M&A in Ukraine: Can anyone beat banks?

By bne IntelliNews February 27, 2007

Dragon Capital in Kyiv -

M&A activity in Ukraine continued booming in 2006, with the estimated number of deals growing to 110 and their combined value reaching $5bn, most of this amount being inward flows from foreign strategic investors. The decrease in the total value of deals, from $7.7bn in 2005, is by no means a sign of the market cooling down, as more than 60% of the latter amount, or $4.8bn, was generated by a single transaction, the privatization of the country’s largest steelmaker, Kryvorizhstal, by Mittal Steel.

Deals in the financial sector, namely acquisitions of local banks by foreign strategic investors, commanded the lion’s share, or more than $3bn, of last year’s Ukrainian M&A transactions in value terms (please see the table below).

The sector is set for at another year of M&A activity, as Sweden’s Swedbank has just announced the acquisition of TAS-Komerzbank for $735m and at least two similar-sized banking deals are reportedly being negotiated. Foreign investors remain attracted by the Ukrainian banking sector’s astounding growth (its total assets jumped by 59% last year, to $67.4bn, or 64% of GDP), and low penetration of banking services, especially in the retail segment (retail lending in Ukraine leapt by 137% in 2006, to $15.5bn). In addition, last year saw about a half-dozen M&A deals in the country’s burgeoning insurance industry, for about $130m collectively.

While financial sector M&A clearly dominated in 2006 and may as well remain on top in 2007, the sharp increase in the total number of transactions observed last year and a wider spectrum of industries involved demonstrate the market’s strong growth potential for the coming years. Probably the largest among non-banking deals in 2006 was the acquisition of a 100% stake in private fixed-line telecom operator Optima Telecom, for an estimated $120m, by Ukraine’s largest business group, System Capital Management. The company was sold by another local group, Privat. Overall, according to Russian agency M&A Intelligence, telecom M&A, represented mostly by domestic consolidation deals, amounted to $190m in 2006.

Other M&A-active sectors last year were food processing (17 deals for $311m), metallurgy (6 deals for $298m), oil & gas (2 deals for $207m) and trade (8 deals for $167m), according to M&A Intelligence. The agency also estimated outward M&A deals in 2006 (acquisitions of foreign targets by Ukrainian companies) at just $105m, or 2% of the total value of deals.

This year may see the Ukrainian M&A market post a new record high if the government decides to proceed with the privatization of a controlling stake in the fixed-line monopoly Ukrtelecom and several other state-owned giants. What’s certain, Swedbank’s acquisition of TAS-Komerzbank as well as the recent announcement of merger talks between local metallurgical giant Industrial Union of Donbas and Russian billionaire Alisher Usmanov’ Gazmetal holding seem to have got the market off to a good start in 2007.

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