The amount of mergers and acquisitions (M&A), with the participation of Russian companies in the first half of 2018 compared with the first half of 2017 increased by 134%, as estimated by analysts at Thomson Reuters. Such growth rates have never been seen in the last 11 years. However, the number of transactions conducted during the reporting period was a record low — only 499.
The total amount of transactions in the first six months of this year amounted to $of 13.48 billion (a record since 2014) versus $5.7 billion in the first half of 2017, and the volume of transactions conducted with the participation of only Russian companies — $6.4 billion versus $2.7 billion for the same period of 2017. The list of M&A deals covers announced deals, pending deals, in-process transactions and closed deals, as explained by Thomson Reuters.
Despite the increase in the volume of M&A transactions in General (with the participation of both Russian and foreign investors), in the first half of 2018, their number decreased by 25% compared to the same period last year, to 499. In particular, the acquisition of Russian assets by foreign companies decreased by 15% in quantitative terms and by 11% in value terms. VTB Capital’s mergers and acquisitions led deals and took of 18.2% of the market.
The most expensive transaction in 2018 on the Russian market due to Western sanctions, according to Thomson Reuters, was the sale of Sberbank of its Turkish daughter Denizbank to Dubai banking group Emirates NBD. The deal was announced in May and will amount to $ 3.2 billion, which is almost a quarter – 23.7% of the total amount of transactions in the first half of the year.
The next most expensive purchase was made by VTB – 29% of the shares of the second largest retailer in Russia “Magnit” from its founder Sergei Galitsky. The deal was closed in March, Galitsky is left with only 3% of the company. The shares of “Magnit” VTB valued at $2.45 billion a few months later VTB has sold part of its stake of almost 12% to investment group “Marathon”, founded by Alexander Vinokurov and Sergey Zakharov.
Also in March, Japan Tobacco announced the purchase of 100% of the group “Donskoy Tabak”, based in Rostov-na-Donu, for $ 1.7 billion. The deal should be closed in the course of this year.
Another major deal in 2018 was the sale of shares in Norilsk Nickel for $1.5 billion. UC Rusal and Interros agreed on that in March. Crispian of Roman Abramovich and Alexander Abramov had planned to sell 4% of its shares in proportion to the shares of UC Rusal and Interrros. However, by the decision of the London Court, this transaction will be canceled — Mr. Abramovich will have to return $770 million to Mr. Potanin for 2.1% of the shares of Norilsk Nikel company he has already bought.
The growth of M&A transactions in four years was achieved due to the “effect of the low base” — after the deterioration of relations between Russia and Western countries due to the accession of the Crimea and the December crisis of 2014, when due to the fall in oil prices, the ruble collapsed twice, and the key rate was raised to 17%. Back then, many people preferred to postpone transactions due to the crisis, sanctions, lack of understanding of how Russia’s foreign policy relations with developed countries will develop further, and uncertainty of the future banking sector.
In recent years, the Russian M&a market has seen a revival. First, over the past six to eight months, private equity funds in Russia have received money that was previously scarce and expensive. The funds began to take an active interest in various projects. Secondly, some European buyers have developed an interest in Russia. Howver, some transactions are frozen because of US sanctions.
“In our opinion, the market is quite lively now, the mid-market (middle) segment is quite active,” said Elena Ershova, head of the M&A group at PwC. “We see a healthy trend in the purchase of assets in Russia from foreign investors. On the other hand, there is activity on the part of asset sellers — owners who want to completely change their strategy and exit, or those who are looking for a co-investor as an opportunity to raise additional funds for business development,” the expert adds.
In recent years, in many sectors of the Russian economy consolidation takes place, large business is beginning to extend to sectors that they had not been interested in. At the same time, the crisis wave that began in 2013 hit small businesses much more than large ones. Small business, unlike big business have no state support in connection with sanctions. And the negative impact on small and medium-sized businesses is stronger, which reduces the number of active players and, as a result, the number of M&A. There are fewer of good quality assets on the market, and they have become more expensive.
Among the key negative factors affecting the M&A market are: a non-growing economy, problems in the financial sector, external negative effects (cheaper oil and sanctions), the devaluation of the ruble, relatively expensive financing, activity of the FAS and FNS tightening regulatory nuts. The big problem is also that there are many insolvent borrowers not being bankrupted who have hung a burden on the balance sheets of banks and are not of interest to potential buyers.
Due to the end of one electoral cycle and the beginning of the next one, the first half of 2018 on M&A transactions is characterized by much more modest results than expected in the second half — at least twice as much. Business owners have understood what the political agenda will be there for the next six years, and will make bolder decisions on mergers and acquisitions: someone will get rid of their business, and someone, especially with a large administrative resource, will try to save and multiply their assets.