Liam Halligan of Prosperity Capital Management -
During 2010, the Russian market benefited from heightened M&A activity - a trend which has continued into 2011. This was particularly the case during the second half of last year, when the cost of three- to five-year ruble loans dropped to 8-12%, down from 13-15% during the same period in 2009. Together with lower credit costs, a more buoyant deal-making environment has also reflected growing cash cushions on the balance sheets of Russia's stronger companies, together with the weakened positions of those firms that the 2008 crisis exposed as inherently inferior.
The largest Russian deal last year was Uralkali's $9.8bn acquisition of Silvinit to create a Russian potash powerhouse, at a time when BHP's bid to buy Potash Corporation was blocked by the Canadian authorities. The next biggest deal was PepsiCo's $5.3bn purchase of 66% of Wimm-Bill-Dann, Russia's leading juice/diary producer. Another high-profile transaction was the sale of supermarket chain Kopeika to Retail Group X5, Russia's largest food retailer, for $1.7bn. In other sectors E.On sold 3.5% of Gazprom for $4.6bn and the telecommunications sector saw several multi-billion-dollar deals as consolidation continued.
A recently published study of Russian M&A, published by the consultancy MergerMarket, in conjunction with the law firm CMS (Russia), makes for interesting reading. Total disclosed deal values in Russia jumped from $23.6bn in 2009 to $68.7bn last year, a 191% rise. The total number of reported transactions grew to 213 in 2010, from 165 the year before.
While the big deals grabbed the headlines, the large number of smaller deals reported by this study reflect the fact that Russia remains a rather fragmented economy. This is a situation that allows long-only, specialized investors like Prosperity Capital Management (PCM) to benefit from highly value-accretive transactions among lower-tier companies as consolidation, across a range of sectors, continues to take place. Yet while Russia has historically seen most deals at the lower end of the spectrum ($20m-$130m), this study shows a shift towards the higher ($131m-$330m) bracket.
Unlike many other regions, Russia's biggest transactions in 2010 generally involved domestic players. Only PepsiCo and Trafigura of Holland, which bought an 8% stake in Norilsk Nickel, featured in the top-10 deals. Yet large multinationals such as BP, Daimler, Renault and Boeing have previously engaged in Russian M&A. In the aftermath of PepsiCo's move, many other large overseas investors are now looking to follow - with big players ranging from Siemens to the China Investment Corporation now voicing their intentions.
While some portfolio investment into Russia can be subject to fads, driven by often garish Western press coverage, strategic direct investors tend to take a more robust (and realistic) view of the business opportunity here after conducting somewhat more thorough risk assessments. Non-specialized equity investors sometimes tell us that they "cannot afford to be in Russia" - given the perceived risks. Major international corporations, in contrast, given the country's resources, technological skills and size of market, often comment that they "cannot afford not to be in Russia."
The sector focus of Russian deal-making shifted last year. During 2009, large-cap energy, mining and utilities deals accounted for just over half of the market by value. That share fell to 33% in 2010. The industrials and chemicals sector, conversely, surged to 29% of deal-value last year, up from 1% the year before - with the Uralkali/Silvinit transaction making up a large part of that increase.
The next biggest sector during 2010 was technology, media and telecoms, which accounted for 20% of deal-value, followed by consumer/retail, which took 12%. Financial services and transportation, both sectors ripe for consolidation, accounted for just 3% and 2% of 2010 total respectively - pointing to interesting opportunities ahead.
The MergerMarket/CMS study also contains a survey of over 100 deal-makers and practitioners involved in Russian M&A - many from overseas.
This indicates that "bureaucracy" and "legislation issues" are still regarded as key challenges when operating in this market. Indeed, the Uralkali/Silvinit deal is currently subject to legal challenge, with some Silvinit minorities, including PCM, contesting the swap terms. Having said that, most survey respondents felt "it is no more difficult to do a deal in Russia than elsewhere" and disagreed that "non-Russian businesses looking to do deals face different challenges than Russian businesses." Further, the vast majority (84%) reported that deals they've done in Russia have lived up to expectations and fulfilled their objectives.
Liam Halligan, chief economist Prosperity Capital Management
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