Russian M&A Review 2019

February 2020

KPMG in Russia and the CIS

kpmg.ru Foreword

Lydia Petrashova

Head of Deal Advisory Russia and the CIS Partner

We are pleased to present you with This year has already seen a the fifteenth anniversary edition number of M&A market studies of our annual KPMG Russian M&A being released, which underlines Review. the importance and relevance of understanding its changes. At the The past year witnessed the most same time, each study comes to positive trends in investment activity a markedly different conclusion, for the whole post-sanctions period. and we wish to draw our readers’ This was reflected in an increased attention to which analysis number of deals, growth in average methodology is used. KPMG has deal value, and greater foreign been releasing the Russian M&A investment – not only from the East review for 15 consecutive years, (which has become the main focus consistently applying the same of investment relations with Russia), methodology. Our conclusions and but also western companies. We forecasts are based on a thorough have observed that, despite some analysis of M&A market data and our issues persisting vis-à-vis internal extensive experience in supporting and external political and economic M&A deals and processes across plans, investors are now more the Russian market. confident about executing their deal strategies within a stabilising In this edition of the Russian M&A Russian environment. Review we reflect on key recent trends and how these will influence A further shift in focus by the M&A in upcoming years. In addition government, towards strengthening to the statistical analysis, we again the economy, boosting production, share our insights into the key trends and raising living standards, will, if being seen in the main economic achieved, provide a further stimulus sectors: Oil & Gas, Innovations to investment activity. Also, in the & Technology, and Real Estate & absence of any additional negative Construction. events, we expect growth in investment activity – not only in We hope that you enjoy reading this traditional sectors such as oil & anniversary edition of our KPMG gas, but also in IT (which, thanks Russian M&A Review. We will be to digitalisation, has recorded happy to answer any questions that impressive growth in the past two you have. years) as well as the consumer markets and real estate sectors. Lydia Petrashova

Overview 4

2019 in review 6

Outlook for 2020 10

Key M&A drivers in 2019 16 Oil & Gas sector: unleashing the pent-up demand 16 Innovations & Technology sector deals 21 Taxation aspects of M&A deals involving innovations & technology companies 26 M&A trends in Real Estate & Construction 28

Methodology 34

Appendices 35 Macro trends and medium-term forecasts 36 Cross-border M&A highlights 37 Sector highlights 38

21.5% $63 billion 19% 49.5%

While 2019 saw only a modest M&A activity grew not only in terms of increase in deal activity, by 3%, the domestic investment, which saw 19% value of Russian M&A leapt 21.5%, growth in deal value, but also in terms to almost USD63 billion. of inbound investment, which jumped almost 50%. Much of this growth was driven by large deals in the oil & 1 gas sector . This demonstrates that the Russian oil & gas The foreign direct investment confidence is improving, sector continues to be highly attractive for investors (we as companies realise that they can live with the status look at this trend in detail later on). quo, resulting in a high level of portfolio investment and The economic slowdown in 2019 did not stop investors attractive 3% yields on rouble assets. from being active. In general, investors are more We expect moderate growth in deal activity in 2020, due confident that the Russian economy is less exposed to to the commencement of a new six-year investment cycle sanctions and oil price fluctuations, and hence is less and a respective boost in domestic projects. dependent on foreign capital or debt financing, and can deliver above-average returns over the medium to long term. The key factors that will determine trends in 2020 comprise the following: Russian M&A (2013–2019) whether the National Projects Programme, 2013 100.9 14.4 which is a catalyst for economic recovery, will be 333 implemented more aggressively 2014 79.0 621 whether the oil price will remain at current high 2015 51.8 470 levels, and hence continue to be a boost for the 2016 64.8 11. 3 economy 482 2 2017 55.3 whether the revised DASKA bill or other 552 sanctions are enforced further 2018 51.7 652 whether there will be any meaningful 2019 62.8 improvements in the business climate 670 how successfully the new government meets Deal value Mega deals Number of deals the challenging targets set by the President at the (excl. mega deals), (>USD10 bn), USDbn USDbn start of the year

Source: KPMG analysis.

1 The acquisition of a 30% stake in Arctic LNG-2 by Japan Oil, together with Mitsui&Co, CNOOD, and CNODC; the designated sale of Gazprom’s minor shareholdings to an undisclosed buyer for the total amount of USD5.1 billion; the new LUKOIL’s share buy-back announced in 2019 for the amount of USD3 billion. 2 The Defending American Security from Kremlin Aggression Act, introduced by the US Senators on August 2, 2018.

10 $25,573 40.7% largest deals million as a % of total transactions in 2019

Russian M&A largest deals in 2019

# Target Sector Acquirer Vendor % acquired USDm

Minority 1 LUKOIL* Oil & Gas LUKOIL 5.1% 3,000 shareholders

Gazprom Oil & Gas Single Undisclosed Buyer Gazprom 3.6% 2,941 2 Gazprom Oil & Gas Single Undisclosed Buyer Gazprom 2.9% 2,202

DKBR Mega Retail Group (Joint venture DIXY Group; DIXY Group; 3 Consumer Markets 51%/49% 2,656 between DIXY, Krasnoe Krasnoe i Beloe Krasnoe i Beloe i Beloe, Bristol)

China National Offshore 4 Arctic LNG-2 Oil & Gas Novatek 10% 2,612 Oil Corp (CNOOC Ltd.) Japan Oil, Gas and Metals 5 Arctic LNG-2 Oil & Gas National Corporation; Novatek 10% 2,612 Mitsui & Co Ltd China National Petroleum 6 Arctic LNG-2 Oil & Gas Novatek 10% 2,612 Corp (CNODC Ltd.) VTB Bank; Communications 7 Tele2 Russia Telecom Rostelecom Rossiya Bank; 55% 2,095 & Media Invintel BV Innovations Existing 8 Luxoft DXC Technology 100% 2,006 & Technology shareholders Joint venture for food-tech and mobility services (combining Innovations 9 Delivery Club, Sberbank; Mail.ru Group Joint venture 100% 1,566 & Technology YouDrive, DC Daily, Performance Group, Foodplex) Gazprombank; Communications 10 MegaFon* MegaFon Minority 20.4% 1,271 & Media shareholders

* LUKOIL announced a buy-back on the open market of its common shares and depository receipts for an aggregate amount of up to USD3 billion; MegaFon repurchased its own shares, representing in total 20.4% of its share capital, for USD1.27 billion.

2018 2019 2.3% 1.3 % GDP growth is slowing-down

2019 was expected to be the final transitional year for the Russian economy, as it should have already been responding to the National Projects Programme as well as other incentives. However, 2019 did not live up to expectations – GDP growth in 2019 was tepid, and, after an exceptional rise in 2018 (to 2.3%), GDP growth is forecast to slow to 1.3% in 2019.

After a rally in 2018 in fixed an accumulation of capital, and investment and industrial growth in dividend yields on output (which both saw growth a number of Russian stocks. in 2018 of around 3%), 2019 This positive momentum has looks weaker, as several major continued in early 2020. projects reached the end of their Pent-up investment demand, cycle. Estimates put investment which was building after the for 2019 at 1.6% growth, while imposition of sanctions, began industry posts a better 2.7%. to abate in 2019 due to clear This is primarily due to the indicators that the Russian National Projects Programme economy has successfully failing to kick in sufficiently; adjusted to the sanctions and positive effects from the is not as dependent on high oil programme may only be seen in prices. This resulted in a 19% the second half of 2020. rise in aggregate domestic Despite the economic M&A deal value, which reached slowdown in 2019, investors USD40.1 billion in 2019. have been optimistic. The RTS equity index rose 45% last year and was the best-performing major index in the world due to a drawdown in country risk,

21.7 Deal value by sector: 2019 vs. 2018, USDbn 14.2

Other 3.3 3.8 3.2 1.5 1.3 1.2 1.5 1.3 4.5 2.4 5.2 7.5 2.0 4.7 4.8 6.0 8.1 5.4 5.5 5.3

Deal volume by sector: 2019 vs. 2018

113 98 Other

90 77 59

32 53 68 80 48

17 18 13 10 134

123 46 43 51 43 53 53

Oil & Gas Transport & Infrastructure Innovations & Technology Chemicals Consumer Markets Power & Utilities Real Estate & Construction Banking & Insurance

Communications & Media 2018 Metals & Mining 2019 Source: KPMG analysis.

The rally seen in the past two years third-largest Russian retailer. Another in innovations and technology, media huge joint venture went ahead in and communications, and consumer the IT sector: Sberbank and Mail.Ru markets continued in 2019. The established an online-to-offline joint consumer markets sector witnessed venture for food-tech and mobility a number of large deals, including services, which will combine existing a joint venture between DIXY and food delivery, car ride, and booking Krasnoe i Beloe, which will become the platforms of the deal participants.

49.5% foreign investments 53% $20.9 in 2019 oil & gas sector growth billion

However, the most Russia raised USD20.9 billion in foreign investment substantial growth was in 2019, which was 49.5% higher than inbound recorded in the traditional oil investment in 2018. & gas sector, both in terms of value (by 53% y-o-y, Apart from the acquisitions of three — The acquisition by the South reaching USD21.7 billion) 10% stakes in LPG-2 by CNOOC African company Naspers of and number of deals (from (jointly with China National Offshore a 29.1% stake in the Russian Oil Corp), Japan Oil (with Mitsui & Co e-commerce platform Avito, for 32 in 2018 to 59 in 2019). Ltd), and CNODC (with China National USD1.2 billion. Petroleum Corp), major deals with — The acquisition by Austrian Oil & gas contributed over 34% to foreign capital comprised: OMV of a USD1 billion stake in the total deal value of Russian M&A. — The acquisition of the international Gazprom’s upstream assets. While M&A deals in 2019 were on IT giant Luxoft (established in average worth USD90 million, oil Moscow in 1995) by the US IT and gas deals averaged three-to-four solutions provider DXC, times that amount. for USD2 billion.

Russian M&A deal value by type (2013–2019), USDbn Russian M&A deal volume by type (2013–2019)

2013 92.2 4.6 18.4 2013 229 41 63

2014 57.3 13.8 7. 9 2014 476 74 71

2015 35.9 5.1 10.8 2015 347 58 65

2016 39.3 15.3 21.5 2016 379 48 55

2017 38.7 5.2 11. 4 2017 394 48 110

2018 33.7 4.1 14.0 2018 493 72 87 2019 2019 40.1 1. 9 20.9 528 45 97

Domestic Outbound Inbound Source: KPMG analysis.

2018 In addition to Asian investors, 2019 which were mainly focused on oil & gas assets, US and $4.1 $1.9 European investors were also billion billion active in 2019. Russian outbound investment continued to decline, The acquisition of Luxoft by DXC both in value terms (from USD4.1 billion in 2018 Technology was a clear driver behind this, to USD1.9 billion) and in the number of deals but overall M&A activity from US and (from 72 to 45 individual deals). Europe reached USD6 billion in terms of deal value in 2019 (almost 10% of the aggregate value of the Russian M&A The largest outbound deal was the such deals are not included in market), notwithstanding a number of acquisition by LUKOIL of a 25% Russian M&A statistics), which can issues, such as sanctions, which are still in stake in Marine XII license, a Congo- lead to the freed-up funds being force in Russia. based oil exploration license, for reinvested in domestic assets. USD800 million. This trend was chiefly observed Middle-eastern investors continued in the IT and telecommunication The opposite trend was seen to show interest in Russian assets in sectors (e.g. the sale of Bulgarian last year, that is, a successful 2019, with a notable acquisition, worth Telecommunication Company by exit of Russian capital from USD637 million, by Mubadala Investment VTB Capital). We cover this issue in foreign assets (in accordance Company in the shopping mall Galeria in detail later in our review. St. Petersburg. with established methodology,

up to1.9 % GDP growth forecast

The GDP growth outlook in 2020 is rather tepid. The strong consensus view is that after the 2.3% rise recorded in 2018, GDP growth will slow to 1.3% in 2019, and then demonstrate positive dynamics, climbing to 1.9% in 2020 after the National Projects Programme kicks in and on the back of lower inflation and real wage growth.

Average growth rates will then As such, we can expect more continue in a range of 1.8% to 2.8% deals in consumer markets, over 2020–2024. Currently there as well as real estate and is a shift in policy taking place, from stringent austerity measures construction deals in the to greater social spending, which coming year, attracting should in turn encourage domestic both domestic and foreign demand, consumption, and investors. We look at this investment. aspect later. Since the introduction of the Fiscal Rule the federal budget has For 2020 inflation is projected to be been less susceptible to oil price at an average level of 3.4%, and at volatility. The budget assumes the year-end stand at 3.6%. At the an average price of under USD43 beginning of 2020 inflation could fall per barrel, while macro-economic to around 2.5% (given the high base advisors assume an average level at the start of 2019) and then price of USD63 per barrel in average 3.5% for the remainder of 2020. The expected surplus will the year, climbing to just 3.6% by the provide a boost to the economy: year-end. A low and predictable inflation consumer sectors will benefit from level, combined with a strong rouble, higher disposable incomes and will positively impact the economy construction / infrastructure sectors and, together with good levels of FX from catalyst programmes. reserves and low public debt, create a solid foundation that will be attractive for investors.

National Projects Programme Sanctions

The start of the National Projects Recently we have seen positive signals from Europe, in Programme has been slower and particular France, related to changing attitudes towards less effective than hoped for. Russia, following lobbying from European business associations. Sanctions have a negative general impact Accelerating the realisation of the on business development, and the entire European programme is the other economic economy suffers from restricted access to Russia. priority for the year ahead. Constrained towards US and European markets, there is a shift in focus for Russian investors towards Asia. And in view of the populations, size of the economies, estimated volume of and GDP growth rates in India and China, this could be investments in national an exciting development for Russia. At the same time, ₽26 projects with Russia making inroads in the east, the geopolitical trillion situation in general is changing. As the Russian economy has adjusted to the 2014 round The government is aiming to have total new spending of US and EU sanctions perceptions have changed, of RUB26 trillion over the six-year period of 2020–2026 and many companies have stated that the sanctions, (3.6% of GDP p.a.), with RUB7.5 trillion of this coming although a negative factor, did not directly damage from private investment (about 25%)3. underlying business. The fear of additional US sanctions began to fade in 2H19, on the assumption that the US The headline numbers look huge, but, when spread over Congress would be too distracted by internal issues. six years, the direct impact on the economy could prove Many investors have drawn the conclusion that the to be rather low. Whatever form the implementation passing of the anti-NordStream2 sanctions (passed as takes, direct impacts and knock-on effects will entail a an amendment to the National Defense Authorization lag period of nine-to-12 months, therefore any positive Act (NDAA) in December 2019) signifies that there will impacts (e.g. an extra 0.1% or 0.2% of growth) will be no further measures in this area. mostly be felt in 2020. Around 25% of the spending is earmarked to come from private investment, however, up to now there has been little private investment into the National Projects Programme and domestic fixed investment has had a DASKA poor seven-year run. Almost half of total spending has been earmarked A revised DASKA draft law remains a for road infrastructure and 20% for the environment. threat, but we presume that unless there Demography (i.e. encouraging births via social spending is a fresh catalyst it will not be enforced policies) accounts for 13% of total spending, while further. healthcare is overall set to receive RUB1.7 trillion, or 6.5% of the total package. The level of social spending appears healthy, but represents only 0.1% to 0.3% of Overall, macro-economic advisors expect that any GDP. The digital economy should be allocated RUB1.6 further US sanctions will be limited in scope and have trillion, or 6.4%, of the package. Housing and education a negligible impact on the Russian economy, which is are each set to receive around 4% of total spending. reflected in the published forecasts for all indicators, SMEs will receive RUB400 billion in support, or 1.5%. including GDP, the rouble, and inflation.

3 Hereinafter: Information materials on 12 National Projects and the “Comprehensive plan for the modernisation and expansion of the main infrastructure for the period until 2024” prepared by the Government of the Russian Federation.

Coronavirus The coronavirus epidemic A decline in trade, falling consumption, related revenues, both in terms began at the end of last and investor concerns have already of reduced revenues from Chinese led to lower economic growth in China tourists (which bring in about year and, according to the and the devaluation of the yuan. And, USD3 billion per annum) and a general IMF, will impact the entire given that China is deeply integrated drop in tourist traffic. The steel industry global economy. into the world economy, particularly could also be affected, as China is a key when it comes to production chains, consumer and producer of steel; since the economic consequences the start of the epidemic, the metal could be significant. One of these price index (compiled by Moody’s) has consequences is likely to be local fallen 7.1%. In the near future we can regroupings of producers and changes also expect a drop in oil prices, due to in logistics routes. fears of lower demand as a result of the Chinese slowdown. For the Russian economy, the situation will chiefly have an impact on tourism-

Sector outlook Oil & Gas Innovations & Technology

The key areas of The oil & gas sector remains the The digital economy has been interest for investors main strategic industry in Russia, allocated RUB1.6 trillion, or 6.4%, of and typically comprises around 20% the National Projects package and in the coming year will of GDP and 60-70% of the value of this will support the sector as well as be concentrated in the exports. In 2019 this sector profited the digitalisation of the economy, in oil & gas sector from stable oil prices after the price addition to announced improvements (where possible in crash in 2014/2015, and the consensus to IT infrastructure, updating terms of sanctions), for the Brent Crude price is that it will respective regulation so that it is more IT, and consumer stay above USD60 in the coming years. competitive, and the digitalisation of public administration. products. Major public and private investments have been allocated to this sector, The digital economy is growing in especially LNG, for which demand is Russia and the e-commerce market is expected to grow continuously in the a good example of this: e-commerce coming decades. The recent launch has seen accelerated development in of the Arctic LNG 2 development, recent years and growth rates for the with capital expenditure of USD21.3 sector have typically ranged between billon, is one of many ongoing projects. 20-30% p.a., with some leading Sanctions have made financing and companies growing by more than working with foreign companies more 50% each year. E-commerce still only difficult, although the bulk of projects accounts for around 5% of total retail (especially those with non-Western sales, however, the figure is projected companies) continue to exist. We can to reach 10% by 2022–2023. also expect a rise in investors interest in onshore arctic projects.

Consumer Markets

Russia’s population is 144 million, the However, wages account for only pressure from the consumer, a drive ninth-largest in the world. However, 66% of overall disposable income, and towards promotions and digitalisation, the population fell by 218,000 in 2019, other activities, such as rental income, and e-commerce platforms. Retailers despite inward migration, owing to entrepreneurship, and FX activities may benefit in the short and medium weaker birth rates. Over 2018–2019 have all stagnated in the past year and term by acting as pick-up points for greater purchasing power among constrained the disposable income digital, however, whether this will consumers stemmed from increased figure. Real wage levels and retail ultimately help or cannibalise their credit levels and declining savings. sales numbers are probably the best business remains to be seen. Consumer credit was rising faster proxy for consumer sentiment. The than 20% in the past 18 months, and figures for retail sales were moderate/ much of this growth was unsecured. lukewarm and in the low single-digits in The CBR is aiming for consumer credit 2019, however, Rosstat may be not be growth to decline to 15-20% in 2019 fully recognising e-commerce activity and 11-16% in 2020, and would like to and hence the retail figures could be see a knock-on effect on certain types underreported. of consumer spending: mortgages, The Russian consumer market has cars, and large household durables. been transformed in recent years, With disposable income still 10 and while brands can still sell well, percent less than it was in 2013, it was companies must work harder to a recovery in real wages in 2016-17- explain their brand proposition. 18 that cushioned the consumer and Russian retailers are modernising and helped consumer product companies. consolidating, but face tremendous

Real Estate Transport Agricultural & Construction & Infrastructure

The construction sector is key to Investments in transport and The agriculture sector witnessed the Russian economy and employs logistics infrastructure are a key strong growth in 2015–2017, boosted around six million people. Real government priority. Almost by a weak rouble and the Russian estate has lagged in recent years half of total National Projects ban on imported food. The Russian and the sector experienced a tough spending has been earmarked for import substitution policy has 2018, however since then it has road infrastructure, and further directly benefited the agricultural increasingly attracted investment, investments are planned in high- sector as well as related ones, which has fostered expansion and speed trains, rail, increasing capacity such as food processing and food growth. Modernising logistics and at ports, and refurbishing almost 50 packaging. Interest from Western investments in housing are major regional airports. investors has been relatively high, priorities. The National Projects and sales of production equipment One trend being seen is that Programme will help the sector to enhance import substitution traditional distributers are in coming years, as significant have been solid. Continued increasingly coming under pressure, resources go towards modernising expansion in the agriculture sector as many companies restructure Russia’s infrastructure. And and in food processing remain and consolidate supply chains. innovation does not stop at the high priority themes for the state. However, logistics companies real estate and construction One government strategy entails that oversee several parts of a sector, especially for large-scale increasing grain production to company’s value chain holistically projects: material requirements 150 million tonnes by 2035 and will remain competitive; those that planning, building information making improvements to related are digitalised will especially be in a modelling (BIM), cloud technology, infrastructure (USD70 billion good position to boost their market and a general accompaniment of investment). And digitalisation does share. digitalised business practices for not stop at agriculture: dynamic projects have become best practice warehousing methods and how in the industry. harvesters and distribution are organised are increasingly being controlled by tech.

Chemicals

Russia is striving to process more minerals and extracted materials within the country in order to boost value-added exports. Investments in chemical and petrochemical facilities have grown and, according to a preliminary disclosure of National Project priorities, this remains a key area in terms of future growth. However, Western investment levels are sometimes restrained by global business patterns, excess capacity, and the steep cost of major plant investments.

Oil & Gas sector: unleashing the pent-up demand

The past year was marked by a high level of interest from investors, primarily foreign, in the Russian oil and gas industry. And in the future we expect Russian exploration and production assets to continue to be a focus for foreign investors seeking to quickly replenish their resource base and Robin Matthews production volumes. Oil & Gas Group Deal Advisory Inbound investment in Director $9 the oil & gas sector in 2019 billion

The Russian oil and gas industry investment of USD9 billion. At became particularly attractive the same time, both external to international investors after investment in the industry and the 2014. Inbound investment in the share of oil and gas transactions oil & gas sector peaked at USD17 in the total value of M&A billion in 2016, while 2019 saw a transactions in Russia grew for the second record year, with inbound second consecutive year.

M&A transactions in the Russian oil & gas sector in the Out of the countries with the largest proven past decade hydrocarbon reserves, Russia is the most 2010 12 attractive for investment, having a stable 18% political regime, a willingness on the part 2011 3 6 17% of state and large companies to work with 2012 65 foreign partners, relatively low production 55% 2013 23 1 costs, a developed infrastructure, and a lack 23% of red tape and regulatory barriers hindering 2014 17 2 31% the exploration and development of new 2015 4 6 fields. 22% 2016 12 17 49% These features are complemented by effective state 2017 4 2 support for the industry and a relatively low entry threshold, 14% with the cost of proven and probable reserves of USD2.8 2018 7 7 31% per barrel of 2P reserves – significantly lower than in other 2019 12 9 oil and gas-rich regions of the world. 36%

Investments growth Cost of 2Р reserves, 2015–2019: Russia has the lowest costs, $/boe Domestic, USDbn Inbound, USDbn Share of oil & gas deals in the total North America Europe Russia deal value*

*The share of oil and gas deals is calculated as the ratio of inbound and domestic investment in oil & gas assets to total Russian inbound and domestic investments in USD. 2.8 Source: KPMG analysis. 4.9 7. 5

Immediately after the drop in oil prices in 2014–2015, nearly 4.7 all global oil companies cut exploration spending, which 5.3 7. 5 resulted in the global oil and gas industry in 2016–2018 demonstrating the worst reserve renewal results in the past 70 years. In 2016, as oil prices began to pick up, global players realised that they had to rapidly build their resource base, and they began looking more closely at regions with large oil and South Africa and Asia and gas reserves. America Middle East Australasia

*Median values Source: KPMG analysis.

In addition, the cost of Russian 2P reserves proved stable against a backdrop of oil price fluctuations: the 2014 crisis had practically no impact on the cost of a barrel of oil equivalent in Russia, which is testament to the investment attractiveness of the Russian oil and gas sector. There was also a rise in the value multiplier for a barrel of oil equivalent for gas projects in the past three years, mainly as a result of interest from foreign investors in Russian LNG projects.

Movement in the cost of 2P reserves against oil prices in the past decade*

2010 0.6 80 2011 2.8 111

2012 1. 7 112 2013 1. 3 109 2014 1. 5 99 2015 2.7 52 2016 2.6 Sanctions are seen as one of the hurdles to 44 2017 2.4 foreign investment in the Russian oil and gas 54 sector, perhaps even the key one. However, 2018 2.7 despite some foreign companies pulling 71 2019 3.7 out of sanctioned projects, most majors are 64 maintaining Russian offices so as to be able Cost of 2P reserves, $/boe Brent price, $/boe to continue to work on current projects and seek new project opportunities. *Median values are given for the cost of reserves. Source: KPMG analysis.

Impact of the sanctions: change in investors’ shares in Russian oil and gas sector, by regions*

2015–2019 2010–2014 2010–2014 2015–2019 2010–2014 2015–2019 0% 89% 33% 11 % 41% 25% – Total – Glencore – CNPC – Indian Oil, Oil – QIA – North – Total – Tupras India, Bharat – Mubadala PetroResources Atlantic – OMV – Oil India Petroleum Drilling – CNOOC – Saudi Aramco – Repsol – CNODC

Europe and North America Asia Middle East

*Top-3 companies in terms of money spent on inbound M&A deals in Russia for the stated period. Source: KPMG analysis.

2019: the flight of foreign investors to LNG; China is the leader

2019 was marked by a boom in investment 10 deals on the oil and gas asset market in 2019. Many in integrated LNG projects (which resulted foreign companies expressed an interest in the project, culminating in deals with Total in 2018 and the Chinese in a jump in the 2P reserve multiplier). entities CNPC and CNOOC and the Japanese company Mitsui in 2019. Other players, such as Saudi Aramco In 2018–2019 NOVATEK’s sale of shares in the Arctic LNG 2 from the Middle East and the Asian companies PTTEP project was one of the key drivers of the oil and gas (and and KOGAS, could be interested in the company’s future the entire Russian M&A) market; this was one of the top- projects.

2019: largest M&A deals in oil & gas industry % # Target Acquirer Vendor USDm acquired 1 LUKOIL LUKOIL Minority shareholders 5.1% 3,000

Gazprom Single undisclosed buyer Gazprom 3.6% 2,941 2 Gazprom Single undisclosed buyer Gazprom 2.9% 2,202

China National Offshore Oil Corp 3 Arctic LNG 2 NOVATEK 10% 2,612 (subsidiary of CNOOC Ltd.) Japan Oil, Gas and Metals National 4 Arctic LNG 2 NOVATEK 10% 2,612 Corporation; Mitsui & Co Ltd CNODC Ltd (subsidiary of China 5 Arctic LNG 2 NOVATEK 10% 2,612 National Petroleum Corp.) Arkady Rotenberg – private 6 Stroygazmontazh Gazstroyprom 100% 1,177 investor

Project to develop sections 4A 7 and 5A of Achimov deposits of OMV Gazprom 25% 1,025 Urengoy gas field Igor Rotenberg – private investor; Managing Company 8 Gazprom Drilling Gazstroyprom 100% 910 Evocorp; Alexander Zamyatin – private investor New Age (African Global Energy) New Age (African Global 9 LUKOIL Upstream Congo SAU 25% 800 Limited, license for Marine XII Energy) Limited

Source: KPMG analysis.

In addition to Arctic LNG 2 project transactions, the buy-back 2019 also saw two significant deals in retail(in 2018 not of stakes in LUKOIL in the public market and a deisgnated a single deal of more than USD2 million was recorded), both sale of Gazprom’s shares, the top-10 transactions included of which took place in the St. Petersburg market. Rosneft the acquisition of a Gazprom construction and drilling acquired the largest independent fuel operator in the region, contractor. Gazstroyprom, Gazprom’s new single contractor, St. Petersburg Fuel Company (which comprises 141 filling in which the gas monopoly holds a 49% stake and the stations, 125 gasoline tankers, and two modern oil depots), remainder is owned by Gazprombank structures and and two months later the acquisition of the Russian fuel individuals, acquired Stroygazmontazh in November 2019, retail business from the Finnish company Neste (75 filling and Gazprom Bureniye two months earlier. stations and a terminal in St. Petersburg) by Tatneft was announced. As part of its international business expansion strategy, LUKOIL closed a deal in 2019 to acquire a stake in the Moreover, Russian majors are continuing to build their Marine XII block, located on the Congo continental resource base by acquiring promising licenses at state shelf. The license covers five discovered fields auctions: NOVATEK, Rosneft, and LUKOIL were the leaders containing 1.3 billion boe of 2P reserves. in terms of the number of licenses acquired in 2019.

2020 forecast: Russia to remain attractive

Russian exploration and production assets will continue to be the focus for foreign investors seeking opportunities to rapidly replenish their resource base and production volumes via acquisitions or through a joint venture. Assets in the exploration or early development stages will be of greatest interest.

In particular, we can expect investor interest and the petrochemical and gas chemical in Arctic projects, especially the Vostok Oil sector. At the same time, Russian project, which combines some of Rosneft’s companies will continue to explore Arctic fields, a joint project with BP Ermak international expansion opportunities Neftegaz, as well as the Payakhskoye field particularly in the Middle East, North and of Neftegazholding. Having the potential of West Africa, and South America. reserves and resources of 37 billion barrels Domestically, we expect further asset of oil equivalent and located in the last consolidation along the entire value chain. undeveloped onshore region of Russia, in The largest Russian players are keen to both 2019, Vostok Oil received unprecedented tax support production and to develop own sales benefits. Last year Rosneft already began to and distribution channels for petroleum look for foreign partners to implement this products. Furthermore, there has long been ambitious project. a need for structural changes in the oilfield Existing sanctions and the threat of new services and related services market, both for ones will dampen interest in offshore oil companies and their contractors. Time will projects, including from European and US tell how quickly this will happen. investors, while investors from Asia and the Middle East will retain interest in both exploration and production acquisitions

Innovations & Technology sector deals

sector remains one 12% of the leaders deal value

In the past two years the innovations & technology sector has been a leader, both in terms of number of deals and aggregate deal value, accounting for 12% of Russian M&A value in 2019. This is to be expected, given the Marina Manakova growing level of digitalisation and the trend Innovations & Technology towards building ecosystems in various sectors of the Russian economy. Deal Advisory Russia and the CIS Director Significant recent events in 2019 also saw a number of the sector included successful major transactions involving local Russian projects involving the sale and attraction foreign investors: a deal to buy shares in the Russian classified of large investments by ads website Avito, by the South companies with Russian African media group Naspers, roots, but orientated since and the IPO of hh.ru. Naspers has their establishment towards steadily raised its stakeholding global markets: Luxoft, in Avito since 2013 and by 2019 Veeam, Nginx, Badoo, and had increased it to 99.6%, having acquired 29.1% for USD1.16 Acronis. billion (the entire Avito business is valued at USD3.85 billion). All these companies are hh.ru was floated on the distinguished by the fact that they NASDAQ and was the first IPO either have a unique business of a Russian company in two model or have created a unique years, and the first IPO of a product that is in demand on the Russian technology company international market. For example, in five years.The IPO raised Luxoft, a global provider of USD220 million, and the entire innovative technological solutions, company was valued at USD675 with 42 offices in 22 countries million; two days after the IPO the around the world and an active company’s capitalisation grew by player in the M&A market, joined almost a quarter. the DXC Technology group of companies; the deal was worth USD2 billion.

M&A as part of an ecosystem building strategy

In 2019 more than 20% of innovation (29.67%), and also invested in other projects: the car- and technology deals were ecosystem sharing company YouDrive, DC Daily vending machines, and Performance Group, a company that delivers prepared transactions, which confirms the current meals. The company also invested RUB8.5 billion in the trend towards building ecosystems under project. Sberbank contributed its stake in Foodplex (35%), the auspices of major Russian business a digital platform for the restaurant market, and around players. The goal of building ecosystems is RUB38.5 billion. to satisfy everyday human needs in various The JV also included the SberMarket delivery service, which industries – from ordering food or taxis to is part of the Instamart start-up. In total, Sberbank and watching a film or looking for a job. Mail.ru Group will devote RUB47 billion to the joint project and they plan to invest up to RUB17.6 billion if the venture achieves its target by November 2020. Sberbank also announced the acquisition of a stake in MF Technologies, a shareholder of Mail.ru Group. Sberbank bought 35% in MF Technologies from Gazprombank, equivalent to 20% of voting rights in Mail.ru Group, and a further 1% from Rostec. The total transaction value was The priority industries for ecosystem purchases in 2019 RUB11.3 billion. were digital food and non-food retail, as well as food and restaurant deliveries – these industries are leaders in terms of speed of digitalisation, frequency of service use, With the creation of such a giant entity and market size. we can expect greater competition in the Ecosystem-related transactions in 2019 featured both digital food retail and transport industries direct investments in technology companies and the and a corresponding increase in investment setting up of joint ventures. As an example, in 2019 Sberbank and Mail.ru Group created a partnership activity, aimed at expanding the entity’s to develop digital technologies for the transport and operations and strengthening its position food market. on a market where there is stiff competition In the JV Mail.ru Group contributed its stakes in the from similar Yandex services and other food delivery service Delivery Club (100%) and Citimobil market participants.

Cognitive Pilot

Other examples of ecosystem-related deals The main advantage of M&A deals, in contrast to the were Sberbank’s investments in the Speech organic growth that comes with building an ecosystem, Technology Centre (STC) and the Cognitive is the time saved and an ability to meet key customer needs as soon as possible, thereby dramatically Pilot project. increasing the Total Addressable Market and lowering the cost of attracting total addressable market. At Following the deal Sberbank obtained a 51% stake in STC, the same time, buying a market leader is not always which creates systems to record telephone conversations advisable, and raising the shareholder value of acquired and voice alerts, biometric access systems (including face assets can be achieved through implementing a recognition), speech-to-text conversion programs, speech synergistic effect: integrating with services within the synthesisers, and military products. The investment in the ecosystem and strategic partnerships with other market Cognitive Pilot project is aimed at developing unmanned players. transport technologies in industry and agriculture, and developing components for unmanned vehicles.

Consolidation of expertise

Activity in the innovation and technology sector is also generated through the ongoing trend of increasing and consolidating expertise.

Hence in 2019 IKS Holding continued to consolidate IT in industries such as engineering, metallurgy, mining, the assets on the Russian market, and tasked itself with oil and gas sector, and the chemical industry. Zyfra actively promoting the development of the digital economy in invests in various products and is developing an industrial Russia, as well as supporting home-grown IT talent. At Internet of things and artificial intelligence environment. In the beginning of 2019 IKS Holding acquired Nexign (a 2019 the company invested in GeoSteering Technologies, St. Petersburg company that creates IT solutions for thereby expanding its portfolio of digitalisation solutions for telecommunications), and later a stake in the developer the oil and gas industry. and manufacturer of Yadro data processing and storage Also noteworthy is ongoing activity in the online gaming systems. In November 2019 the holding acquired a segment. Hence in 2019 Playrix continued with its controlling stake in a Russian developer of cloud platforms, acquisitions of gaming studios: Eipix Entertainment in Serbia Digital Energy. and Vizor Games in Belarus. Such activity was connected Another example of the continuing consolidation of with ambitious plans on the part of the founders to be on a expertise is Zyfra, a subsidiary of Renova Group, which is par with the giants Activision Blizzard and Electronic Arts by engaged in developing industrial digitalisation technologies 2025.

Innovation and technology sector transaction specifics

Because of the trend towards digitalisation Here, the key components of reaching an agreement and and building business ecosystems in various the success of the enterprise are the approach used to assess a start-up, a well-structured deal that takes into sectors of the Russian economy, the type of account the long-term motivation of key personnel and the transactions is changing and, as a result, the features of joint operations, and the approach selected for priorities when taking a decision on whether asset integration. to go ahead with a transaction: the focus is shifting from traditional financial indicators Due to the specifics of deals involving 4 (revenue, EBITDA , debt, working capital, purchases of IT start-ups, M&A teams have etc.) to the quality and uniqueness of a begun to pay greater attention to studying product, the key people and founders of the the operating model of the company they company, and whether the product has legal are buying before signing the SPA (sales and protection. purchase agreement) and closing the deal, examining in detail the functioning of the start-up, and seeking to identify potential risk areas (so called “dis-synergies”) .

This involves identifying key risks related to HR, the IT An IT start-up or young company with a workforce of infrastructure, the maturity of the finance function and three to 500 often becomes an investment target in reporting, corporate culture characteristics, the maturity of the innovation and technology sector. After closing the business and intellectual property rights. the respective transaction, the sellers remain minority shareholders and top managers of the company, and are tasked with attaining specific business indicators set out in the respective contract. An important issue is preserving the shareholder value of the investment object by striking a balance between the interests of the buyer and the top management of the acquired company, which will agree on joint operational functioning and how to realise the various synergies offered by the deal.

A marked dis-synergy also arises during Overall, the innovation and the process of integrating a purchased technology sector continued to asset when a large corporation attempts to grow in 2019, which was largely integrate a small start-up into its business due to the rapidly developing and operating model. The solution in this case may be a balanced approach to ecosystem aspect and the focus company integration. on digitalising the economy. The largest M&A market players Companies / serial buyers of small IT start-ups have learned in the sector were Sberbank, from past mistakes, and are increasingly choosing a “preserve IKS Holding, Mail.ru Group, and incubate” approach to integration; this allows, on the Yandex, and VTB. In the next one hand, the speed of decision-making and the competitive advantages of acquired companies to be maintained, and on few years we expect increased the other hand allows the minimum necessary level of asset competition for technology control to be obtained. start-ups among major players Hence when deciding to buy a company in the innovation and in the Russian business technology sector, qualitative characteristics are paramount: the uniqueness of the product and the presence of a team landscape and, as a result, that can develop the technological know-how and realise greater investment activity the project’s potential; also, the pre-investment focus shifts within the sector. from an analysis of historical financial results to assessing the product and the corresponding market, as well as the technological and operational features that make up the company’s competitive advantages.

Taxation aspects of M&A deals involving innovations & technology companies

Managing the tax risks inherent within a particular business is one of the most important components of an M&A project.

When it comes to tax risks, one can risk of not performing a due diligence distinguish between universal risks when choosing a counterparty), and that arise for companies regardless of specific risks that a particular sector Dmitry Garaev their industry sector (for example, the of the economy are exposed to. Head of Tax M&A Which specific tax risks do investors face when investing in IT sector Tax & Legal companies? Russia and the CIS Partner Tax incentives

IT companies can take advantage of a number of tax incentives, including reduced insurance and social contribution rates and Skolkovo Innovation Centre residents qualifying for tax-exempt status. Such incentives can represent a significant asset when calculating future returns on investments, but can constitute a hidden obligation if the conditions for applying the incentives were not properly met. When determining the investment attractiveness of IT companies, it is important to correctly assess historical risks and to assess how likely it is that any tax benefits can be retained.

Efficiency boosting measures

In the pursuit of greater efficiency, some IT companies create more risks than benefits. Of the instruments used to increase efficiency, the following, on the surface, may seem feasible: dividing a single business into a number of legal entities, and using civil law contracts with staff. However, such optimisation measures can often be the subject of disputes with the tax authorities. Therefore, to assuage the risk of cash outflows as a result of negative tax assessments, a thorough analysis of the economic feasibility of such measures should be performed.

Intra-group relationships Intangible assets (IA)

It is not uncommon for personnel, trademarks, software, In practice, rapidly growing companies do not always offices, etc. to be in common use by different legal correctly formulate the cost of developing software or entities from the same group, without formal contractual other intangible assets. Therefore, instead of capitalising relations being entered into and, accordingly, respective costs that form the value of intangible assets, the cost payments. For shareholders where all the companies of their creation is deducted for accounting and/or tax of the group are a single business, the absence of accounting purposes. If the company is not planning any such formalities is not important, however, for the tax M&A activity, this issue may not be so crucial. Everything authorities it is. From a tax perspective, intra-group changes, however, when a company is preparing for a relationships without proper clearance and remuneration deal, and especially if pre-sale restructuring is covered can carry significant risks. by the respective terms. If the key developments and technologies of the acquired business are not listed Given the close attention being paid to on the balance sheet of the transaction object, the question arises: «How can these be transferred to the intra-group services by the tax authorities, new structure?» Solving such problems is often quite it is important that intra-group operations complicated in practice, and requires well-coordinated within M&A transactions be carefully collaboration among M&A specialists, lawyers, and tax analysed. consultants.

Risks are identified – now what?

Identifying and assessing tax risks is just the beginning of the process. Subsequently: — a decision needs to be taken on how to manage historical risks — a decision needs to be taken on how to protect the investor from any negative consequences — a decision needs to be taken on the type of transaction, taking into account the identified risks: share deal, asset deal, or hybrid — a protection mechanism against the identified risks needs to be determined and agreed with the parties — strategies need to be developed to retain any tax benefits — possible mechanisms for staff relations need to be developed so that new relations do not trigger any labour / tax risks

The tax aspects of IT M&A projects are complex and require proper attention and planning. As practice shows, the saying “we live in times of an unpredictable past” is especially pertinent when it comes to tax and legal relations.

M&A trends in Real Estate and Construction

we expect growth in M&A activity in the near future

2019 saw significant changes to the legislation of the residential real estate development market, and these could lead to a rise in M&A activity, as well Alexander Borontov as a strengthening of consolidation Real Estate and Construction processes in this market segment. The Deal Advisory commercial real estate segment was Russia and the CIS characterised by changes in market Director conditions and moderate investment activity.

The following events and trends in 2019 characterised both the real estate and construction sector in general, and M&A in the sector in particular: 1 2 3 4 5

2019 saw a trend We are increasingly Legislative changes A redistribution On the commercial towards large banks seeing acquisitions in the area of of the market real estate market and funds switching of claims under credit housing construction and spheres of a number of major to actively managing agreements whose changed the influence in the transactions took portfolios of problem and collateral is real procedure for project housing sector is place, involving non-core assets. This estate. Banks have financing and raised being observed: both state-owned was accompanied by the created the necessary requirements government companies and setting up of specialised reserves, which allows for developers, participation private investors, portfolio management them to dispose of and also affected is rising, and partially representing teams, the development assets in the open project revenue and a number of non-investment of new technical tools, market. margins; this could transactions have transactions; and efforts to boost in future lead to a been completed at the same the efficiency of asset consolidation of involving large time, moderate management business market players. development investment activity processes. companies. was observed in all segments of the commercial real estate market.

Active real estate portfolio management

During the post-crisis years, major Russian banks and returning to projects funds accumulated a large number of problem and non- that got delayed core assets made up of real estate, large- and medium- sized development projects, and other real estate and construction sector assets. Recently, banks have created For example, in the second quarter of 2019 Sberbank the necessary reserves, which gives them the option of adopted a development strategy for the delayed Rublevo- disposing of assets. Arkhangelskoye project, which plans to build over four million square metres of real estate. As a result, players with large portfolios Also, PJSC Ingrad (previously PJSC OPIN) resumed a appeared on the market that switched project to refurbish the Torpedo football stadium and to or began transitioning to an active develop the surrounding area: under the original plan it was management style. planned to develop over 20 hectares, as well as build over 250 thousand square metres of housing and commercial real estate. The construction of the first residential For example, in early 2019 a decision was taken to complex on the project site (River Sky) has already begun, transfer the assets of VEB.RF to the active management and, according to the Moscow City Town-Planning Policy of Dom.RF, including the right to sell assets. For each and Construction Complex, the project to refurbish the asset, a separate strategy is developed that corresponds stadium should begin in the second quarter of 2020 and be to market conditions. completed at the end of 20225. The activities of Trust Bank confirm this trend and serve as a further example of active portfolio management. Against the background of this emerging At the start of the year, the creation of a bank of non- new trend, the KPMG real estate and core assets within Trust Bank was announced, whose goal was to optimise the efficiency and value of assets, construction sector practice has observed with a view to their subsequent sale. In the past year a rise in the number of client requests the company has sold a number of non-core assets, and to provide services related to adopting also transferred specialised office assets to its parent strategic and investment decisions company Otkritie Holding. Head of Trust Bank, Alexander regarding real estate sector assets. Sokolov4, has stated that a number of negotiations are currently underway on including businesses that complement the assets of the bank into their asset pool, Clients are requesting valuation services (as part of and jointly developing them. complex transactions) or services to transfer assets to management, optimise investment decision-making In addition to real estate transactions, processes, develop appropriate tools (integrated finance models, platform solutions, etc.), as well as developing a number of players are returning to strategies and concepts for managing large asset development projects that got delayed portfolios using Big Data. as a result of the crisis.

4 https://www.trust.ru/press/mass_media/detail182148 5 https://stroi.mos.ru/stadiony-moskvy/plany-po-rekonstrukcii-stadiona-imeni-e-a-strelcova

2 Acquisitions of claims under loan agreements

The sale of the rights of claim under loan agreements An example of a public transaction was the assignment of secured by a real estate item removes the need for a claim under a VEB.RF loan agreement for a Neskuchny bankruptcy procedures for “bad” assets from the Home&Spa residential complex construction project. The lender and gives the buyer access to the asset. For claim rights were transferred to Promsvyazbank, which plans default or near-default assets, the purchaser of claims to restructure the debt and finance the construction of the can receive a real estate item at a discount, which facility, which is currently owned by Stroy-Complex LLC. potentially creates additional profits, while the bank Last year also saw a deal to purchase claims under a Sberbank gets rid of the problem asset and does not have to loan agreement in relation to the Tsvetnoy department store. engage in bankruptcy and subsequent procedures to The Bonum Capital investment group acted as the buyer of the dispose of the collateral independently. However, until claim rights, and thus gained control over the asset. The deal the creation of the appropriate reserve, the possibility value was RUB4.2 billion. of alienating the asset under market conditions in many cases is extremely difficult and “painful” for the bank. The observed deals could be an indicator that banks have created appropriate reserves and this enables them to alienate assets on market conditions, while there 2019 witnessed a large number of both are investors in the market interested in acquiring such public and private transactions to acquire non-core assets for banks, of course, provided the price rights of claim under loan agreements is adequate, which allows profits to be earned that are secured by real estate. commensurate with the risks.

3 Changes in housing law

In order to resolve an acute issue related appropriate level of relevant experience and a certain level of to defrauded equity holders and to boost share capital and funds in the company’s current account. the level of control over the activities of The transition to the new rules will likely have a developers, respective amendments were negative impact on the margins (due to the need to pay made to Russian legislation in 2019. interest on funds raised for construction) and return on investment (due to the delay in receiving funds until For residential projects that had a building permit issued commissioning) of development projects. This may after 1 October 2019, significant amendments were made result in the withdrawal from the market of weaker to Federal Law 214-FZ “On Apartment Block Construction developers that have small safety margins or who Co-Funding”: now funds received from participants in are unable to meet the requirements of the law and co-funded constructions (from the sale of apartments financing banks. However, the legislative changes will under construction), will go to special escrow accounts in not have an immediate effect, since many developers authorised banks. managed to obtain building permits before October 2019 and thus are bound by the old rules. Developers will be able to receive this money only after the building has become operational, and construction will Small developers will find it especially difficult to work in the be financed using credit received from the same bank, at a new conditions, therefore we expect consolidation in the preferential interest rate. In the event of the developer going market in the short and medium term. It will be natural for bankrupt, money from escrow accounts will be repaid to large, “too-big-to-fail” developers to absorb small, promising equity holders, and the unfinished building will be transferred land mortgage lenders, and combine small developers into to the bank. Also, the updated law imposes stringent alliances, in order to fulfil the requirements of the law and requirements for developers and their projects, including an with a view to jointly financing projects.

4 Redistribution of the housing market

In 2019 a number of changes took place that In parallel with increased state participation, a redistribution pointed to a redistribution process within of property within the sector is taking place among the housing construction market. The key private investors. At the end of the year there was a major transaction involving a merger between Etalon Group, which change was increased state participation operates predominantly in the St. Petersburg market, and in the industry, which tightens the rules on JSC Leader-Invest, which operates on the Moscow market shared housing construction. and was previously owned by Sistema. As a result of the merger, Etalon Group has further strengthened its position as a leader in the construction market. It is expected that plays an important the merger of these two developers will boost business efficiency after the integration process is finalised, and Dom.RF role in the market also create a synergy effect vis-à-vis the integration of management, the utilisation of production capacities, and streamlining business processes so that they conform to An important role in the market is now played by the best practice. state-owned Dom.RF, which is actively involved in cases In 2019 a deal was announced involving the redemption of involving equity holders being defrauded and collecting a 49% stake in the A101 Development (which previously information on the activities of all Russian developers. belonged to Mikhail Shishkhanov) by Mikhail Gutseriev, The aim of Dom.RF is to support the housing sector in and which was transferred to Trust Bank as part of the Russia and increase the affordability of housing for citizens. reorganisation of Binbank by the CBR. The share buyback One of their key tasks is to solve the acute social problem deal will raise Gutseriev’s stake in the development of defrauded equity holders using mechanisms approved by company to 100%. law. Dom.RF consolidates information on the activities of all Russian developers working under the shared construction scheme, through a specially developed platform called UISS, Changes in housing legislation, and is developing standards for the integrated development of the territory and the quality of the urban environment. the state playing an increasing In addition, in its structure, the state-owned company has role in the industry, and changes a bank, which is one of the main players in the segment of in market conditions all lead us mortgages and project financing for development projects. to expect a further redistribution Greater government participation in the of the market in the short term. industry also indirectly occurs through state-owned banks.

As an example, in 2019 VTB Group almost tripled the size of its stake in the PIK Group of Companies (the largest residential developer in Russia), to 23.05%. The parties to the transaction hope that this will bolster the strategic partnership and, due to the increase in its stake, VTB Group will have additional control over the developer’s business, while PIK Group will benefit from stable project financing, which is particularly pertinent in view of the legislative changes.

5 Major commercial real estate market transactions involving state-owned companies and private investors

Transactions announced and closed in 2019 involving — The purchase of trade centres Aura in Yaroslavl and office assets could have a consequent impact on the Surgut by MallTech from Renaissance Development (the commercial real estate segment. combined value of these assets was put at more than USD100 million). A number of state-owned companies One of the players in the warehouse real estate market, and corporations are planning to move to the Logistics platform Professional Logistics Technologies large modern office facilities: the CBR is (PLT, a consortium of RDIF, Arab Mubadala, and other funds) negotiating the purchase of the Oruzheyny replenished its portfolio with two facilities in St. Petersburg and Solnechnogorsk (the investment has been estimated Business Centre, Sberbank has plans as being worth more than USD100 million), and ACCENT to create a Sberbank City complex on CAPITAL bought from PNK Group 84,200 sq.m in PNK Kutuzovsky Prospekt, the IQ-Kvartal Tower Valishchevo Park (the transaction value has been put at is completely occupied by government around USD40 million). The office segment was also rich for ministries, and Eurasia Tower, which is investment transactions, one of which is considered to be controlled by VTB, is not currently being the largest in this segment in 2019: the sale of the office part of the Neva Towers complex in the Moscow City business actively marketed, which suggests it could centre; the size of the transaction has been put at RUB154.5 – be used for VTB’s own needs. 175 billion. In the hotel segment, there have been two noteworthy deals: the acquisition of the Bridge Resort hotel If all the transactions indicated above are concluded, complex in Sochi and Lux Hotel (formerly Central); the size many employees will move from various kinds of buildings of these transactions, according to market estimates and dispersed throughout the city, and several large high-quality open source data, was around USD78 million and USD55 office properties will immediately exit the market. This may million, respectively. create a deficit of large quality office space in Moscow, Emerging market conditions and announced and closed which in turn will push up rental rates and revive investor transactions in the market demonstrate moderate interest in such properties. investment activity during 2019, and may also reflect Along with the non-investment deals, in 2019 a number positive investment expectations in the industry and of investment-related transactions were closed and the existence of capital among market participants, announced. The largest of these were: both local and foreign, for investment in high-quality commercial real estate. Improving attractiveness and — The planned purchase of a 49% stake in the Gallery Mall market activity leads us to expect further growth in the of the Arab Mubadala Investment Company from the commercial real estate sector. We expect further growth Morgan Stanley Fund (the value of the deal has been put in the commercial real estate sector, based on improved at around USD600-650 million). market attractiveness and existing levels of activity.

What we expect Changing market conditions in the real estate and construction sector point to a rise in M&A activity, in both commercial and residential real estate, as well as an increase in consolidation processes in the residential real estate development sector. In the near future, a large number of assets of potential interest to both local and foreign investors could enter the market.

KPMG Russian M&A database

This report is based on the KPMG The KPMG Russian M&A database has Russian M&A database which includes been complied over a number of years and transactions where either the target is based on information included in the (inbound) or acquirer (outbound) or both Mergemarket M&A deals database and (domestic) are Russian. All data are based EMIS DealWatch database, together with on transactions completed between KPMG desktop research of other sources. 1 January and 31 December 2019, or The allocation of deals to industry sectors announced during this period but pending may involve using our judgment and at 31 December 2019. Historical data may is therefore subjective. We have not differ from earlier versions of this report, extensively verified all data within the as the KPMG Russian M&A database is KPMG Russian M&A database, and cannot updated retrospectively for lapsed deals be held responsible for its accuracy or and information subsequently made completeness. An analysis of different public. databases and information sources Data include transactions valued in excess may yield deviating results from those of USD5 million, as well as transactions presented hereto. with undisclosed deal values. Deal values are based on company press releases, as well as market estimates disclosed in the public domain.

Macro trends and medium-term forecasts

Macro trends and medium-term Development, State Statistics Agency, forecasts represent publicly available data the CBR, Apecon and Bloomberg. collated from the Ministry of Economic

Macro trends and medium-term 1 forecasts

2 Cross-border M&A highlights

3 Sector highlights

APPENDIX 1. Macro trends and medium-term forecasts

Trend 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

GDP, USD bln 2,058 1,360 1,347 1,635 1,592 1,648 1,778 1,879 2,066

Growth, real % YoY 0.7 –2.8 –0.2 1.5 2.3 1.3 1.9 2.4 2.8

Inflation - year-end, % YoY 11. 4 12.9 5.4 2.5 4.3 3.0 3.6 3.8 3.6

Real disposable income, % YoY –1.0 –6.5 –5.9 –1.7 0.1 0.2 0.8 1.2 1.5

Unemployment, % EOP 5.3 5.6 5.4 5.0 4.8 4.6 4.6 4.6 4.6

Budget, balance % of GDP –0.5 –2.4 –3.4 –1.4 2.6 1.6 1.2 0.9 0.8

Current account, % GDP 3.0 5.3 1.9 2.1 6.8 4.3 3.2 3.1 2.5

RUB/USD, year-end 56.3 72.9 60.7 57.6 69.5 61.8 64.0 64.0 62.0

RUB/EUR, year-end 68.3 79.7 63.8 68.9 79.5 69.6 72.0 72.0 69.0

Brent, USDp/bbl, average 99 52 44 55 71 64 63 60 60

Sources: Ministry of Economic Development, Rosstat, Central Bank of Russia, Bloomberg, Macro-Advisory estimates.

APPENDIX 2. Cross-border M&A highlights

Inbound value by region (2019 vs. 2018), USDbn Inbound volume by region (2019 vs. 2018)

5.9 47 42 8.2 3.4 2.6 0.3 0.4 4 4 4.8 10 CIS 5 CIS 0.2 Europe 2.7 2.4 18 North North Europe 13 10 America America 7

MEA Asia-Pacific Asia-Pacific 3.6 MEA 18 8 0.3

Other Other 2018 2019

2018 2019 Source: KPMG analysis. Note: 17% of deal value (19% of deal volume) representing other regions largely comprises deals in stock exchanges with undisclosed compositions of private and institutional investors.

Source: KPMG analysis.

Outbound value by region (2019 vs. 2018), USDbn Outbound number by region (2019 vs. 2018)

2,008 23 13 542 8 14 12 463 29 10 27 186 1,020 CIS 786 CIS Europe 8 North North Europe America 6 6 308 39 America 3

Asia-Pacific Asia-Pacific MEA 13 MEA 471

45 1

Other Other

2018 2019 Source: KPMG analysis. 2018 2019 Source: KPMG analysis.

APPENDIX 3. Sector highlights