February 2010 Deal Drivers Russia A survey and review of Russian corporate finance activity Contents Introduction 1 01 M&A Review 2 Overall deal trends 3 Domestic M&A trends 6 Cross-border M&A trends 8 Private equity 11 Acquisition finance 13 Valuations 14 02 Industries 15 Automotive 16 Energy 18 Financial Services 20 Consumer & Retail 22 Industrial Markets 24 Life Sciences 26 Mining 28 Technology, Media & Telecommunications 30 03 Survey Analysis 32 Introduction Prediction may be fast going out of fashion. At the end of 2008, CMS commissioned mergermarket to interview 100 Russian M&A and corporate decision makers to find out what they thought about the situation at the time and what their views on the future were. Falling commodity prices were viewed as the biggest threat, the Financial Services sector was expected to deliver the greatest growth for M&A activity and the bulk of inward investment was expected from Asia. The research revealed that two thirds of the respondents expected the overall level of M&A activity to increase over the course of 2009, with only one third predicting a fall. That third of respondents was right and, in general, the majority got it wrong or very wrong. The survey did get some things right – the predominance of Who knows? What’s the point? We consider the point to be the domestic players, the increase of non-money deals, the in the detail. Our survey looks at the market in 2009 sector number of transactions against a restructuring background, by sector – what was ‘in’ and what was ‘out’. It talks about the late recovery from the credit squeeze. But, on the whole, the ways the deals are being structured, the values and who the survey group was too optimistic about the level of activity are the significant players. It shows that there truly was in the M&A market; reflecting perhaps a healthy positivism activity and some important plays. Also, this time, this is real among the market drivers and that 2009 was the start of data from the post-credit crunch era from which trends may a new economic beginning when, instead of following the be identified -- not forgetting that it is too early to exclude old, new trends would be created. To be sure, last year’s unexpected plays from big guns that have so far kept their predictions were pure guess work. powder dry. Undeterred, CMS commissioned mergermarket to carry We also think the point is that it is interesting reading in itself out the same survey at the end of last year looking back and gives us cause to be positive. over the year and ahead into 2010. Only 1% of respondents this time thought that M&A activity will decrease during David Cranfield 2010, as against the views of 33% at the end of 2009. The Head of Corporate practice feeling, perhaps even among pessimists, is that it cannot CMS Russia get any worse for those of us who support the mergers and acquisitions market, but there is a general consensus that the market will take time to recover. A smaller majority than last year, but a majority all the same, believes M&A activity will increase, although a large number forsee no change. 2009 seems to have been a year for reforming, planning and above all, waiting. However, our survey group seems to be cautious about whether 2010 will really see the end of the waiting game. In December 2009, mergermarket interviewed 100 Russian M&A and corporate finance decision makers in order to garner their views on various aspects of the current Russian M&A environment. In addition, mergermarket supplemented this research with deal type and sector analysis. Finally, the report has been underpinned by mergermarket’s historical M&A data. 1 Deal Drivers Russia - M&A Review 01 M&A Review 2 Deal Drivers Russia - M&A Review Overall deal trends So impressive had its recent commodity-fuelled growth been, the Russian economy, backed by significant state influence, was arguably expected to effectively insulate itself from the worst effects of a global downturn. However, this viewpoint has lost validity in recent months as Russia has continued to feel the acute impact of the financial crisis. Rather tellingly, the International Monetary Fund estimates that GDP fell by a significant 7.5% in 2009. It is somewhat unsurprising that the contraction in the To an extent, announced activity has been driven by large economy has had a negative impact on investment appetite groups moving to dispose of assets and restructure their with the M&A market witnessing a sharp decline in the portfolio. Oleg Deripaska’s Basic Element is a case in point level of deal making. Indeed, 2009 saw a total of 164 deals in this regard having moved to dispose of a 25% stake announced in Russia, worth a collective €17.6bn. Compared to in Strabag, the listed Austrian construction group. In a the previous 12 months, this represents a fall of 40% in terms transaction valued at €494m, Rasperia Trading, a wholly owned subsidiary of Basic Element, sold out to Raiffeisen Overall M&A trends in Russia Holding Niederoesterreich-Wien and the Haselsteiner family. The deal enabled Deripaska’s group to repay debt owed to 100 30,000 Raiffeisen, although the company kept an as yet unexercised 90 call option to reacquire the stake at a later date in 2010. 25,000 80 Elsewhere, aluminium producer United Company RUSAL sold 70 20,000 a 4.5% stake to domestic investment fund Onexim Group for m) € 60 ( an undisclosed consideration as part of its debt restructuring 50 15,000 process. Under the terms of the agreement, the Deripaska- olume of deals V 40 alue of deals V run UC RUSAL restructured US$2.8bn worth of debt with 10,000 30 Onexim Group’s overall stake in the company increasing to 20 18.5%. Interestingly, AFK Sistema also moved to reshuffle 5,000 10 its portfolio, brokering significant deals on both the buy and sell-side. The largest deal saw the conglomerate dispose of a 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 50.91% stake in telecommunications operator OAO Comstar Volume Value United TeleSystems to domestic firm Mobile TeleSystems for a consideration of €1.41bn. of deal volume while valuations declined by 52%. Significant obstacles to M&A remain with buy-side parties still holding the Deal size split of Russian M&A activity: 2009 belief that corporate valuations have not sufficiently corrected since the acute onset of the financial crisis. As a result, price 5% Not disclosed dislocation is hindering activity with acquirers unwilling to 3% <€15m expose themselves and non-distressed vendors generally 9% €15m-€100m preferring to hold onto assets until sale conditions become €101m-€250m €251m-€500m more favourable. 45% >€500m 26% 12% 3 Deal Drivers Russia - M&A Review Leverage remains difficult and expensive for companies to Looking at the sector breakdown of M&A activity in 2009, obtain and this has led to increasingly creative deal structures the Energy, Mining & Utilities space continued to witness the being used in order to counteract the austere debt financing most significant transactions in Russia. Indeed, three of the environment. Recent months have seen companies attempt top five deals of the year were seen in the sector with the to do non-cash transactions, which is remarkable given that largest deal seeing Gazprom exercise its option to acquire a cash has traditionally been king in the Russian M&A market. 20% stake in oil producer JSC Gazprom Neft from Eni, the One such deal that came to the market in 2009 was the listed Italy-based oil and gas group. €346m buy of the Oil Field Services enterprises of TNK-BP Conversely, the Financial Services space has witnessed International by Weatherford International, the US-based less activity than expected, especially at the top-end of the provider of services to the oil and gas industry. The deal market. Huge potential for consolidation remains, although saw Weatherford issue 24.3m shares as the companies the global financial crisis has curtailed the acquisitive entered into a registration rights agreement. Such deals are aspirations of the larger global players. The overwhelming particularly beneficial to distressed vendors as firms can ease majority of banks have been preoccupied with repaying cash flow issues while also ‘keeping skin in the game’ to reap bail-out funds and reducing their exposure to toxic assets. the benefits of any future upside. Furthermore, the deals that have come to the market have mostly been seen in the traditional hotbeds of activity with Russian M&A sector split by value: 2009 many Financial Services firms perceiving Russia to be too risky a place to broker deals, even in a benign economic 1% 1% 1% climate. Indeed, compared to other BRIC countries, Russia is Energy, Mining & Utilities deemed high risk with widespread legislative reform required 4% TMT 5% to attract investment and increase market confidence. Defence 5% Financial Services Private equity activity has also been largely subdued with Consumer funds continuing to be preoccupied with preserving value in 6% Leisure Construction existing portfolio companies. The debt financing environment 6% Transportation and the increasingly risk-averse nature of the asset class Real Estate 52% has also meant that there has been very little activity from Industrials & Chemicals Western European and North American funds.