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 2 • Russian M&A Review 2019 © 2020 KPMG. All rights reserved. Contents 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 © 2020 KPMG. All rights reserved. Russian M&A Review 2019 • 3 Overview 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. 4 • Russian M&A Review 2019 © 2020 KPMG. All rights reserved. Overview 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. © 2020 KPMG. All rights reserved. Russian M&A Review 2019 • 5 2019 in review 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, 6 • Russian M&A Review 2019 © 2020 KPMG. All rights reserved. 2019 in review 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.