Rising to the Challenge: M&A in Ukraine
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RISING TO THE CHALLENGE: M&A IN UKRAINE CONTENTS 03 Foreword 04 Key trends in Ukrainian M&A 05 M&A overview 08 Sector watch 15 Private equity in the spotlight 16 The outlook for 2017 and beyond 18 Conclusion: Rising to the challenge 20 About Aequo 22 About Mergermarket DEAL METHODOLOGY Deals within regular Mergermarket criteria have a transaction value greater than or equal to US$5 million, except for some minority stake acquisitions where a higher threshold applies. If the consideration is undisclosed, deals are included on the basis of a reported or estimated deal value greater than or equal to US$5 million. If the deal value is not disclosed and cannot be confirmed to be greater than or equal to US$5 million, the deal is included if the target’s turnover/revenue is greater than or equal to US$10 million. If neither the deal value nor the target revenue is disclosed, Mergermarket will use other indicators to determine inclusion, including but not limited to number of employees of the target company, assets under management exceeding US$200 million for the asset management firms, and value of assets/deposits exceeding US$50 million for banks. To capture a wider scope of the Ukrainian M&A market, for this report some deals outside of the regular deal criteria have been included. 02 RISING TO THE CHALLENGE FOREWORD In 2016, the Ukrainian M&A market has proven resilient and there is room for optimism in the year ahead despite a slow return to economic stability and continued political unrest. From agriculture through financial services to technology, media and telecommunications (TMT), transactions in Ukraine have ranged across a variety of sectors. Year-on-year, value and volume both rose substantially as domestic and foreign dealmakers took cautious steps back into the Ukrainian market. Combined disclosed deal value for the year was substantially boosted by a major deal in the banking sector, as Italy’s UniCredit exited the country, selling its local Ukrsotsbank to Russian-owned, Luxembourg-based ABH Holding in exchange for a stake in ABH. This deal is part of a wider reform of the financial sector. The weight of non-performing loans and central bank efforts to clear up the banking Judicial and legal reform is also in the pipeline system are leading to greater consolidation. In and could significantly improve the business December 2016, the government nationalised environment in the country, though the evolving PrivatBank, the country’s largest lender, in a move regulatory framework makes forming local indicative of the challenges that the sector faces partnerships with experienced legal professionals as banks move to recapitalise. However, this is on the ground ever more important. likely to create opportunities for investors over the longer-term. However, challenges remain in the country – there are downside risks from the ongoing Although TMT saw a small dip in year-on-year conflict in Donbas; political risk to the reform volume and value, the outlook for the sector is agenda; and external shocks from the eurozone, hopeful as Ukraine has a range of lively start- Russia, and US. ups and established players in outsourcing and software development, as well as a consolidating Despite, the increase in M&A and the undoubted broadcasting industry. opportunities that the country offers, Ukraine’s economy and its M&A market are not in peak Liberalisation of the natural gas market condition. Growth remains below historic levels, has reaped rewards in inbound investment; while inflation has eroded consumer spending a lesson that successful reform can provide power. However, there is a growing sense a significant fillip to dealmaking. In addition, that the country is on the right track, with an foreign and domestic investors are eyeing ambitious reform programme that can help it long-awaited privatisations, including of capitalise on competitive advantages in location, electricity distribution companies, which costs, skilled workforce, and resources. Investor are being encouraged by the International interest in the country is increasing, and it will Monetary Fund (IMF) as part of Ukraine’s be courageous and quick-thinking, first-movers landmark US$17.5bn deal with the IMF. that benefit. RISING TO THE CHALLENGE 03 KEY TRENDS IN UKRAINIAN M&A M&A OVERVIEW SECTOR WATCH 35 FINANCIAL SERVICES Volume has risen Volume from 26 to 35 deals 43 81 Value Financial services was by far the strongest sector in 131 terms of both value and volume in 2015-2016. Much Value is up considerably of this came from UniCredit’s sale of Ukrsotsbank to but much of this is on the ABH Holdings for €281m. More deals are expected back of the UniCredit deal in the sector in 2017 as consolidation continues. with ABH Holding ENERGY, MINING AND UTILITIES OUTLOOK 10 Volume Forecast optimistic for 2017 6 Value Energy, mining and utilities (EMU) was the second-largest sector in terms of both value 22017 and volume in 2015-2016. Indeed, two of the top five deals come from the EMU sector. 12016 FOREIGN VS DOMESTIC Inbound WORLD BANK ECONOMIC deal volume -992015 GROWTH FORECAST 31 Inbound deal volume was down to lowest GDP growth to rise to 2% in 2017 level since 2013. Inbound (from 1% in 2016 and -9.9% in 2015), 93 deal value according to World Bank data Conversely, inbound deal value was at its highest point in seven years. 04 RISING TO THE CHALLENGE M&A OVERVIEW After two exceptionally difficult years, the Ukrainian economy showed signs of recovery in 2016, as it emerges from a deep recession, with momentum growing in the second half of the year and the outlook brightening Despite global headwinds and a number of A new law on financial restructuring introduced ongoing economic and political challenges, in October 2016 allows foreign and domestic prospects for dealmaking in Ukraine are creditors to negotiate restructuring with debtors gradually beginning to rise. The current transparently and consensually. It encourages IMF deal is encouraging fiscal consolidation companies in distress but with viable businesses and improvements to the business climate, to restructure their debt in cooperation with as well as underpinning macroeconomic creditors, through out-of-court orders. stability. Reforms have continued, albeit at a slower pace, despite a change of prime However, the World Bank noted in September minister in April, indicating a degree of that reform momentum slowed from the political consistency. third quarter of 2015, while IMF loan tranche disbursements have been delayed by faltering THE ECONOMIC LANDSCAPE progress on Ukraine’s commitments under its Ukraine’s GDP grew by 1% in 2016, following agreement with the fund. a 9.9% contraction in 2015, and growth is expected to pick up to 2% in 2017, according In a November 2016 report on Ukraine, the to World Bank data. The economy expanded IMF praised ‘good progress’ but said that further by 4.7% in the last quarter of 2016 compared forward movement would be dependent on to Q4 2015, according to the government, decisive reforms. Several of these would help with both industry and agriculture contributing boost the M&A environment directly or indirectly to growth. including improving the business environment, reforming state-owned enterprises, and repairing The country appears to be reaping some rewards the financial system and reviving bank lending. from its tough reform programme of 2014-15, IMF funding resumed in early April 2017. and the US$17.5bn, four-year funding deal agreed with the IMF in March 2015. Inflation dropped to 12% at the end of 2016, from 43% a year earlier, easing pressure on Ukrainians’ “Looking at the macroeconomic situation incomes. The currency, the hryvnia, continued and GDP numbers in particular, we to fall against the US dollar in 2016, but proved can say that Ukraine effectively has less volatile than in 2015, a course that is expected to continue in 2017. passed the bottom of the downturn. We expect that 2017 will be another “We expect devaluation, but that will be year of moderate growth in the economy commensurate to the situation in the economy overall, which will probably translate overall, and it is not likely that there will be into more deals.” any major drop of the local currency against the US dollar,” says Denis Lysenko, managing partner Denis Lysenko, Managing Partner, Aequo at Aequo. RISING TO THE CHALLENGE 05 M&A MAKING ITS MARK Ukraine M&A, 2009-2016 Helped by the improving macroeconomic environment, the M&A market saw an uptick, 100 5,000 with deal volume rising from 26 to 35, and disclosed value doubling to €310m. Overall 87 value was much boosted by UniCredit’s sale 80 4,000 of Ukrsotsbank to ABH Holdings for €281m. 75 Domestic deals accounted for 69% of volume, 69 the highest level since 2013, but only 7% of 60 62 3,000 Deal value €m value, thanks largely to the disproportionately large inbound Ukrsotsbank transaction. The sale will lead to the merger of Ukrsotsbank and deals Number of 40 2,000 ABH’s Alfa Bank, part of a broader movement 35 35 towards financial sector consolidation and 31 26 ownership restructuring being encouraged by 20 1,000 the authorities in the wake of a severe banking crisis. The financial services sector accounted for 43% of deal volume over the past two years. 0 0 2009 2010 2011 2012 2013 2014 2015 2016 Outside financial services, lively sectors included agriculture, where domestic players are looking to increase their land holdings, and TMT, particularly Volume Deal value €m information and communications technologies (ICT) outsourcing. Both have attracted attention in recent years thanks to their export-oriented nature, with hard-currency earnings making them forward privatisations.