Russian M&A Review 2017

Russian M&A review 2017 March 2018 KPMG in Russia and the CIS kpmg.ru 2 Russian M&A review 2017 Contents page 3 page 6 page 10 page 13 page 28 page 29 KEY M&A 2017 OUTLOOK DRIVERS OVERVIEW IN REVIEW FOR 2018 IN 2017 METHODOLOGY APPENDICES — Oil and gas — Macro trends and medium-term — Financing – forecasts sanctions-related implications — Appetite and capacity for M&A — Debt sales market — Cross-border M&A highlights — Sector highlights © 2018 KPMG. All rights reserved. Russian M&A review 2017 3 Overview Although deal activity increased by 13% in 2017, the value of Russian M&A Deal was 12% lower than the previous activity 13% year, at USD66.9 billion, mainly due to an absence of larger deals. This was in particular reflected in the oil and gas sector, which in 2016 was characterised by three large deals with a combined value exceeding USD28 billion. The good news is that investors have adjusted to the realities of sanctions and lower oil prices, and sought opportunities brought by both the economic recovery and governmental efforts to create a new industrial strategy. 2017 saw a significant rise in the number and value of deals outside the Deal more traditional extractive industries value 37% and utility sectors, which have historically driven Russian M&A. Oil and gas sector is excluded If the oil and gas sector is excluded, then the value of deals rose by 37%, from USD35.5 billion in 2016 to USD48.5 billion in 2017. USD48.5bln USD35.5bln 2016 2017 © 2018 KPMG. All rights reserved. 4 Russian M&A review 2017 Russian M&A (2011–2017) We believe that the outlook 621 for 2018 is for moderate 546 growth, in both the number 56.0 14.4 470 482 and aggregate value of deals, compared to 2017. 334 333 302 11.3 100.9 79.0 79.5 64.8 66.9 70.0 52.0 2011 2012 2013 2014 2015 2016 2017 Deal value (excl. mega deals), Mega deals (>USD10 bn), Number of deals USDbn USDbn Source: KPMG analysis Progress in terms of economic compounded following the recovery, although positive, has publication of the so-called Kremlin been slower than that targeted report . The economy has largely by the government. One of adapted to the 2014 sanctions, and the principal reasons for this investors have become used to is continuing uncertainty over working within the legal constraints sanctions, which was further they impose. However, two key factors could influence Russian M&A during the year ahead: how the US August 2017 sanctions are further enforced, and the Russian presidential election cycle. 1 A report listing officials and billionaires from Russia’s ruling elite that could be targeted through further sanctions. It was compiled by the US Treasury Department, mandated by the US Congress under the Countering America’s Adversaries Through Sanctions Act, and made public on 30 January 2018. © 2018 KPMG. All rights reserved. Russian M&A review 2017 5 Russian M&A largest deals in 2017 % Value Target Sector Acquirer Vendor acquired USDm CEFC China Energy Glencore, Qatar 1 Rosneft Oil Company* Oil & Gas 14.2% 9,254 Company Limited Investment Authority Otkritie Financial Banking & 2 Central Bank of Russia Private shareholders 99.9% 7,720 Corporation Bank** Insurance Joint venture of ride- Innovations & Yandex, N.V.; Uber Yandex, N.V.; Uber 59.3%/ 3 hailing businesses of 3,800 Technology Technologies Technologies 36.6% Yandex and Uber The Nature's Bounty Holland & Barrett LetterOne Group 4 Consumer Markets Co; The Carlyle Group 100.0% 2,250 International (Mikhail Fridman) LP 5 Yuzhno-Russkoye field Oil & Gas OMV AG Uniper SE 25.0% 2,040 6 SIBUR Holding Chemicals Leonid Mikhelson Kirill Shamalov 14.3% 1,910 Eurasia Drilling 7 Oil & Gas Schlumberger Limited Private shareholders 51.0% 1,900 Company Limited Qatar Investment Authority; AnAn 8 En+ Group Metals & Mining Oleg Deripaska 18.8% 1,500 Group; Russian Direct Investment Fund Retail portfolio of Real Estate & 9 Fort Group Immofinanz Group 100.0% 1,051 Immofinanz in Moscow Construction Communications 10 MegaFon Gazprombank Telia Company AB 19.0% 1,046 & Media largest as a % of total deals 48.5% transactions 10 in period USD32.47bln in 2017 *The completion of the deal was postponed due to the CEFC’s cash constraints. **On 11 December 2017, the Central Bank of Russia acquired 99.9% of the ordinary shares of Otkritie Financial Corporation Bank as part of its bankruptcy protection measures. © 2018 KPMG. All rights reserved. 6 Russian M&A review 2017 2017 in review As previously mentioned, part of GDP Last year also saw the consumer the reason for the increased sectors beginning to show signs of optimism and activity is the recovery after experiencing a slump economy continuing to show strong in the previous two years. resilience to both the sanctions and 1.8% lower oil revenues. The large drop in inflation The economy continues to benefit (which is estimated to from increased competitiveness as a result of the weak rouble and have ended the year According to Macro- a steady shift in consumption close to 2.5% year-on- towards domestically produced year, compared to 5.4% Advisory estimates, GDP goods. The agriculture sector expanded by 1.8% in 2017, in 2016) in combination has been the big winner from with a pick-up in wage thus ending the two-year the weaker rouble and Russia’s recession which saw GDP counter-sanctions, which bans the growth helped boost contract by 2.8% and 0.2% import of many food types from consumer spending and the EU and US, and was again confidence. in 2015 and 2016, one of the main drivers of the respectively. recovery in 2017. Last year Russia was the world’s largest exporter of This, together with a steady wheat and sugar, and the country decrease in debt servicing costs recorded significant increases in following the CBR cutting its the production and export of other benchmark interest rate and the high agriculture and food products. street banks following suit, saw a return in demand for higher-priced durable goods, such as vehicles. The total number of passenger and light commercial vehicles sold in 2017 rose 12%, to 1.5 million, the highest number recorded since 2009 and testament to the improving economic environment. © 2018 KPMG. All rights reserved. Russian M&A review 2017 7 Deal value by sector: 2017 vs. 2016 Deal volume by sector: 2017 vs. 2016 USDbn Oil & Gas 4.7 Banking & Insurance 43 2.3 100 31 3.3 1.5 5.0 Real Estate & Construction 44 3.2 18.4 86 44 4.0 2.3 Metals & Mining 3.5 77 Innovations & Technology 1.7 63 41 2017 5.2 2016 Consumer Markets 2017 10 2016 8.8 40.6 102 Communications & Media 12 43 55 5.5 9.1 Chemicals 8.3 36 1.1 57 28 Agriculture 48 6.9 37 7.5 Other 71 Note: Further detailed analysis of M&A activity by sector is presented in Appendix 4. Source: KPMG analysis Investors also responded to the government’s efforts The innovations and technology sector saw one of the and commitment to a new industrial strategy aimed largest deals of 2017, with the USD3.8 billion merger of at creating a more diversified activity base and a Yandex and Uber’s ride-hailing businesses in Russia broader mix of exports, which traditionally have been and other CIS countries. The deal effectively sees Uber dominated by the extractive industries. The so-called withdraw from the Russia and CIS market, and follows localisation programme, in tandem with the improved its 2016 exit from China, where it sold its operations competitiveness of the economy, have begun to attract to local rival Didi while retaining a minority stake. investors to a wider range of sectors. Furthermore, recent press reports suggest that Uber potentially could exit other international markets where it has so far struggled to achieve a market-leading position. Substantial growth was demonstrated by the communications and media sector (from 43 deals, worth USD2.3 billion in 2016, to 57, worth USD4.0 billion, last year), consumer sectors (up from 36, worth USD3.5 billion, to 71, worth USD5.2 billion) and the innovations and technology sector (deal value more than doubled in 2017 compared to 2016). © 2018 KPMG. All rights reserved. 8 Russian M&A review 2017 Russian M&A deal value by type (2011–2017) USDbn Inbound M&A deal value by region (2017 vs. 2016) 11.8 16.3 10.7 12.0 3.3 1.7 18.4 1.4 0.1 1.9 CIS 4.6 5.4 0.0 Europe 7.9 North America 13.6 13.8 21.5 0.0 107.3 22.5 6.4 MEA 15.8 92.2 10.9 15.3 Asia-Pacific 5.1 5.2 57.3 1.2 40.6 36.0 39.3 39.1 Other regions 2011 2012 2013 2014 2015 2016 2017 Domestic Outbound Inbound 2016 2017 Source: KPMG analysis Russian M&A deal volume by type (2011–2017) Inbound M&A deal volume by region (2017 vs. 2016) 71 40 36 74 111 54 6 65 2 48 47 58 CIS 5 22 0 Europe 73 63 North 4 2 71 America 8 476 MEA 48 41 36 53 347 379 388 6.4 Asia-Pacific 213 229 178 5 Other regions 2011 2012 2013 2014 2015 2016 2017 Domestic Outbound Inbound 2016 2017 Source: KPMG analysis © 2018 KPMG. All rights reserved.

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