"Investors are starting to believe in long-term stability and security in Ukraine"MYKOLA STETSENKO, CO-MANAGING PARTNER AT AVELLUM, SAYS ANALYZING TRENDS IN UKRAINIAN M&A
— How would you evaluate the state of the M&A market in Ukraine this year?
— I have good news: M&A market has begun to grow. The number of transactions has increased, although their size is still quite small.
The trend in the activity of Ukrainian players, who consolidate their positions and get rid of less efficient assets, continues. It is taking place in agriculture, FMCG, banking and real estate. In addition, we see an increase in activity on the part of foreign investors, first of all, in real estate. Everyone knows that quite a lot of transactions are done in the area of office and retail real estate. According to the media, Dragon Capital, with the participation of Goldman Sachs, buys many pieces of real estate in Kyiv and other cities. Compared to last year, this is clearly a new trend showing the interest of foreign investors to not the most profitable, but certainly stable and predictable areas. And most importantly, this shows that investors are starting to believe in long-term stability and security in Ukraine.
The revival in the private equity segment is a new and pleasant trend. And this is not just Horizon Capital, we’re also hearing about the revival of Sigma Bleyzer, we know that the EBRD intends to more actively develop its private equity unit and invest in equity capital, and not just grant loans. We recently closed a transaction in agriculture, where Diligent Capital Partners, a new private equity boutique, invested together with the Netherlands Development Bank FMO into Allseeds SA, a major manufacturer and exporter of vegetable oils. And this is just the beginning. Now is a golden time for small private equity agencies: the value of assets has not yet been overrated and the major players have not returned yet. Their entry into the market, of course, will be connected with the situation on the world market, but nothing should be ruled out. The gradual entry of large Ukrainian business into foreign markets and purchase of foreign assets is another trend becoming more noticeable. It's amazing that Ukrainian companies are becoming players at least on the general European market.
— What Ukrainian assets are in demand?
— We can see huge activity in the area of alternative energy, a lot of transactions related to solar and wind power plants. This area will undoubtedly continue to grow and consolidate.
In the banking sector, there are a number of examples of bank acquisitions and consolidation of banking groups. A number of banking institutions also took the opportunity to merge. The merger of MTB Bank and Center Bank, which previously belonged to different groups of owners, is one of the recent examples. In view of the planned increase in the requirements towards the authorized capital of banks, not all owners are willing to finance this at their own expense, they are more likely to reach out to their colleagues, merge into one bank, thereby satisfying regulatory requirements and becoming larger players on the market. I do not exclude that in a few years time we will see another trend. Namely, that banks, which have undergone rehabilitation and modernization, will become attractive for foreign investors. It is clear that state-owned banks, either whole or in part, will be put up for sale. It is common knowledge that both the ICFI and EBRD showed interest in Oshchadbank and Ukrgasbank.
The acquisition of Mriya Agroholding became a landmark transaction in the agricultural sector. I suppose a third of the top law firms worked on this project. Many players were interested in this asset, but, as you know, a company from Saudi Arabia won. And this is also an awesome example that investors are starting to believe in Ukraine. Despite all the difficulties and losses, creditors and investors were able to "ride out" total bankruptcy, saved the company, restructured and sold it, returning at least part of the money spent. This is better than nothing.
As for the IT sector, M&A are taking place there continually at the global level, which affects Ukraine in one way or another. I think their number will increase. This is a very hot sector, and with the number of IT specialists in Ukraine continuing to grow, this solidifies the country’s status as one of the largest IT hubs.
— Do the areas of interest of private equity and large investors coincide?
— I would say that they partially overlap. Rumour has it that private equity is not interested in real estate, some are not willing to invest in net farming. At the same time, they are ready to invest in processing and IT. We’ve all heard about the famous merger of Rozetka and Prom.ua. Horizon Capital, one of the shareholders in Rozetka, plays a meaningful role in this transaction. This is a difficult project of great importance for the Ukrainian market. Finally, the Ukrainian market needs its own domestic flagships, which we can be proud of. We have them, but we need more.
— To what extent is the Ukrainian M&A market public?
— It depends on what do you mean by "publicity". The vast majority of transactions do, sooner or later, become public. Changes are made to public registers, creditors are notified, press releases are published and so on. Certainly, there are projects that the wider general public do not know about, but their share is not very large. Another thing is information on the terms and conditions of transactions: these are private M&A and one should not expect all the nuances to be revealed. Often, the parties prefer not to disclose sensitive issues such as price, settlement terms and conditions, unless, of course, the participant is a public company, which is obliged to disclose such relevant information. This is a common practice accepted all over the world. Another question is that there are more transactions involving public companies in the Western world and, due to this fact, the level of disclosure is higher.
— What’s happening with transaction structuring? Did the legislative changes adopted contribute to the return of M&A to the Ukrainian jurisdiction?
— Yes, definitely. Adoption of laws on limited liability companies and corporate agreements were also encouraging. Moreover, both we and some colleagues on the market have already begun to prepare shareholders agreements under Ukrainian law. This does not mean that everyone immediately began to structure transactions according to Ukrainian law. The risks of unpredictability of interpretation of Ukrainian legislation by Ukrainian courts will gradually decrease, but there are always taxation reasons. Therefore, many transactions will be made with the involvement of other jurisdictions, at least between the foreign seller and the buyer, and the assets may, at the same time, be located in Ukraine. Nevertheless, transactions will be made, with ever-increasing frequency, at the Ukrainian level and the structuring will be simplified. I think that this is correct, and Ukrainian lawyers will have more opportunities to practice Ukrainian law, gradually integrating Western tools of contract law into it. Sooner or later, the Ukrainian courts will adopt the relevant practice, and I am sure that a high-quality judicial doctrine will be formed at least at the level of the Supreme Court.
— How far has Ukraine advanced in improving the investment climate? What issues still hold back investors?
— I do not think that something can restrain an investor, except for outdated geopolitical myths. We finally see a wave of information that the reforms are having a positive effect, the state budget is growing, the deficit is under control has reached investors and the sums of investment coming into the economy keep increasing. I don’t see any serious constraining factor, Ukraine is gradually busting many myths. The complexity of running a business, the lengthiness of the processes — all of this is in the past, many procedures are canceled. I'm not saying that absolutely everything is going perfectly, but comparing Ukraine with many European countries, I can say that the conditions for running business in Ukraine are not so bad, and the procedures are far from the most complex out there. We all are aware of the problem of corruption, everyone talks about it, even those who have actually dealt with it. I am putting high hopes on the new Supreme Court, where many good specialists are working right now and most importantly, on decent people. I believe that for the time being everything looks quite optimistic.