 2% 10% Deal value Deal volume Share of Ukrainian Share of Ukrainian deal value deal volume

Banking and Insurance

53% 50% 1% pts 4% pts $10 m 6 1% 9% Deal value Deal volume Share of Ukrainian Share of Ukrainian deal value deal volume Appendix Healthcare and Pharmaceuticals

95% 67% 3% pts 4% pts $5 m 2 1% 3% Deal value Deal volume Share of Ukrainian Share of Ukrainian deal value deal volume

KPMG Ukraine Macro trends and Macro trend M&A database medium term forecasts 2019 2020E 2021E 2022E 2023E 2024E

GDP, UAH bln nominal 3,975 3,903 4,142 4,576 4,953 5,400

This report is based on the KPMG Ukraine Information presented in this report on macro trends and GDP, USD bln, nominal 154 145 142 151 157 165 M&A database which includes transactions where medium-term forecasts are based on data from DT-Global either the target (inbound) or acquirer (outbound) or both Business Consulting GmbH, a consultancy company offering Growth, real % YoY* 3.2% (5.6%) 3.6% 4.8% 4.7% 4.3% advice and information on global business and emerging (domestic) are Ukrainian. All data is based on transactions CPI - average, % YoY 7.9% 2.6% 5.6% 6.2% 5.6% 4.8% completed between 1 January and 31 December 2020 or markets with a focus on Central & Eastern Europe and the announced during this period but pending at 31 December Russia-CIS region. CPI - period-end, % YoY 4.1% 3.7% 6.5% 6.0% 4.9% 4.9% 2020. Historical data may differ from earlier versions of this report as the KPMG Ukraine M&A database is Gross fixed investment, real % YoY 14.2% (19.0%) 7.0% 6.5% 6.3% 6.0% updated retrospectively for lapsed deals and information subsequently made public. Industrial production, real % YoY (0.5%) (7.3%) 5.0% 4.5% 3.2% 2.8% The KPMG Ukraine M&A database has been complied over a number of years based on information included in Agricultural output, % change YoY 1.4% (6.0%) 4.5% 2.5% 2.5% 2.5% the Mergemarket M&A deals database, EMIS DealWatch database and S&P Capital IQ database, together with Bank average lending rate, % 19.8% 14.4% 12.7% 12.3% 10.8% 9.1% KPMG desktop research of other sources. Data includes transactions valued in excess of USD5 million, as well as transactions with undisclosed deal values where the target’s Real disposable income, % YoY 1.0% 14.4% 11.5% 6.1% 7.0% 5.1% turnover exceeds USD10 million. Unemployment, % EOP 8.2% 9.5% 9.6% 8.8% 8.8% 8.3% Deal values are based on data included by Mergermarket, DealWatch and Capital IQ, as well as company press Budget, balance % of GDP (1.9%) (6.9%) (6.2%) (4.3%) (3.6%) (2.8%) releases and market estimates which are disclosed in the public domain. Current account,% of GDP (2.7%) 2.6% (0.3%) (0.8%) (2.7%) (2.7%) Between 2013 and 2020, transaction values were not publicly disclosed for 50 percent of known Ukrainian M&A UAH/USD, year-end 23.7 28.3 29.8 31.0 32.2 33.4 deals on average. This low level of transparency may distort the data included in the KPMG Ukrainian M&A database and UAH/USD, average 25.8 27.0 29.2 30.4 31.6 32.8 the comparability of deal data between periods. * Source: Economist Intelligence Unit.

Peter Latos Oleg Neplyakh Partner, Partner, Valuations, M&A, Financing Head of Consulting Head of Energy & Natural Resources and Deal Advisory

[email protected] [email protected]

Dmitry Musatov Yuriy Fedoriv Partner, Director, Valuations, Head of Financial Services M&A, Financing and Restructuring

[email protected] [email protected]

Illya Segeda Svitlana Shcherbatyuk M&A Principal, Transaction Services Lead, Deal Advisory Deal Advisory

[email protected] [email protected]

Volodymyr Marchuk Yuriy Katser Associate Director, Director, Deal Advisory, M&A Legal Infrastructure [email protected] [email protected]

Maksym Zavalnyy Director, M&A Tax

[email protected]

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