Low cost start
"Western investors know that Ukrainian assets are at their lowest price at the present time, and believe that it will grow in future" — Anna Babych, partner at Aequo Law Firm, stresses
— What became the prevailing trend in Ukrainian M&A in the year that it passing?
— Before analyzing the special trends of the Ukrainian M&A market, we need to evaluate the balance sheet. One should note the indications that the market is slowly beginning to recover from the acute crisis of 2014-2015: GDP growth of 1%–2%, increase in gold and foreign exchange reserves, steady decline in inflation, stabilization of the national currency rate, and decrease in the National Bank of Ukraine discount rate. There are also other factors, indirectly indicating the revival of business processes in our country: improvement of consumer sentiment (according to GfK Ukraine), rising freight traffic.
Nevertheless, despite positive dynamics, economic progress has not yet made the impression on M&A activity to the extent expected. This is partly explained by the fact that it is difficult to call the previous year very successful in the context of M&A: the number of transactions was 25% lower in comparison with 2014, and the aggregate value fell by 5.5 times. Consequently, the market did not have enough momentum last year, and improvement of the general economic situation is still not sufficiently noticeable to significantly affect the market. However, some transactions have been concluded, for example, in the segment oriented for the Western market, which is only indirectly affected by the geopolitical problems in Ukraine. The IT sphere is a good example.
In addition to insignificant volumes, the other trend has also remained: the acquisition of "bad" assets with the expectation that their value growth in the future made up the majority of transactions. It's no secret that it is high time to buy them right now.
In general, it is difficult to sum up the results under circumstances where the majority of transactions were not public ones; it is another trend of the expiring year along with the increase in number of exclusively internal transactions concluded by local players.
— In what economic sectors were the most transactions concluded? What made an impact on such distribution?
— According to the results of our research, conducted by Aequo together with the respected publisher Mergermarket, the leading industries by number and volumes of transactions were formed in Ukraine in 2015: financial services (more than 40% of total value), energy sector (about 30%) and agricultural sector (slightly more than 15%).
Such results were expected. The increase in the number of transactions in the financial services market is explained, on the one hand, by the presence of troubled banks and, on the other, by the confidence of foreign investors that the banking sector had now seen the worst of times. This is primarily the merit of the regulator, who conducted a competent campaign to remove insolvent banks from the market.
However, this year was not marked by a significant amount of transactions in the energy sector. One of the reasons is that privatization is not currently being implemented, as it was expected. Previously, the State Property Fund assumed that the budget would receive about 17 billion UAH in 2016 as a result of privatization. But the real results so far are still more than modest — about 41 million UAH for the first half of the year.
Interestingly, the focus suddenly shifted towards real estate and land in 2016. So, we can see the growth of direct foreign investment in commercial real estate: warehouses and shopping centers, land plots. There is only one explanation, and it is quite simple: Western investors know that the price is at its lowest at the present time, and believe that it will grow in future.
In Technology, Media, and Telecommunications, we have observed stable activity since 2015 (these are transactions on the acquisition of Rozetka, Maxymiser, Ciklum, Looksery), which has continued in 2016 (Datagroup, Lohika, Ask.fm, Giraffe). In my opinion, the TMT sector is especially important for Ukraine. This is not only the first actual foreign investment since 2014, but the new positioning of Ukraine as a country that produces innovative products, and not just raw materials.
— What major M&A projects can you highlight?
— Serious work carried out by the regulator on removal of insolvent banks from the market caused transactions, unique ones for Ukraine, in the financial services market. For example, NCH Capital concluded the first and so far only transaction successful in Ukraine, on the purchase of an insolvent bank from the Deposit Insurance Fund (DIF). This is to do with about the purchase of Astra Bank (now renamed as Agroprosperis Bank), which became possible thanks to the coordinated efforts of the National Bank of Ukraine, the Deposit Insurance Fund and the investor. Another example of a unique transaction in the financial services market is the purchase by a Ukrainian business group of a transitional bank, created on the basis of Omega Bank, previously recognized as insolvent. The Deposit Guarantee Fund provided transfer of the majority of the assets and liabilities of the insolvent bank in favor of the transitional bank in order to perform this transaction.
In the agricultural sphere, the transaction on the asset swap between MHP and Agriculture is worthy of attention.
Another significant transaction is the acquisition by the George Soros Fund of a shareholding in a leading software developer, Ciklum Holding Limited, one of the main development centers of which is located in Ukraine. The importance of the transaction is determined by the fact that it is, in practice, the first post-crisis investment into the IT sector of Ukraine, which can play an important role in attracting other investors to the emerging Ukrainian market.
— Is the Government taking some measures to stimulate the country’s investment attractiveness and to activate M&A?
— The Government is undertaking a number of reforms, successful implementation of which will without doubt leave a positive impression on the level of business activity and presence of interest from outside. It's not just about large-scale projects such as judicial reform, counteracting corruption, reform of antitrust law and comprehensive work by the National Bank of Ukraine on normalizing the situation on the financial services market.
The improvement of corporate legislation through amendments to the Law "On Join-Stock Companies", which came into force in May 2016, also plays an important role. Furthermore, work on improving regulation of limited liability companies — the main form of business legal structure of legal entities in Ukraine — is in progress. The draft, prepared by the joint efforts of representatives of the legal market, MEDT and the Center for Commercial Law, has been submitted to the Ukrainian Parliament. The ultimate goal is ensuring real improvements in doing business (Ukraine is currently in 80th place in the Doing Business rating) and attracting transactions to the Ukrainian legal framework.
In addition, the efforts aimed at privatization of objects of state property are also worthy of mention. Despite the fact that the process is progressing more slowly than was expected, experts note that Western investors are interested in key facilities: Odesa Portside Plant, Centrenergo, and regional electricity distribution companies.
— What is your forecast for 2017?
— The forecast can be expressed in terms of cautious optimism. In fact, there was nothing in 2016 that would cause doubt in the fact that we can expect moderate growth. Perhaps, a number of forecasts for the current year were premature, but it doesn't mean that we have no reason to expect progress next year.
Further stabilization of the economic situation in the country and absence of considerable external shocks is a guarantee of a gradual increase in business activity. We are still reliant on the beginning of an active phase of privatization, which will provide significant budget revenues and can prompt the reform of a whole number of industries.
First and foremost, private equity funds will remain the main investors — the success of their activities will, in turn, serve as a positive signal for strategic players.