Merger and acquisition (M&A) activity in Ukraine increased from 41 transactions seen in 2016 to 44 deals in 2017, while deal value increased by an impressive 57% to €554mn, according to May's report published by Kyiv-based law firm Aequo.

Despite greater political stability in Ukraine and the economy’s ongoing recovery from recession, dealmaking activity is still well below levels seen earlier in the decade. Market volume peaked in 2012 with 91 deals, following 70 transactions in 2010 and 75 in 2011, while total value topped €3bn in both 2010 and 2013.

At the same time, there was a significant shift towards domestic M&A activity taking place within the country in 2017, with 75% of deals changing hands between Ukrainian firms.

"We believe M&A activity is likely to pick up in 2018 compared to 2017, a trend we already saw in the final quarter of last year," believes Denis Lysenko, managing partner at Aequo. "This is due to the overall stabilisation of the Ukrainian economy, including FX stabilisation. The government is negotiating with the International Monetary Fund (IMF) and European Commission, and it seems keen to meet the requirements by multinational financial institutions to get access to funding within  this year."

The financial services sector remains the backbone of M&A activity in Ukraine, accounting for 33% of volume and overall M&A value in 2016-17; having contributed 37% and 42% respectively in 2014-15.

"Consolidation in the banking sector has become commonplace, as foreign owners have sold Ukrainian subsidiaries to focus on other regions and decrease their exposure to the country’s risk factors," the report reads. "Meanwhile, local businesses have proved keen buyers. Intra-group restructurings have been another factor behind dealmaking."

At the same time, the serious financial difficulties experienced by Ukrainian banks during the recession have driven up non-performing loans (NPLs), which accounted for an eyewatering 55% of the total loan portfolio in late 2017, according to the National Bank of Ukraine (NBU). The central bank has undertaken a cleanup and recapitalisation of the sector as a result.

The highest-valued deal targeting the sector in 2017 was the €13m acquisition of Lviv-based VS Bank by Kyiv-based TAScombank from Russia’s Sberbank. TAScombank’s owner, businessman and former minister Serhii Tihipko, plans to merge the two banks, and said that the acquisition significantly boosts TAScombank’s capital. Tihipko has stated that his TAS Group is also seeking to purchase distressed debt portfolios.

However, Aequo believes that after a period of strong activity, M&A in the financial services sector may slow in the coming years, partly due to the completion of the latest round of consolidation, and fewer targets being available. Regulatory barriers are also an impediment to dealmaking.

"I would say that the tide of financial institutions’ M&A is subsiding slightly, because many of the banks were acquired in the past three years, either through share transactions or asset transactions," Lysenko underlined.

"The banks remaining on the market that are up for sale are subsidiaries of Russian banks. There is a complication related to sanctions imposed by the Ukrainian state and the various regulatory hurdles for potential buyers to acquire these banks. We have seen a number of failed attempts to buy so far - failed for regulatory and compliance reasons."

Meanwhile, Ukraine’s energy, mining, and utilities (EMU) sector has become an important driver of M&A dealmaking in recent years. EMU accounted for 14% of deal volume and 23% of overall value in 2016-17, and 12% of volume and 29% of value in 2014-2015

The second highest deal of 2017 targeted  the EMU sector, the €98mn acquisition of Evraz Sukha Balka (ESB) by Berklemond Investments from Evraz, a metals and mining company. ESB has one of Ukraine’s largest iron ore mines, extracting 2.5mn tonnes of lumpy ore in 2016, and operates an ore enrichment plant with an annual production capacity of around 3.1mn tonnes of iron ore.

The EMU sector will continue to be one of the most active sectors for M&A in 2018, with the renewables segment seeing lively interest from investors, including Chinese businesses, Aequo believes.

"The regulatory regime is, in principle, quite favourable and is already being used by a number of players in the wind development sector, as well as solar," Lysenko underlined. "A range of utilities companies have been lined up for privatisation and part-privatisation in 2018, including combined heat and power plants and power distribution outfit Kharkivoblenergo."

Agriculture generated 8% of deal volume in 2016-2017, the same level as in 2014-2015, while its contribution to overall value doubled from 16% to 33%.

The sector attracted the highest-valued deal of 2017, and the only transaction topping €100mn
- the €127mn acquisition of a 92.1% stake in Ukrainian Agrarian Investments (UAI) by Kernel Holding. Warsaw-listed Kernel is one of the biggest agribusinesses in the Black Sea region, focusing on sunflower oil in particular, and the acquisition of UAI fits its strategy of building up its land bank.

Ukraine’s strengths as an agricultural producer are likely to see continued activity targeting the sector. Consolidation of both farming and processing is ongoing, with bigger domestic players looking to acquire smaller and medium-sized companies, according to Aequo's report.

One barrier to investment is a moratorium on the sale of agricultural land, which was extended by another year in December 2017. The ban means that Ukraine’s agricultural land, which totals more than 40mn hectares, cannot be bought or sold, but must be leased from its current owners. This has made consolidation of fragmented land holdings difficult, and deterred investors.