bne -

One man's misfortune is another's opportunity. The crisis wrecked many fast growing companies, but by the fourth quarter of 2010 cheap interest rates and low company valuations had sparked a wave of mergers and acquisitions.

As Russia dived into recession in late 2008, it was anticipated that many sectors would see consolidation as credit lines dried up and sales dimmed for a host of smaller companies that had stretched themselves too thin chasing sales during the boom years. It never really happened. On the one hand, with the government pumping cash into them, the banks agreed to restructure debt; on the other, those same banks hoarded that cash, which meant that corporations couldn't raise the credit to go shopping.

But everything changed at the end of last year: M&A deals in the final quarter of last year hit a three-year high and several landmark deals were announced, led by PepsiCo's $1.5bn takeover of dairy producer Wimm-Bill-Dann - Russia's largest-ever deal, which leaves PepsiCo as the biggest player in the profitable dairy sector.

Pepsi's deal was the icing on the cake for a year that recorded $15bn worth of deals in the consumer sector - crisis notwithstanding. Overall, the volume of deals was down 40% on 2008, but the size of the deals are going up: in other words, the smaller more speculative deals were swept away in the crisis flood, but as Russia emerges from the crisis international players are moving in to take a position in the largest consumer market in Europe.

The tide will almost certainly build; three-quarters of all deals in Russia were done in the last quarter of 2010, worth a total of $33.8bn (against China's $37.7bn and Brazil's $8.2bn in the same period).

Cost of borrowing

Another factor driving M&A is the greatly reduced cost of borrowing following more than a dozen rate cuts by the Central Bank of Russia. "The cost of three- to five-year ruble loans dropped to 8-12% during the autumn, from 13-15% a year ago, helping to drive Russian M&A," says Liam Halligan, chief economist at Prosperity Capital Management.

Large companies are jostling for pole position to take advantage of the recovering economy, which has $50bn a month in retail sales and boasts the largest customer base in Europe.

Pepsi's deal came at the end of a string of consumer sector deals. Supermarket chain X5 announced it had bought out the smaller rival Kopeika supermarket chain for RUB51bn ($1.7bn) on December 5 - with Renaissance Capital estimating the rate on the RUB30bn, five-year credit line it secured for the purchase from Sberbank at a maximum of 7%. Bloomberg compared that with the 18.46% coupon it offered on ruble bonds in June last year.

Those kind of rates are only available to the biggest, though. The smaller fish are still cut off from credit, and although a few have wriggled through the net via the equity markets, the lack of risk appetite around the globe means it was a close run thing for many.

Former Kopeika owner Nikolai Tsvetkov is also looking to unload a stake in his bank, Uralsib Financial, as it struggles to compete with the large state-owned and foreign financial houses. In a December 1 interview with the Financial Times, the bank's deputy chairman, Alexander Dementiev, said that the future of private banks in Russia is in "serious question."

Meanwhile, one of those state-controlled banks, VTB Group, continued its own acquisition programme in December by helping itself to a 19.28% slice of mid-sized Rosbank, which it held as collateral. The buyer is also said to be interested in a controlling interest in Bank of Moscow, while bne has learnt that talks are still ongoing with PPF over buying its Home Credit & Finance Bank, though any deal probably won't happen until after a stake in VTB has been sold later this year. A deal for TransCreditBank is expected to close by the end of the year.

Yet it's not just relative minnows that are shedding weight, as some corporations unload non-core assets to power acquisitions by their main businesses. Sistema, for instance, has sold real estate, tourism and retail companies this quarter as it appears to be consolidating its telecoms and energy assets.

With three-quarters of all M&A coming from emerging markets in 2010, whatever happens clearly this momentum is building fast for a shape-changing consolidation in many of Russia's sectors.