Deal Drivers Russia - CMS · Deal Drivers Russia - M&A Review 3 Overall deal trends It is somewhat unsurprising that the contraction in the economy has had a negative impact on investment

Deal Drivers RussiaA survey and review of Russian corporate finance activity

February 2010

Contents

Introduction 1

01 M&A Review 2

Overall deal trends 3

Domestic M&A trends 6

Cross-border M&A trends 8

Private equity 11

Acquisition finance 13

Valuations 14

02 Industries 15

Automotive 16

Energy 18

Financial Services 20

Consumer & Retail 22

Industrial Markets 24

Life Sciences 26

Mining 28

Technology, Media & Telecommunications 30

03 Survey Analysis 32

1

Prediction may be fast going out of fashion. At the end of 2008, CMS commissioned mergermarket to interview 100 Russian M&A and corporate decision makers to find out what they thought about the situation at the time and what their views on the future were. Falling commodity prices were viewed as the biggest threat, the Financial Services sector was expected to deliver the greatest growth for M&A activity and the bulk of inward investment was expected from Asia. The research revealed that two thirds of the respondents expected the overall level of M&A activity to increase over the course of 2009, with only one third predicting a fall. That third of respondents was right and, in general, the majority got it wrong or very wrong.

Introduction

The survey did get some things right – the predominance of

the domestic players, the increase of non-money deals, the

number of transactions against a restructuring background,

the late recovery from the credit squeeze. But, on the whole,

the survey group was too optimistic about the level of activity

in the M&A market; reflecting perhaps a healthy positivism

among the market drivers and that 2009 was the start of

a new economic beginning when, instead of following the

old, new trends would be created. To be sure, last year’s

predictions were pure guess work.

Undeterred, CMS commissioned mergermarket to carry

out the same survey at the end of last year looking back

over the year and ahead into 2010. Only 1% of respondents

this time thought that M&A activity will decrease during

2010, as against the views of 33% at the end of 2009. The

feeling, perhaps even among pessimists, is that it cannot

get any worse for those of us who support the mergers and

acquisitions market, but there is a general consensus that the

market will take time to recover. A smaller majority than last

year, but a majority all the same, believes M&A activity will

increase, although a large number forsee no change. 2009

seems to have been a year for reforming, planning and above

all, waiting. However, our survey group seems to be cautious

about whether 2010 will really see the end of the waiting game.

Who knows? What’s the point? We consider the point to be

in the detail. Our survey looks at the market in 2009 sector

by sector – what was ‘in’ and what was ‘out’. It talks about

the ways the deals are being structured, the values and who

are the significant players. It shows that there truly was

activity and some important plays. Also, this time, this is real

data from the post-credit crunch era from which trends may

be identified -- not forgetting that it is too early to exclude

unexpected plays from big guns that have so far kept their

powder dry.

We also think the point is that it is interesting reading in itself

and gives us cause to be positive.

David CranfieldHead of Corporate practiceCMS Russia

In December 2009, mergermarket interviewed 100 Russian

M&A and corporate finance decision makers in order to garner

their views on various aspects of the current Russian M&A

environment.

In addition, mergermarket supplemented this research with

deal type and sector analysis. Finally, the report has been

underpinned by mergermarket’s historical M&A data.

Deal Drivers Russia - M&A Review

2

M&A Review01


3

Overall deal trends

It is somewhat unsurprising that the contraction in the

economy has had a negative impact on investment appetite

with the M&A market witnessing a sharp decline in the

level of deal making. Indeed, 2009 saw a total of 164 deals

announced in Russia, worth a collective €17.6bn. Compared to

the previous 12 months, this represents a fall of 40% in terms

of deal volume while valuations declined by 52%. Significant

obstacles to M&A remain with buy-side parties still holding the

belief that corporate valuations have not sufficiently corrected

since the acute onset of the financial crisis. As a result, price

dislocation is hindering activity with acquirers unwilling to

expose themselves and non-distressed vendors generally

preferring to hold onto assets until sale conditions become

more favourable.

To an extent, announced activity has been driven by large

groups moving to dispose of assets and restructure their

portfolio. Oleg Deripaska’s Basic Element is a case in point

in this regard having moved to dispose of a 25% stake

in Strabag, the listed Austrian construction group. In a

transaction valued at €494m, Rasperia Trading, a wholly

owned subsidiary of Basic Element, sold out to Raiffeisen

Holding Niederoesterreich-Wien and the Haselsteiner family.

The deal enabled Deripaska’s group to repay debt owed to

Raiffeisen, although the company kept an as yet unexercised

call option to reacquire the stake at a later date in 2010.

Elsewhere, aluminium producer United Company RUSAL sold

a 4.5% stake to domestic investment fund Onexim Group for

an undisclosed consideration as part of its debt restructuring

process. Under the terms of the agreement, the Deripaska-

run UC RUSAL restructured US$2.8bn worth of debt with

Onexim Group’s overall stake in the company increasing to

18.5%. Interestingly, AFK Sistema also moved to reshuffle

its portfolio, brokering significant deals on both the buy and

sell-side. The largest deal saw the conglomerate dispose of a

50.91% stake in telecommunications operator OAO Comstar

United TeleSystems to domestic firm Mobile TeleSystems for

a consideration of €1.41bn.

So impressive had its recent commodity-fuelled growth been, the Russian economy, backed by significant state influence, was arguably expected to effectively insulate itself from the worst effects of a global downturn. However, this viewpoint has lost validity in recent months as Russia has continued to feel the acute impact of the financial crisis. Rather tellingly, the International Monetary Fund estimates that GDP fell by a significant 7.5% in 2009.

Overall M&A trends in Russia

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Deal size split of Russian M&A activity: 2009

45%

3%5%

9%

26%

12%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

€251m-€500m

>€500m


4

Leverage remains difficult and expensive for companies to

obtain and this has led to increasingly creative deal structures

being used in order to counteract the austere debt financing

environment. Recent months have seen companies attempt

to do non-cash transactions, which is remarkable given that

cash has traditionally been king in the Russian M&A market.

One such deal that came to the market in 2009 was the

€346m buy of the Oil Field Services enterprises of TNK-BP

International by Weatherford International, the US-based

provider of services to the oil and gas industry. The deal

saw Weatherford issue 24.3m shares as the companies

entered into a registration rights agreement. Such deals are

particularly beneficial to distressed vendors as firms can ease

cash flow issues while also ‘keeping skin in the game’ to reap

the benefits of any future upside.

While deal structures have become more creative, they have

also become increasingly complicated with transactions

taking substantially longer to complete. Negotiations over

company valuations are now generally more robust and

exhaustive, in stark contrast to the pre-crisis large-cap

transactions that were generally brokered at break-neck

speed. The increased caution in the Russian M&A market is

also apparent post-deal with firms placing increased emphasis

on post-merger integration in a bid to ensure that an M&A

deal ultimately creates value in the long-term.

Looking at the sector breakdown of M&A activity in 2009,

the Energy, Mining & Utilities space continued to witness the

most significant transactions in Russia. Indeed, three of the

top five deals of the year were seen in the sector with the

largest deal seeing Gazprom exercise its option to acquire a

20% stake in oil producer JSC Gazprom Neft from Eni, the

listed Italy-based oil and gas group.

Conversely, the Financial Services space has witnessed

less activity than expected, especially at the top-end of the

market. Huge potential for consolidation remains, although

the global financial crisis has curtailed the acquisitive

aspirations of the larger global players. The overwhelming

majority of banks have been preoccupied with repaying

bail-out funds and reducing their exposure to toxic assets.

Furthermore, the deals that have come to the market have

mostly been seen in the traditional hotbeds of activity with

many Financial Services firms perceiving Russia to be too

risky a place to broker deals, even in a benign economic

climate. Indeed, compared to other BRIC countries, Russia is

deemed high risk with widespread legislative reform required

to attract investment and increase market confidence.

Private equity activity has also been largely subdued with

funds continuing to be preoccupied with preserving value in

existing portfolio companies. The debt financing environment

and the increasingly risk-averse nature of the asset class

has also meant that there has been very little activity from

Western European and North American funds. Looking at

announced activity, the private equity arms of state-backed

Russian banks have largely driven financial investor deal

3%4%

2%2% 1%

6%

18%

17%

15%13%

12%

7%

Consumer

Energy, Mining & Utilities

TMT

Financial Services

Industrials & Chemicals

Construction

Leisure

Business Services

Real Estate

Transportation

Agriculture

Pharma, Medical & Biotech

Russian M&A sector split by volume: 2009

4%

5%

1%1%

1%

5%

52%

19%

6%

6%

Energy, Mining & Utilities

TMT

Defence

Financial Services

Consumer

Leisure

Construction

Transportation

Real Estate

Industrials & Chemicals

Russian M&A sector split by value: 2009


5

flow. Indeed, the top buyout of 2009 saw JSC VTB Capital,

alongside TPG Capital, acquire a 35.4% stake in hypermarket

chain OOO Lenta for a consideration of €77m. Private equity

buyout and exit activity in the coming months is set to remain

depressed, the fundamental issue remains that the asset class

targets multiples which simply cannot be achieved given the

present stake of the Russian market.

Going forward, the Russian M&A market is set to see an

increase in the level of overall deal making in 2010. A wave of

privatised assets is likely to drive activity, with the government

recently moving to announce that it is looking to sell shares in

14 strategic and 435 non-strategic companies, raising a total of

approximately €1.7bn. Intriguingly, some of these assets have

also been mooted as potential IPO candidates, suggesting

that the recent rally in global equity markets has increased

confidence and potentially opened the listing window. Indeed,

following a long and protrcted process, the beginning of

2010 saw UC Rusal’s listing in Hong Kong. According to the

Financial Times, the company was valued at a 15% premium

to the Aluminum Corporation of China, adding credence to the

viewpoint that the IPO market will enjoy a resurgence in the

coming months. However, UC Rusal’s debut was not initially

successful with its share price falling by 10.6% on the first day

of trading.

TOP 10 OVERALL DEALS: 2009 Ranking Announced

dateStatus Target

companyTarget sector Target

countryBidder company Bidder country Seller company Seller

countryDeal value (€m)

1 Apr-09 C JSC Gazprom Neft (20% stake)

Energy Russia OAO Gazprom Russia ENI SpA Italy 3,089

2 Mar-09 C Bashkir Oil and Energy Group

Energy Russia AFK Sistema Russia Agidel-Invest LLC; Inzer-Invest LLC; Ural-Invest LLC; Yuryuzan-Invest LLC

Russia 1,894

3 Jun-09 C OAO Rostelecom (40% stake)

TMT Russia Deposit Insurance Agency; Vnesheconombank

Russia KIT Finance Russia 1,513

4 Aug-09 C OAO Comstar United TeleSystems (50.91% stake)

TMT Russia Mobile TeleSystems OJSC

Russia AFK Sistema Russia 1,412

5 May-09 P OAO Novatek (13.13% stake)

Energy Russia Volga Resources SICAV SIF SA

Luxembourg Cartagena Development Inc

Russia 1,125

6 Nov-09 P United Aircraft Corporation (32.67% stake)

Defence Russia The Federal Agency for Federal Property Management; Vnesheconombank

Russia 1,054

7 Dec-09 P Gostinichnaya Kompania (51% stake)

Leisure Russia Russia Real Estate Fund LP

Russia The Moscow City Government

Russia 705

8 Mar-09 C OJSC Polyus Gold (20% stake)

Mining Russia Suleiman Kerimov (Private Investor)

Russia Vladimir Potanin (Private investor)

Russia 541

9 May-09 C OAO Yamal LNG (51% stake)

Energy Russia OAO Novatek Russia Volga Resources SICAV SIF SA

Luxembourg 465

10 Oct-09 C Belon Group OJSC (41.3% stake)

Mining Russia Magnitogorsk Iron and Steel Works OJSC

Russia Sapwood Investments Ltd

Cyprus 426

C = Completed; P = Pending


6

Domestic M&A trends

While there was an initial expectation that the financial crisis

would be short-lived in the Russian M&A market, the legacy

of overheated prices from the 2007-2008 period has meant

that even after crisis there have still been some difficulties in

matching buyer and seller price expectations. Add to this, the

lack of affordable leverage from Russian lenders and a broader

sense of uncertainty and risk aversion among corporates in

the hostile business climate, then the fall in deal flow is not

surprising.

In the domestic market, M&A players have generally

eschewed ambitious mega-deals with activity principally led by

large conglomerate portfolio restructuring and, more generally,

by defensive and distressed bear-market M&A. Indeed,

restructuring of portfolios by some Russian high-net-worth

investors have accounted for a number of notable transactions

brokered in 2009. Vladimir Potanin, head of Interros, the

investment holding company with interests in Mining and

other activities, divested a 20% stake in OJSC Polyus Gold for

€541m and a further 15% stake for €404m through Interros.

On the buy-side, business tycoon Suleiman Kerimov acquired

these assets both as a private investor and then through JSC

Nafta-Moskva, the investment holding firm that he controls.

Elsewhere, AFK Sistema was active on both the buy and

sell-sides for two of the top domestic transactions of the

year. First, the group acquired Bashkir Oil and Energy Group,

an investment company holding controlling stakes in six

Energy firms, for a total consideration of €1.9bn from a

consortium of Russian charity funds. The deal increases

Sistema’s shareholding in all of the six firms, for which it

already owned minority stakes. In accordance with Russian

legislation, Sistema will make an offer to acquire the remaining

stakes in the companies. Later in the year, in a deal involving

two subsidiary holdings, Sistema divested a 50.91% stake

in Comstar United TeleSystems for €1.4bn to Mobile

TeleSystems (MTS), a company majority owned by Sistema.

The deal will give MTS a platform for greater growth in

Russia’s broadband market.

Looking at distressed transactions, the most notable

situation saw aluminium giant UC RUSAL sell a 4.5% stake

to investment firm Onexim Group in an undisclosed debt-to-

equity swap, understood to be worth around US$2bn. The

deal is part of an ongoing and wider restructuring of some

US$16.8bn in liabilities that helped open the way for a

Hong Kong listing of the group.

Elsewhere, KIT Finance, the Russian investment bank, sold

off a 40% holding in Rostelecom, the listed telecoms firm,

with 30% and 10% going to two state-controlled entities, the

Deposit Insurance Agency, the deposit-insurance provider, and

Vnesheconombank (VEB), the Russian development lender.

The two SOE’s paid €1.5bn for KIT after the group defaulted

on obligatory repurchase agreements to clients amid an

intensification of the financial crisis in the autumn of 2008.

Not surprisingly, the Energy, Mining & Utilities deal market

was also the most active space for domestic M&A in 2009,

accounting for nearly 20% of total activity and over 50% of

deal value. The top domestic transaction in the year saw

Gazprom OAO exercise its option to acquire a 20% stake in

JSC Gazprom Neft from Italian oil and gas group Eni SpA for

€3.1bn, taking its total share in the company to 95.68%.

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Domestic M&A trends in Russia

Russia’s domestic M&A market slowed considerably over 2009, similar to transaction trends in peer markets throughout Europe and further afield, which were also badly affected by the fallout from the global financial crisis. In the year, the total domestic deal count amounted to 117 transactions collectively valued at €14.1bn, a decrease of around 40% from the prior year in both volume and value terms.


7

The outlook for the domestic deal market in 2010 appears

bright compared to 2009. Further non-core disposals and

complimentary bolt-on buys by the larger firms should bolster

activity with market fundamentals also likely to continue

to improve. Indeed, the price dislocation that stymied deal

flow through much of 2009 is starting to unwind, helping to

unlock deal flow as vendors become more willing to sell in a

rising market. Financing conditions are also showing tentative

signs of easing, although it is noteworthy that Russian deal

makers have become more innovative, surmounting liquidity

obstacles by financing transactions in equity based deals –

this is something completely new to the market. Lastly, the

government’s privatisation drive will help to shore up M&A

activity as assets come to market in 2010 with domestic

players tipped to be the biggest beneficiaries of state

divestments.

TOP 10 DOMESTIC DEALS: 2009 Ranking Announced

dateStatus Target

companyTarget sector Target







Russia 1,894







5 Nov-09 P United Aircraft Corporation (32.67% stake)

Defence Russia The Federal Agency for Federal Property Management; Vnesheconombank

Russia 1,054




Russia 541



Luxembourg 465




Cyprus 426

9 Apr-09 C OJSC Polyus Gold (15% stake)

Mining Russia JSC Nafta-Moskva Russia Interros Company

Russia 404

10 Sep-09 P ANK Bashneft JSC (23.48% stake)

Energy Russia AFK Sistema Russia 254



8

Cross-border M&A trends

Inbound M&A

While Russia remains an attractive market for overseas

buyers, particularly in resource-based sectors, the country’s

leadership has been less successful in projecting a positive

image abroad to attract foreign direct investment (FDI). This

is especially the case when compared to other big emerging

economies – such as its peer BRIC nations, Brazil, India and

China. Nevertheless, there has been some effort in tempering

the political rhetoric and meaningful changes in the legal arena,

although such changes rarely filter through the foreign press.

In terms of inbound M&A, the number of transactions totalled

47 deals collectively valued at €3.4bn last year, compared to

89 deals worth €12.7bn in 2008. The Consumer space was

the top destination for inbound deals in 2009, accounting for

around one-third of total transactions valued at a combined

€279m. The Energy, Mining & Utilities space, traditionally the

principal investment hub for overseas acquirers, ranked as the

second most active investment area in terms of deal volume

with six transactions worth €1.6bn.

Not surprisingly, the top inbound buy came to market in the

Energy niche. The deal saw Volga Resources SICAV SIF, the

Luxembourg-based holding company of Russian investor

Gennady Timchenko, agree to acquire a 13.13% stake in OAO

Novatek, an oil and gas firm, for an estimated consideration

of €1.1bn. Interestingly, plays by Russian-controlled holding

companies abroad are relatively common in the cross-border

deal market with Cyprus being a key staging ground for

inbound M&A to the Russian market.

In 2009, companies from Western Europe were the most

active buyers in the Russian market with a total of 29

transactions valued at €1.8bn. However, US companies,

among the most active investors into Russia in recent years,

ranked as the top acquirers from any single country in the year,

brokering eight transactions worth a combined €1.2bn.

The outlook for inbound M&A over 2010 remains

comparatively bright, although deal activity is likely to remain

subdued over the first half before picking up as the global

economic recovery becomes more consolidated. Foreign

buyers will likely continue to target established sectors such as

Energy, Mining & Utilities and the Consumer space. However,

in the Financial Services sector, one of the top investment

hubs of recent years, foreign banks are likely to largely eschew

acquisitions, preferring to use cash to either bolster their capital

ratios or broker deals in more traditional hotbeds of activity.

Outbound M&A

The inclement foreign investment climate that hindered

inbound deal activity to Russia was little better for domestic

firms looking to source acquisitions overseas in 2009. Indeed,

the number of outbound transactions fell by some 35% year

on year to 39 deals, although aggregate valuations rose on the

back of Vimpel-Communications’ landmark tie-up of Kyivstar, the

Ukrainian mobile operator, for an equity consideration of €3.6bn.

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Inbound M&A trends in Russia

Similar to economies across the world, the Russian market has witnessed a marked fall in cross-border foreign investment flows since the onset of the global financial crisis. Foreign and Russian companies have reigned in spending to save precious cash and in terms of M&A activity, the fall in investment persisted throughout the whole of 2009 for both inbound and outbound transactions. Nevertheless, it is noteworthy that the severity of the fall off in deal flow gradually dissipated over the course of the year.


9

Post-deal, the two firms will merge to form a new company,

VimpelCom, which will be listed on the NYSE. The combined

entity will become one of the largest emerging markets

mobile operators, with approximately 85m subscribers. The

management foresees significant future growth potential, both

within its existing markets and through potential expansion

into the CIS, Asia and Africa, which may bode well for future

outbound M&A activity.

Looking at outbound markets, Russian companies have mainly

targeted assets in the US, UK and the neighbouring countries

of Central & Eastern Europe in recent years. In 2009, there

was little deviation from longer term trends as the Ukraine

remained the top foreign target market for Russian bidders

with five deals transacted; the Vimpel-Communications deal

was the only transaction among these carrying a disclosed

value. In addition to this, Cyprus has also figured prominently

in outbound cross-border transactions in recent years given the

outpost of Russian holding companies on the island nation.

In terms of the sector breakdown of activity, the Industrials

& Chemicals niche has been the largest target area by M&A

volume in recent years, accounting for over a quarter of total

transactions since 2004. In value terms, the sector ranks as

the second largest after Energy, Mining & Utilities, a deal

market with comparatively pricier assets, in which valuations

were upheld by the hard commodities and oil and gas boom

which only faltered in 2008.

TOP 10 INBOUND DEALS: 2009 Ranking Announced

dateStatus Target company Target sector Target






Russia 1,125

2 Dec-09 C Gostinichnaya Kompania (51% stake)

Leisure Russia Russia Real Estate Fund LP

USA The Moscow City Government

Russia 705

3 May-09 C TNK BP International Ltd (Oil Field Services enterprises)

Energy Russia Weatherford International Ltd

USA Novy Investments Ltd

Russia 346

4 Oct-09 C OSAO Rossija Financial Services

Russia Viktor Pinchuk (private investor)

Ukraine OAO UK Trastkom

Russia 241

5 Mar-09 C Troika Dialog Group (33% stake)

Financial Services

Russia Standard Bank Group Ltd

South Africa 237

6 Apr-09 C Russian Alcohol Group (12% stake)

Consumer & Retail

Russia Central European Distribution Corporation

Poland Lion Capital LLP United Kingdom

109

7 Nov-09 P Promsvyazbank JSCB (11.75% stake)

Financial Services

Russia European Bank for Reconstruction and Development

United Kingdom

107

8 Sep-09 C OOO Lenta (35.4% stake)

Consumer & Retail

Russia JSC VTB Capital; TPG Capital LP

USA Oleg Zherebtsov (Private Investor)

Russia 77

9 Sep-09 C Yandex (9% stake)

TMT Russia Baring Vostok Capital Partners (BVCP); Tiger Global Management LLC; UFG Asset Management

USA Oradell Capital Russia 69

10 Oct-09 C Nobel Oil Group (45% stake)

Energy Russia China Investment Corporation

China 67



10

In 2009, however, Energy, Mining & Utilities was the

most active sector with 12 transactions in the year, which

surpassed the annual deal count of eight for 2008. Depressed

corporate valuations may have helped to unlock deal flow with

acquirers more eager to buy while prices were relatively low.

Despite this, aggregrate valuations in 2009 still totalled a not

insignificant €3.9bn

Going forward, Russian acquisitions in foreign markets may

well gain steam in line with the economic recovery. The IMF is

forecasting real GDP growth of 1.5% in 2010, compared to an

estimated 7.5% contraction in 2009. Large conglomerates will

be best placed to pursue outbound opportunities, particularly

for players such as Gazprom and Rosneft in the Energy niche

who are tipped by some analysts to actively eye key refinery

assets in the coming year.

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Outbound M&A trends in Russia

TOP 10 OUTBOUND DEALS: 2009 Ranking Announced

dateStatus Target company Target

sectorTarget country

Bidder company Bidder country Seller company Seller country

Deal value (€m)

1 Oct-09 P Kyivstar GSM CJSC TMT Ukraine VimpelCom Russia Altimo; Telenor ASA

Russia 3,637

2 Mar-09 C MOL Hungarian Oil and Gas Public Ltd Company (21.2% stake)

Energy Hungary OJSC Surgutneftegaz

Russia OMV AG Austria 1,415

3 Dec-09 C Lukarco BV (46% stake)

Energy Netherlands Lukoil OAO Russia BP plc United Kingdom

1,094

4 Apr-09 C Sistema Shyam TeleServices Ltd

TMT India Government of Russian Federation

Russia AFK Sistema Russia 530

5 Jun-09 C Total Raffinaderij Nederland NV (45% stake)

Energy Netherlands Lukoil OAO Russia Total SA France 431

6 Apr-09 C Bluestone Coal Group

Mining USA Mechel Mining OAO Russia Justice Family Group LLC

USA 410

7 Feb-09 C NS Group Inc (49% stake)

Industrial products and services

USA Trubnaya Metallurgiczeskaya Kompaniya

Russia Evraz Group SA Russia 396

8 Jun-09 C KazakhGold Group Ltd (50.1% stake)

Mining Kazakhstan OJSC Polyus Gold Russia 358

9 Dec-09 P BPS-Bank (Belpromstroibank) JSC (93.27% stake)

Financial Services

Belarus Sberbank Russia Government of Belarus

Belarus 191

10 May-09 C Sibir Energy plc (7.8% stake)

Energy United Kingdom

JSC Gazprom Neft Russia 172



11

Consequently, private equity transaction volumes and deal

values shrank to a fraction of that seen in preceding years

with just eight deals worth €276m transacted in the Russian

market in 2009, compared to 27 deals valued at €1.7bn in

the previous 12 month period. While private equity buy-side

activity dominated in 2009, the largest transaction brokered

in the year was in fact an exit. The deal saw Lion Capital, the

UK-based buyout group, agree to divest a 12% equity stake

in vodka distiller Russian Alcohol Group to Central European

Distribution Corporation (CEDC), the US-listed alcohol importer

and distributer, for €109m. Interestingly, the structure of the

deal, which will see CEDC’s stake in the business eventually

rise to 54%, will see the acquisition phased in over five years

in multi-stage equity purchases. The arrangement is indicative

of a very nascent trend underway in Russia in which both

financial and strategic investors employ more innovative

deal craft in an attempt to largely bypass a still challenging

financing environment.

In terms of buyouts, the largest acquisition undertaken saw

VTB Capital, the private equity arm of the investment bank,

and TPG Capital agree to acquire a 35.4% stake in OOO

Lenta, the retail hypermarket and cash & carry store chains,

from private investor Oleg Zherebtsov for an estimated

consideration €77m. It is noteworthy that interest for Lenta

was strong with Zherebtsov reportedly abandoning an

earlier agreement to sell to financial investor Marshal Capital

Partners. Furthermore, there was rumoured interest from

key trade players in the form of Wal-Mart, the world’s largest

retailer, and France’s Carrefour.

Going forward, private equity activity in Russia in 2010 will

likely pick up over the second half of the year, initiated by

domestic private equity firms with some of the state-backed

Russian banks providing funds for investment. Looking at

foreign players, it is expected that some overseas funds with

strong local knowledge, such as Baring’s private equity arm in

Russia for instance, may also be early comers to the market.

Notably, Baring Vostok has remained active despite the economic

downturn, making two plays on the buy-side in 2009. 0

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Private equity buyout trends in Russia

Private equity exit trends in Russia

Private equity

Over the past year, financial investors have retreated from deal making, largely concentrating on the preservation of value in existing portfolio companies amid the hostile business environment. Equity sponsors looking to source deals in the Russian market further encountered difficulties in getting the right multiples, an essential part of the private equity buyout model.


12

On the whole, however, western funds are still eschewing

Russian assets, instead investing closer to home where

perceptions of risk are comparatively lower. But private equity

activity is starting to recover in Western Europe and the US, as

well as in Central & Eastern Europe where there are stirrings of

activity, which bodes well for the future return of foreign capital

to the Russian market. Indeed, several funds are sitting on dry

powder, with capital allocations for the Russian and CIS markets,

which will need to be deployed at some point in the future.

On the sell-side, a return to growth and firming valuations

will lead to more viable exit routes for financial investors from

portfolio companies. Likewise, these same factors should help

to improve the quality and quantity of assets coming to market

for private equity bidders.

TOP PRIVATE EQUITY DEALS: 2009 Ranking Announced



Bidder company Bidder country Seller company Deal type Deal value (€m)

1 Apr-09 P Russian Alcohol Group (12% stake)

Consumer & Retail


Poland Lion Capital LLP Exit 109


Consumer & Retail



IBI 77

3 Sep-09 C Yandex (9% stake) TMT Russia Baring Vostok Capital Partners (BVCP); Tiger Global Management LLC; UFG Asset Management

USA Oradell Capital SBO 69

4 Sep-09 P Depo Computers TMT Russia Depo Computers (MBO Vehicle)

Russia IBS MBO 21



13

Acquisition finance

The economic downturn has had a profound impact on the global M&A market. Not only has general market confidence plummeted but the austere debt financing environment has hindered the acquisitive aspirations of firms who had been looking to broker deals. Indeed, given the fallout from the financial crisis, many banks have been unwilling to provide leverage at acceptable terms which in turn has adversely impacted upon the overall level of deal making, particularly from financial investors, in Russia and beyond.

The majority of recent lending in Russia has emanated from

state-owned institutions as the government has looked to

inject liquidity and kick-start the domestic economy. VTB

Bank, 85.5% owned by the Russian government, is one such

institution which has stepped up its lending to domestic firms.

Indeed, a prime example of this was seen in June 2009 when

Bank VTB North-West provided a €23m loan to transport

company Lengipotrans to help fund the €39m acquisition of a

50% stake in Roszheldorproject via its subsidiary Transproekt

Finans. Interestingly, Lengipotrans utilised around €9m of the

financing from VTB to replenish its working capital.

The European Bank for Reconstruction and Development

(EBRD), owned by 61 countries and two intergovernmental

institutions, has also significantly increased its investment

activity in 2009, supporting viable companies throughout

the downturn. Tellingly, alongside Indian tea producer Tata

Tea, EBRD acquired a 51% stake in Grand Tea House during

the first quarter of the year. Elsewhere, state banks have

also assisted with the restructuring of domestic firms.

Vnesheconombank (VEB) has been particularly active in this

regard, having been involved in the 98.95% stake acquisition

of investment bank KIT Finance by OJSC Russian Railways

and TransFinCapital (TFK). Post-deal, the investors refinanced

KIT Finance’s mortgage portfolio and increased its capital by

selling the banks’ ordinary shares in OAO Rotelecom to VEB

and the Deposit Insurance Agency (ASV).

While state-run banks have undoubtedly helped to ease

liquidity issues, the availability of leverage has remained

an issue with firms increasingly using more creative deal

structures in a bid to bridge to financing gap. The last 12

months has seen more mezzanine financing while companies

have also attempted to respond to the changing deal making

landscape by undertaking all share deals. This has been

a significant development in the Russian M&A market

considering that cash has traditionally been king.

Creative deal structures were seen to good effect in the fourth

quarter of the year when freight transportation company

GlobalTrans Investment moved to acquire an indirect 50%

stake in OOO BaltTransServis (BTS), the railway transportation

service operator, for an equity consideration of €179m.

The deal was structured so that the vendor, Transportation

Investment Holding Ltd (TIHL), transferred part of its

ownership in a Cyprus-based holding company to GlobalTrans.

The holding company owns 90% of BTS and post-deal TIHL

will still hold a 40% in BTS with an unrelated third party

holding the remaining 10%.

Looking back over the previous 12 months, it can be seen

that Russian companies have generally been over-reliant on

state-owned banks to provide financing for not only M&A,

but wider corporate survival. This has proved to be effective

up to a point, although going forward the state will need to

seriously look to implement further financial and regulatory

reform in order to attract increased lending, and indeed overall

investment, from foreign sources. A number of important

lessons should have been learnt in recent months and while

the debt financing environment undoubtedly improved over

the course of 2009, it will likely take until at least H2 2010

before the market reaches a level of normality.


14

Valuations

After years of robust company valuations in the boom years leading up to the financial crisis, asset prices have clearly come under an immense downward pressure since the collapse of Lehman Brothers in the autumn of 2008. In the past year, concomitant price corrections to reflect the new market reality are clearly observable, particularly in situations where distressed assets are coming to market at fire sale prices.

There is still a degree of price dislocation evident in the

Russian M&A market, stymieing deal flow as misaligned

price expectations persist on both the buy and sell-sides. That

said, the price gap is beginning to narrow as the recovery

progresses, helping to unlock deal flow with vendors more

willing to sell and acquirers eager to snap up assets at

comparatively cheaper prices in a still recovering market.

Looking at figures from last year, the average deal size fell to

€107m from €134m in 2008. Average deal sizes varied widely

over 2009, peaking at €158m in Q2 on the back of six large-

cap (<250m) transactions coming to market - excluding Q2,

the average deal size was just €86m.

Furthermore, the proportion of non-disclosed value deals

nearly doubled in 2009 to around 45% of overall M&A. As

most undisclosed value transactions are in the small and mid-

cap market range (>250m), the rise probably masks greater

activity in this lower-end value segment. That said, advisers

still did not see the level of activity in the second-tier segment

of the market they had anticipated in 2009, which may partly

reflect the ongoing effects of the valuation gap.

Although there is a limited data set owing to low levels

of disclosure of deal financials in the Russian market, exit

multiples also reveal more subdued valuations over 2009. The

adjusted EBITDA multiple (i.e. excluding the top and bottom

2.5% of the original data series) fell to just 7.7% in 2009,

down from 26.7% in the 2004-2008 period. Likewise, the

average bid premia – calculated against share closing price one

day prior – for public M&A transactions over the same five-year

period stood at 16.8%, but fell sharply to -13.5% in 2009.

It is relatively safe to assume that the worst of the financial

crisis has passed in the Russian market, with the downward

pressure on company valuations gently easing in step with

the wider economic recovery, more visibility in terms of

market direction, as well as prospects for better financing

conditions. Barring a W-shaped recovery, these factors should

support company valuations with equity prices firming and the

recovery consolidating, particularly over the third and fourth

quarters of 2010.


15

Industries02

Deal Drivers Russia - Industries

16

Automotive

M&A activity in the Russian Automotive sector has seemingly stalled, with just one transaction coming to market over the course of 2009. This particular transaction saw ZAO UBT-Uralvagonzavod, the Russian company engaged in the distribution of railway equipment, acquire OAO Uralshina, the Russian tyre manufacturer, for an undisclosed sum thought to be in the range of €18m. The vendor in this case was Sibur Holding JSC, the Russian petrochemicals company, who initially bought the company out of bankruptcy for just €6m back in 2004.

Sibur Holding could have been motivated to sell out of OAO

Uralshina because it is now looking to acquire the beleaguered

Russo-Dutch tyre manufacturer, Amtel-Vredestein, which is

burdened with US$600m worth of debt. If the deal comes

through, Sibur will most likely merge Amtel-Vredestein with its

Sibur-Russian Tyres division.

Despite the low levels of activity, there are signs that 2010

could bring an increased deal flow with a number of deals

already in the offing. For example, Germany’s Daimler

has recently expressed an interest in increasing its 10%

stake in heavy trucks maker Kamaz. Market research is

also encouraging with it being predicted that the Russian

Automobile market will be the third-largest in the world by

2012 after the US and China. Any such rebound could be

driven by a new raft of government policies which will –

among other things – look to curb the import of second-hand

foreign-made cars older than five years. Further boosts to

domestic demand for Russian vehicles are also likely to stem

from expected increases in import tariffs as well as the recent

introduction of a car scrappage scheme which will see buyers

of new locally-manufactured vehicles receive a RUB50,000

rebate if they trade in their 10-year-or-older model.

Furthermore, looking ahead to the future, it must be noted

that the lone transaction announced in 2009 is not broadly

indicative of wider trends – it must been seen as a direct result

of the financial crisis which makes investments in an already

challenging market even more risky. Looking back over the

past six years, 24 Russian Automotive assets have changed

hands for a total of €1.7bn. In volume terms, more than half

of these took place in 2007 and 2008, when 13 acquisitions

worth a total of €1.6bn were announced. The first quarter of

2008 was the pinnacle of this particular boom period, with

three deals, worth €864m taking place – propelled, to a large

extent, by the announcement of the largest Automotive

transaction in Russia over the six-year period.

This particular transaction saw Renault SA, the French

automobile manufacturer, acquire a 25%-plus-one-share stake

in AvtoVAZ, its Russian counterpart, for €768m including earn-

outs, which are payable in 2010 and are based on AvtoVAZ’s

earnings performance in 2008 and 2009. It is unlikely that the

earn-out will be paid in full since the company went through a

severe restructuring in 2008 following the onset of the credit

crisis. Indeed, in November 2009, the Russian government,

along with Renault, announced a US$1.7bn rescue package

for AvtoVAZ with Renault contributing US$369m worth of

technology and know-how. The restructuring will allow Renault

to maintain its stake in the company, which was under threat

following an earlier ultimatum from the authorities warning

Renault that its holding would be diluted if it did not assist in

the planned shake-up.

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Automotive M&A trends in Russia


17

The deal highlights the relatively high number of tie-

ups between foreign and domestic Russian Automotive

manufacturers. Inbound acquisitions of Russian assets

accounted for 58% of all such deals by volume and some 74%

in terms of value. Interestingly a relatively large proportion of

inbound transactions were joint ventures (five deals worth a

total of €72m), with three of them stemming from European

acquirers.

However, while foreign corporates have seemingly taken a

bullish view on the business prospects of Russian Automotive

businesses, the same cannot be said for financial investors. In

fact, just two private equity-related transactions have occurred

in this particular space since the beginning of 2004. On the

buy-side, the only deal to come to the market was announced

in the second quarter of 2008 and saw Troika Capital Partners’

acquire a 37.8% stake in KamAZ Capital, the Russian

investment fund and 33% owner of KAMAZ Incorporated, the

Russian heavy duty vehicle manufacturer, for an undisclosed

consideration. Troika Capital already owned a 16.6% stake in

KAMAZ, meaning that, post-deal, the private equity group had

a 50.3% controlling stake.

Elsewhere, the only exit saw the private equity arm of the

European Bank of Reconstruction and Development (EBRD)

sell out of its 75% holding in Intercos-IV ZAO, the company

engaged in the design and manufacture of dyes and moulds

for the Automotive industry, for an undisclosed sum. The

Magnitogorsk Iron and Steel Works was the buyer in this

particular transaction.

4%4%

8%

38%

38%

8%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

€251m-€500m

>€500m

Automotive volume split by deal size: 2004-2009

TOP 5 AUTOMOTIVE DEALS OVER 2004-2009Ranking Announced




Deal value (€m)

1 Feb-08 C AvtoVaz OAO (25% stake)

Automotive Russia Renault SA France Russian Technologies State Corporation

Russia 768

2 Feb-07 C Newdeal Investments Ltd (85% stake)

Automotive Russia Vadim Shvetsov (private investor)

Russia 348

3 Dec-08 C KAMAZ Incorporated (10% stake)

Automotive Russia Daimler AG Germany Troika Dialog Group

Russia 187

4 Nov-07 C Stadco Limited /Gestamp Automacion (St Petersburg joint venture)

Automotive Russia Gestamp Automocioen S L; Stadco Ltd

United Kingdom

104

5 Mar-08 C CJSC Moscow Tyre Plant-M

Automotive Russia Midland Resources Holding Ltd

United Kingdom

Amtel - Vredestein OJSC

Russia 49



18

Energy

Energy deal making has, over the past six years, played an important role in shaping overall M&A activity in Russia. Indeed, the sector has witnessed 240 transactions worth €101bn over this time frame, accounting for around 15% of total volume and a more significant 45% of valuations.

However, in 2009 the sectors’ share of the overall M&A

pie fell to 12.2%, highlighting the increasing scarcity of

Russian Energy assets being sold. This dearth of suitable

targets can also be seen when looking at the relative value

of Energy assets. In 2008, Russian Energy businesses sold

for a cumulative €12.3bn, comprising just over one-third of all

Russian sales that year. Over 2009, this percentage jumped to

44%, giving a strong indication that Energy sector valuations

have remained robust. Some 38% of Russian Energy

transactions with a disclosed value in 2009 were valued at

over €250m – 10% higher than seen in 2008. In contrast, just

over one-in-ten Russian M&A transactions across all sectors

were worth more than €250m last year.

However, the rising importance of Energy M&A activity

compared to the country’s wider M&A market should not

disguise the fact that, in absolute terms, Energy sector deals

have fallen of late. At the height of the global M&A boom in

2007, acquisitions of Russian Energy companies numbered

some 59 transactions, worth €39.6bn. This fell to 46 deals

worth €12.3bn in 2008 and continued to plummet in 2009.

Over the course of the year, just 20 deals, worth €7.7bn, were

announced, a decline of some 66% in terms of deal volumes

and 81% by value compared to the market’s peak two years

prior. Quarterly M&A performance in Russia’s Energy industry

over 2009 perhaps also points to the further direction of the

market in 2010 – over the second half of the year, 13 deals

worth just €758m were undertaken, the lowest amount

invested over a half-yearly period since H1 2004.

Private equity firms were, for the most part, uninterested in

this particular space, with just four buyouts worth €813m

taking place over the past six years. The most notable of

these saw a consortium consisting of the Urals Energy Public

Company and Ashmore Investment Management, the UK

private equity and fund management firm, acquire a combined

45.8% stake in OOO Taas-Yuriakh Neftegazodobycha (Taas),

the oil exploration and production company, for €515m. The

deal ultimately soured, at least for Urals Energy, who, in late

2009, sold its 35.3% interest in Taas to Sberbank in return for

a full discharge of the outstanding portion of the debt which

Ural Energy utilised in order to initially acquire Taas.

Domestic Energy M&A purchases over the past six years

numbered 164 transactions worth €69.1bn, accounting for

68% of all Russian Energy transactions in terms of both

volume and value. Of the remainder, the bulk of inbound

activity stemmed from the US, with American companies

making 13 acquisitions over the period. However, in terms of

value, Chinese businesses have been the most acquisitive,

spending a total of €7.1bn on Russian Energy assets over

the same period.

Notably, the largest Russian Energy transaction to take place

over the course of 2009 was a purely domestic transaction

which saw Gazprom exercise its option to purchase a 20%

stake in JSC Gazprom Neft, the Russian oil producer, for

€3.1bn from Eni, the Italian oil and gas company. Gazprom

took the option to acquire the stake back in 2007 when

Gazprom Neft was auctioned following the break-up of its

parent company Yukos. Eni was reportedly able to net a 6.4%

profit on the sale, having initially purchased the stake for

US$3.85bn.

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Energy M&A trends in Russia


19

Meanwhile, the most significant inbound M&A transaction

saw Volga Resources, the Luxembourg-based holding

company with interests in oil and gas exploration, acquire a

13.13% stake in OAO Novatek, the oil and gas exploration and

distribution company, for €1.1bn in May 2009. The deal also

resulted in OAO Novatek acquiring a 51% interest in Yamal-

LNG, the Russian operator of the Yuzhno-Tambeiskoye gas

field, from Volga Resources for a reported €465m.

consumer flyer 4 page

20%

5%

15%

5%

15%

40%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

€251m-€500m

>€500m

Energy volume split by deal size: 2009

TOP 5 ENERGY M&A DEALS: 2009 Ranking Announced




Deal value (€m)





Russia 1,894




Russia 1,125



Luxembourg 465

5 May-09 C TNK BP International Ltd (Oil Field Services enterprises)

Energy Russia Weatherford International Ltd

USA Novy Investments Ltd

Russia 346



20

Financial Services

The number of buyers interested in Russian Financial Services assets waned over the course of 2009. This development can largely be attributed to the fact that the country’s financial system came close to collapse in the days and months following the demise of Lehman Brothers. Indeed, the steep decline in Financial Services-related M&A transactions in Russia over 2009 was not wholly unforeseen, although the scale and scope of decline was arguably more severe than market practitioners expected.

Over the course of 2009, just 21 Financial Services deals

worth €988m came to market, nearly half the number of deals

completed the previous year and just over 10% of 2008 deal

values. However, this figure may have been skewed by the

high number of undisclosed transactions with only around one-

third of deals having a disclosed value, the bulk of which were

in the €100-250m bracket.

Looking forward, however, deal prospects for Russian

banks and other financial institutions are looking up, with an

expected bout of consolidation expected to slim down the

country’s distended Financial Services industry to around

half its current size. Indeed, such a move is actively being

driven by a government initiative which is looking to raise the

minimum shareholder equity within local banks to US$35m

within five years, a more-than-tenfold increase on the current

figure. Nonetheless, Russian banks continue to remain reticent

on undertaking M&A for a number of reasons. Firstly, local

institutions continue to be primarily focusing on cleaning up

their own books as opposed to M&A. Secondly, many firms

lack liquidity for purchases while the wider macroeconomic

situation remains uncertain, further constraining the acquisitive

aspirations of many Russian Financial Services firms.

Meanwhile, inbound acquisitions of Russian banking assets

is likely to rise slowly over the next 12 months. According to

one Western European M&A practitioner, the Russian banking

market remains attractive to western players due to its

immense macro and micro growth potential. Others, however,

are more reserved, suggesting that foreign bidders are too

preoccupied with issues at home to consider cross-border

acquisitions. At the same time, concerns with the sturdiness

of Russia’s legal framework continue to be aired, despite the

country’s judiciary having worked hard to improve working

practices of late.

Nonetheless, while Financial Services-focused M&A

practitioners in Russia might now be complaining about the

lack of deal heat, the same could not be said in 2008. Over

the course of the year, 37 acquisitions worth a total of €7.9bn

came to market, meaning that the sector accounted for 13.5%

of total Russian M&A transactions by volume and more than

one-fifth of overall valuations. Deal flow was led by Interros

Company’s acquisition of a 50% stake in KM Invest, the

Russian investment fund, for €4.6bn in April 2008.

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Financial Services M&A trends in Russia


21

Since the beginning of 2004, private equity activity has

accounted for around 10% of all Russian Financial Services

M&A deals by volume, although this percentage fell to just

5% over 2009. In fact, the only financial investment to be

made last year was the MBO conducted by the management

of Rosbank, the Russian fund management company, for an

undisclosed sum.

Since the beginning of 2004, 110 Russian Financial Services

transactions, worth a total of €9.5bn, have been purely

domestic plays; the most notable example being the above

mentioned tie-up between Interros and KM Invest. Cross-border

acquirers were responsible for just 29% of deals in the sector

over 2009, indicating that foreign investors continue to view deal

making in Russia as high risk. Furthermore, activity was also

hindered by the fact that many overseas institutions remained

preoccupied with re-capitalising their own balance sheets and

reducing their exposure to toxic assets.

24%

5%

5%

66%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

Financial Services M&A split by deal size: 2009

TOP 5 FINANCIAL SERVICES M&A DEALS: 2009 Ranking Announced




Deal value (€m)

1 Oct-09 C OSAO Rossija Financial Services

Russia Viktor Pinchuk (private investor)

Ukraine OAO UK Trastkom

Russia 241

2 Mar-09 C Troika Dialog Group (33% stake)

Financial Services

Russia Standard Bank Group Ltd

South Africa 237

3 Feb-09 C Bank VEFK (undisclosed stake)

Financial Services

Russia Deposit Insurance Agency; NOMOS Bank; OTKRITIE Financial Corporation

Russia 218

4 Mar-09 C OTKRITIE Financial Corporation (19.99% stake)

Financial Services

Russia VTB Bank JSC Russia 111

5 Nov-09 P Promsvyazbank JSCB (11.75% stake)

Financial Services

Russia European Bank for Reconstruction and Development

United Kingdom

107



22

Consumer & Retail

Russian M&A activity in the Consumer & Retail space dwindled over 2009, with just 31 transactions, worth a total of €791bn taking place over the course of the year. This contrasts with the 52 deals, worth €6bn, which came to market in 2008, representing the peak of this particular market in terms of annual valuations.

Over the past six years, the Russian Consumer M&A market

has seen significant peaks and troughs. In 2004, 29 deals

worth €796m were undertaken, largely mirroring deal flow

in 2009. Conversely, the boom years of 2007 and 2008 saw

significant M&A activity -- more than double 2009 volumes and

nearly ten times the year’s deal valuations.

The relative dearth of Consumer sector transactions in Russia

over 2009 is most likely attributable to the low likelihood of

a wider economic recovery in the foreseeable future. Year-

on-year GDP figures are expected to show that the economy

contracted over 2009, a belief that was reinforced by recent

data which indicates that Russia’s Manufacturing PMI index

fell 0.5 percentage points to 49.1 in November 2009. Any

figure less than 50 signals a contraction in the number of new

industrial orders. At the same time, the Services PMI index

also fell one percentage point in November to 53.5, well below

the long-run historical average of 56.9.

However, the uncertain macroeconomic outlook could also act

as a spur for Consumer M&A activity with many businesses

finding themselves in stressed situations and likely to be

forced to come to the market in 2010. One such company

could be Avtomir, the privately-owned Russian car dealer,

which has been approached with offers from investment funds

to sell a stake. At the same time, the owner of the Russian

jewellery business, Moscow Jewellery Plant, is reportedly

looking to sell up, primarily in order to raise capital to repay

previously-accrued loans.

Over 2009, not one M&A deal in the space was worth more

than €250m. In fact, the largest acquisition to be announced

over the year was the €183m acquisition of supermarket

Paterson by the X5 Retail Group. In contrast, the largest deal

in 2008 was valued at €1.3bn and saw PepsiCo and The Pepsi

Bottling Group jointly acquire a 76% stake in Russia’s leading

branded juice company JSC Lebedyansky.

While local strategic players stayed away from conducting

acquisitions in Russia’s Consumer sector last year, private

equity firms remained relatively active, no doubt looking to

indulge in some opportunistic bottom-fishing, spurred on by

cheap valuations. Financial investors accounted for €186m

worth of transactions in 2009 -- itself not a particularly large

figure although still 24% of overall Consumer valuations in

Russia over the year.

The two 2009 private equity transactions in question saw Lion

Capital, the UK private equity firm, sell a 12% stake in the

Russian Alcohol Group to the Central European Distribution

Corporation, the Polish importer and distributors of beers,

wines and spirits, for €109m. A few months later, TPG, the

US private equity firm, along with a local investor, acquired a

35.4% stake in hypermarket OO Lenta.

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Consumer M&A trends in Russia


23

Foreign firms also struck a number of deals, accounting for

close to half (45%) of overall activity in the Consumer sector,

interestingly, this figure falls to 33% when looking at deal

flow over the past six years. The relative rise in importance of

inbound deal flows over 2009 mainly stemmed from European

players, with German, Dutch, Italian, Swedish and Polish

businesses emerging as key players in this regard. Indeed, the

largest inbound M&A purchase of a Russian Consumer asset

over the year was the aforementioned acquisition of a 12%

stake in the Russian Alcohol Group.

10%

48%

32%

10%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

Consumer volume split by deal size: 2009

TOP 5 CONSUMER & RETAIL DEALS IN 2009 Ranking Announced




Deal value (€m)

1 Nov-09 P Paterson Consumer & Retail

Russia X5 Retail Group NV Russia CorpInvest Inc Russia 183

2 Dec-09 C Sibirsky Bereg Consumer & Retail

Russia Konditerskiy Dom Vostok

Russia Maybond Ltd Russia 135

3 Apr-09 C Russian Alcohol Group (12% stake)

Consumer & Retail


Poland Lion Capital LLP United Kingdom

109


Consumer & Retail



Russia 77

5 Jun-09 C Concordia (60% stake)

Consumer & Retail

Russia Miratorg Agribusiness Holding

Russia Sadia SA Brazil 56



24

Industrial Markets

M&A activity in the Russian Industrial space tailed off over 2009 with just 18 deals worth €10m being announced over the course of the year. This marks a substantial drop from activity levels seen in the M&A boom years of 2006 and 2007 when a total of 93 deals worth €109bn were announced.

Nonetheless, while annual deal flows over 2009 have certainly

fallen compared to the preceding boom years, M&A volumes

were broadly comparable to 2008 with year-on-year activity

increasing by a modest 13%. It was, however, perhaps

unsurprising that 2009 deal sizes were exclusively focused

in the lower mid-market (<€100m) space, although this

figure could have been skewed by the fact that just 22% of

transactions had a disclosed valuation. Deal sizes over the

past six years were slightly more diffuse with 14% of overall

activity in the sector worth >€100.

The bulk of deal flow over the past six years was focused in

the Industrials products and services niche, which witnessed

some 111 transactions worth €16.2bn, accounting for 57%

of all Industrial Markets deals conducted over the past six

years by volume and 69% in terms of valuations. Indeed, the

largest deal of the past six years was announced in this space

with Oleg Deropaska-owned Rusal acquiring the aluminium

and alumina assets of Siberian Urals Aluminium (SUAL) and

Switzerland-based Glencore International for €6.8bn. As a

result of the transaction, RusAl owned 66% of the new entity,

named United Company RusAl, with 22% owned by SUAL and

12% by Glencore.

The second-largest deal to have taken place in the Russian

Industrial Markets space was a Chemicals and Materials deal

which saw Neft Aktiv, the Russian company a subsidiary of

OAO Rosneft Oil, win an auction to acquire assets of the now-

defunct Russian oil giant Yukos, which went into receivership

in 2004. Neft Aktiv ultimately acquired stakes in 28 enterprises

including 100% in OJSC Samaraneftegaz, the Russian oil and

gas producer; the Kuibyshev Refinery; the Novokuibyshev

Refinery; the Syzran Refinery; the Novokuibyshev Oils and

Additives Plant; the Samaranefteprodukt, Samara Terminal; a

98.1% stake in the Neftegorsk Gas Processing Plant and the

Otradnoye Gas Processing Plant; as well as various stakes in

a group of companies involved in gas refining and oil product

marketing in Russia. Interestingly, Neft Aktiv had – just two

months prior to winning the auction – already acquired another

batch of Yukos assets for €5bn.

While large-cap corporate M&A plays have traditionally

dominated the headlines, it is also noteworthy that private

equity houses have been busy brokering deals in the sector’s

mid-market. Indeed, financial investors have undertaken 20

deals over the course of the past six years, worth a total

of €359m, 16 of these being buyouts. As a result, financial

investors accounted for a not insignificant 10.2% volume share

of overall Industrial Markets activity, although private equity

valuations comprised just 1.5% of total deal making.

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25

3%4%

8%

45%

25%

15%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

€251m-€500m

>€500m

Industrial Markets volume split by deal size: 2004-2009

TOP 5 INDUSTRIAL MARkETS DEALS OVER 2004-2009Ranking Announced




Deal value (€m)

1 Oct-06 C Glencore International AG (aluminium and alumina assets); Siberian Urals Aluminium (aluminium and alumina assets)


Russia United Company RUSAL

Russia Glencore International AG; Siberian Urals Aluminium (SUAL)

Switzerland 6,750

2 May-07 C NK Yukos OAO (Lot 11 comprising of 28 enterprises)

Chemicals and materials

Russia Neft Aktiv Russia NK Yukos OAO Russia 4,730

3 Jun-06 C Evraz Group SA (41.3% stake)


Russia Millhouse LLC Russia Crosland Global Ltd

Cyprus 2,476

4 Oct-06 C Trubnaya Metallurgiczeskaya Kompaniya (33% stake)


Russia TMK Steel Cyprus Dalecon Ltd Russia 1,039

5 Dec-04 C Magnitogorsk Iron and Steel Works OJSC (17% stake)


Russia U.F.G.I.S. Trading Ltd

Cyprus Mechel OAO Russia 650



26

Life Sciences

M&A deals conducted in the Life Sciences sector in Russia have been few and far between over the past six years. However, the future is looking brighter. Changes to the legislative framework governing pharmaceutical product pricings and the projected rapid expansion of the country’s generic medicine market in 2010 is likely to drive significant M&A activity going forward.

However, since the beginning of 2004, a mere 17 Life

Sciences transactions, worth a total of €727m, have come

to market in Russia. The bulk of them were announced in

2005 and 2006, when nine purchases, worth €264m, were

conducted. The acute onset of the global financial crisis in

September 2008 completely stalled Life Sciences activity

with transactions only returning to the market in the fourth

quarter of 2009. The deal in question saw Sanofi-Aventis,

the French pharmaceutical company, acquire a 74% stake in

Bioton Wostok, the insulin manufacturer for €28m. Bioton, the

Polish Biotech firm, initiated the sale in a bid to reduce its debt

burden, which will ultimately allow it to significantly reduce its

debt by around €25m in 2009.

At €28m, the deal valuation typified the vast majority of

Life Sciences M&A transactions conducted in Russia over

the wider period. Indeed, the mid to low-end of the market

dominated with 70% of deals with an announced value worth

less than €100m. Moreover, not a single transaction worth

more than €125m has come to the market in recent years.

The largest deal to take place in the sector saw the German

drug manufacturer Stada Arzneimittel, under its Nizhpharm

JSC firm, acquire ZAO Makiz Pharma, ZAO Skopinpharm

and ZAO Biodyne Pharmaceuticals, its Russian counterparts,

from the Makiz Group for a total consideration of €125m. The

deal strengthened Stada Arzneimittel’s presence in Russia,

with the German firm having already undertaken a previous

€81m 97.5% stake acquisition of Nizhpharm OAO, the

Russian pharmaceutical company, from the European Bank of

Reconstruction and Development (EBRD) in 2004.

Significantly, the EBRD played an important role in driving

private equity activity in Russian Life Sciences – which, in

total, comprised three exits worth some €130m over the past

six years. EBRD divested its investment in pharmaceutical

distributor ZAO Katren, made through a Berkeley Capital

Partners fund, in September 2005. The management of the

business were the buyers in this case, spending some €8m

acquiring a 31.4% stake in the company. The last sale saw

US buyout house The Carlyle Group sell out of a 96% stake

in pharmaceutical wholesaler AP Apteka for €41m to the UK-

based firm Alliance Boots.

In fact, foreign players have always had a strong presence in

the Russian Life Sciences M&A market, having accounted for

close to half (47%) of all such transactions over the past six

years, as well as 62% of total valuations. However, overseas

interest in Russian assets has rarely extended beyond

European bidders with only one transaction stemming from a

buyer located outside the region. The acquisition in question

saw PPD, the US-based service provider for pharmaceutical

and biotechnology firms, acquire Innopharm, the Russian

contract research organisation for an undisclosed sum.

While Life Sciences deal flow in Russia has seen a small but

steady number of transactions come to market in recent years,

a raft of new government regulations is set to substantially

alter the market in 2010 and beyond. Firstly, the government is

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27

planning to introduce new price controls on all life-saving and

essential medicines in 2010, ultimately resulting in the prices

of all such medical products being set by the government. At

the same time, the Federal Antimonopoly Service recently

issued an order compelling 10 foreign pharmaceutical

manufacturers to join a register of businesses that have

dominant positions in the Russian pharmaceutical market.

The businesses include Johnson & Johnson, Roche-Moscow,

Novartis Pharma, Nycomed Distribution Center and Schering.

Going forward, if these companies are found to be abusing

their positions, the regulator will be able to impose penalties,

or, in severe cases, reject future M&A acquisitions by these

companies within their respective Russian markets.

12%18%

58%

12%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

Life Sciences volume split by deal size: 2004-2009

TOP 5 LIFE SCIENCES DEALS OVER 2004-2009Ranking Announced




Deal value (€m)

1 Aug-07 C Skopinpharm ZAO; ZAO Biodyne Pharmaceuticals; ZAO Makiz Pharma

Life Sciences Russia Nizhpharm JSC Germany 125

2 Oct-06 C Masterlek Life Sciences Russia Pharmstandart Group

Russia 116

3 Mar-08 C Moron Ltd (75.00% stake); Vitim & Co (75.00% stake)

Life Sciences Russia Oriola-KD Corporation

Finland 85

4 Dec-04 C Nizhpharm JSC (97.50% stake)

Life Sciences Russia STADA Arzneimittel AG

Germany European Bank for Reconstruction and Development

United Kingdom

81

5 May-08 C European Medical Center (EMC)

Life Sciences Russia Goldencorp Enterprises Ltd (BVI)

Russia Pharmacy Chain 36.6, OAO

Russia 71



28

Mining

Before the collapse of Lehman Brothers in the third quarter of 2008, Mining M&A in Russia had been booming. Indeed, between Q3 2007 and Q2 2008, 24 such transactions, worth €12.9bn were conducted, more than 50% of total M&A valuations seen in the sector since the beginning of 2004. In comparison, Mining M&A deal flow in Russia over the second half of 2008 and 2009 has been subdued with a total of 11 deals worth just €1.6bn coming to the market.

Looking at the wider period, the largest deal was announced

in November 2007 and saw Russian Aluminium’s (RusAl)

acquire a 25% plus-one-share stake in MMC Norilsk Nickel,

the Russian metals and mining company, for €8.5bn from

the Onexim Group, the Russian private investment fund.

Intriguingly, RusAl was able to secure debt financing for the

deal to the tune of US$4.5bn or – perhaps more pertinently

– 75% of RusAl’s cash payment to the Onexim Group. The

lending syndicate comprised ABN Amro, BNP Paribas, Credit

Suisse, and Merrill Lynch, highlighting the relative willingness

of banks to fund large-cap strategic deals pre-financial crisis.

RusAl’s performance following the acquisition has had a large

impact on M&A activity in the sector. As the credit crisis hit

harder in mid-2008, Norilsk Nickel lost around four-fifths of

its value, ultimately resulting in RusAl having to undergo a

painful round of restructuring in the first half of 2009. Indeed,

the largest Mining transaction of the year came about as a

direct consequence of the restructuring with private investor

Suleiman Kerimov purchasing a 20% stake in OJSC Polyus

Gold for €541m from Vladimir Potanin, a counterpart who was

looking to sell out in order to raise capital to buy into RusAl’s

debt restructuring.

A relatively large number of unique M&A situations arose

over the course of 2009 with the 20% stake buy in OJSC

Polyus Gold by Kerimov being just one of them. In what was

the sector’s third largest transaction of the year, Kerimov’s

company, JSC Nafta Moskva, went on to buy a further 15%

stake in Polyus Gold for €404m from Potanin less than two

months after completing his initial transaction and at a deep

discount to Polybus Gold’s share price one day prior to the

deal announcement. Meanwhile, another Mining transaction,

the €78m acquisition of a 50%-plus-one-share stake in

Dalpolimetall OAO by the Russian Mining Company, was

undertaken chiefly because the target was heavily in debt.

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29

Domestic plays have tended to dominate Russian Mining

M&A deal trends over the past six years, accounting for 77%

of all Mining transactions, worth a significant €22.2bn. Of

the remainder, the bulk of inbound transactions by volume

stemmed from UK businesses, who undertook five Mining

acquisitions worth a total of €380m over the period – the

largest of these being Aricom’s buy of the remaining 50%

stake it did not already own in Rubicon, the Russian mining

company, for €215m.

From a valuations point perspective, the most active foreign

investors were, perhaps surprisingly, Irish firms, or more

specifically, Ovaca Resources, the Irish gold & zinc mining

company. The company has made two acquisitions in Russia

over the past six years, firstly acquiring a 78% stake in

Norplat, the Russian exploration company, for €484m in 2005,

followed by the €17m acquisition of a 74% stake in CJSC

Ayax Prospectors one year later.

14%

14%

14%

29%

29%

Not disclosed

<€15m

€15m-€100m

€251m-€500m

>€500m

Mining volume split by deal size: 2009

TOP 5 MINING DEALS IN 2009Ranking Announced




Deal value (€m)




Russia 541




Cyprus 426

3 Apr-09 C OJSC Polyus Gold (15% stake)

Mining Russia JSC Nafta-Moskva Russia Interros Company

Russia 404

4 Feb-09 C Dalpolimetall OAO (50% stake)

Mining Russia Russian Mining Company (RGRK)

Russia 78

5 Sep-09 C Ozernoe project (49% stake)

Mining Russia MBC Resources Ltd Russia Lundin Mining AB

Canada 24



30

Technology, Media & Telecommunications While the number of Russian Technology, Media & Telecommunications (TMT) acquisitions fell over the course of 2009, valuations remained remarkably resilient with a total of 25 transactions worth €3.4bn coming to the market. Given the tough deal making conditions, these figures stand up well to the 40 deals worth €1.5bn that were announced in 2008.

2009 annual deal activity was dominated by a duo of €1bn+

deals. The larger of the two was the €1.5bn acquisition of

a 40% stake in telecommunications company Rostelecom

by the Deposit Insurance Agency (ASV), a state-owned

corporation, and Vnesheconombank (VEB), the Russian

banking service provider, from beleaguered local bank KIT

Finance in June 2009. The financial institution came close

to meltdown following the collapse of Lehman Brothers in

September 2008, with its assets shrinking 72% in value to

US$1.4bn in the subsequent market turmoil. As a result,

ASV, along with RZD, the Russian railroad operator and

largest single stakeholder in KIT Finance, restructured the

business, with ASV investing a total of US$3.58bn in order to

turn the bank around and shrink its assets by around a third.

The restructuring was evidently successful, with the bank

reportedly returning to profitability in Q3 2009.

A further notable TMT transaction in 2009 was the public

takeover of a 50.91% stake in OAO Comstar UTS, the

telecommunications operator, by Mobile TeleSystems OJSC,

the listed mobile phone operator, for €1.4bn in August. The

deal was agreed at a 23.3% premium to Comstar’s share price

one day prior to the deal announcement, a rarity given that the

vast majority of public takeovers conducted in Russia in 2009

were undertaken at large discounts to the target’s share price

one day prior – likely due to the stressed nature of such sales

and, also, the significant rally seen in equity markets over the

second half of the year.

Acquisitions of Russian telecommunications carriers and

media businesses have accounted for the bulk of TMT deals

since the beginning of 2004, representing more than a 75%

share of overall deal volumes and valuations in the sector. The

largest telecommunications carrier M&A deal, as well as the

largest Russian TMT M&A transaction to be conducted since

the beginning of 2004, was the €3bn acquisition of Golden

Telecom by Vimpel-Communications (VimpelCom), the Russian

mobile phone operator in late 2007.

While the VimpelCom/Golden Telecom transaction was a

purely domestic play, foreign investors have also shown

interest in the sector, with US businesses being the most

active foreign acquirers, having completed such 10 deals

worth €834m over the past six years. The largest of these

transactions was the 2004 €529m acquisition of a 25%

stake in OAO Svyazinvest, the telecommunications holding

company, by Access Industries, the investment vehicle of

Len Blavatnik in 2004. The target was brought to market by

Mustcom, one of George Soros’s investment funds, due to

its poor performance – Svyazinvest lost considerable market

share under its ownership with Mustcom having initially paid

US$1.8bn for the stake in 1997.

Private equity has also been active in the Russian TMT

market over the past six years, accounting for a total of

€2.7bn in 40 separate transactions – equivalent to 18% of

all M&A transactions in the TMT sector and some 17% of

deal valuations. These percentages are generally higher than

private equity investment trends over the whole Russian M&A

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31

market, which, over the same period, accounted for just 7%

of all deal volumes and 3.2% of total valuations.

And while private equity interest, perhaps understandably,

faded in 2009, three buyouts worth €90m were completed

despite the very testing deal making climate. Activity was

led by the €69m acquisition of a 9% stake in Yandex, the

search engine company, by a consortium of private equity

firms including Baring Vostok Capital Partners, UFG Asset

Management and Tiger Global Management.

TOP 5 TMT DEALS IN 2009 Ranking Announced




Deal value (€m)







3 Oct-09 P JSC Sitronics / Rusnano (Joint Venture) (49.9% stake)

TMT Russia Russian Corporation of Nanotechnologies

Russia Sitronics JSC Russia 149

4 Dec-09 C Eurotel Russia TMT Russia Mobile TeleSystems OJSC

Russia Effortel Russia Group

Russia 77

5 Sep-09 C Yandex (9% stake) TMT Russia Baring Vostok Capital Partners (BVCP); Tiger Global Management LLC; UFG Asset Management

USA Oradell Capital Russia 69


8%

4%

36%

32%

20%

Not disclosed

<€15m

€15m-€100m

€101m-€250m

>€500m

TMT volume split by deal size: 2009

Deal Drivers Russia - Survey Analysis

3232

Deal Drivers Russia

Survey Analysis03


33

MethodologyIn December 2009, Remark, the publishing division of mergermarket, interviewed 100 Russian M&A and corporate

finance decision-makers in order to garner their views on various aspects of the present Russian M&A environment. Their

opinions were all reported confidentially and in aggregate.

Close to nine-in-ten respondents are bullish on Russia’s economic prospects for 2010

Business operations are likely to be constrained by a lack of liquidity and weak domestic demand

How positive do you feel about the prospects of the Russian economy in 2010 compared to 2009?

Rate the following in terms of the threat they pose to the growth prospects of Russian firms over the next 12 months:

• DealmakersinRussiaareoverwhelminglyoptimistic

about the future of Russian M&A with 81% of those

surveyed feeling positive about the prospects of the

Russian economy in 2010 compared to 2009. An additional

6% even claim to feel very positive about Russia’s M&A

prospects. Reinforcing this sentiment, one respondent

said “The worst is already over and we are expecting good

financial climate in next year” while another said “the

economic situation is improving and is now showing some

positive results”.

• Tightcreditconditionsandthelackofliquidityinthe

market are viewed as the biggest threats to the growth

prospects of Russian firms over the next 12 months.

32% of respondents view it as the greatest threat while

30% see it as a major issue. Meanwhile, it should be

acknowledged that while a rising rouble poses the least

concern to respondents, more than one quarter still

believe that currency appreciations are a major threat. This

echoes comments made by deal makers in the Ukraine at

a previous event, who said that currency fluctuations have

hindered deal flow over the past year and will continue to

do so well into 2010.

6%

5%

8%

81%

Positive

Undecided

Negative

Very positive

Greatest threat Major threat Threat Minor threat No threat

0 10 20 30 40 50 60 70 80 90 100

Currencyappreciation

Politicalissues

Commodityprices

Weak domesticdemand

Tight credit conditions/lack of liquidity

Percentage of respondents

3%11%36%31%19%

3%8%26%30%32%32%

3%12%50%23%12%

10%59%17%9%

8%13%51%21%7%

4%


34

Russian M&A prospects in 2010 remain open to debate with just over 60% of respondents suggesting that activity will rise

Takeover activity in the TMT sector is most likely to dominate overall Russian M&A, according to respondents

What do you expect to happen to the overall level of M&A activity in Russia over the next 12 months?

Which sector do you believe will witness the most M&A activity in Russia over the next 12 months?

• Nevertheless,despitetheongoingeconomicdownturn,

the majority of deal makers are expecting to encounter

increased level of deal flow over the next 12 months. 58%

of those surveyed by mergermarket say that they expect

the overall level of M&A activity in Russia to increase over

the next 12 months, with a further 3% even thinking it

will increase greatly. One respondent explained that “to

survive in the current market, big companies are acquiring

smaller counterparts” while a further two pointed out this

could go either way with deal flow also resulting from

smaller companies being unable to deal with the current

economic situation and becoming targets for bigger, cash-

rich and acquisitive players.

• Asizable48%ofrespondentsexpecttheTMTsector

to witness the most M&A activity in Russia over the

next 12 months – in stark contrast, a mere 8% felt the

Construction sector would be the hottest sector. The fate

of the Financial Services sector has also undergone a

noticeable change – when asked the same question last

year, an overwhelming 80% of respondents felt that this

sector would see the bulk of deal flow. This time around,

only 30% continue to support this assertion – probably

explained by the fact that as the financial crisis lessens,

so do the opportunities the sector offers to investors.

3%

1%

38%

58%

Increase

Remain the same

Decrease

Increase greatly

0 5 10 15 20 25 30 35 40 45 50

Construction

Transportation

Industrials &Chemicals

Pharma, Medical& Biotech

Consumer

Financial Services

Energy, Mining& Utilities

TMT


8%

41%

24%

14%

30%

22%

49%

10%


35

69% of respondents consider that the bulk of Russian M&A transactions will be worth less than €250m over the next year

Russian M&A is most likely to be driven by non-core asset disposals according to 47% of respondents

Which deal size range do you expect to witness the most M&A activity in Russia over the next 12 months?

What do you believe will drive M&A activity in Russia over 2010?

• Themajorityofrespondentstothesurveyexpectsthe

bulk of deal activity to take place in the mid-range with

valuations between €101m to €250m. This is a slight shift

from last year when the majority of respondents expected

the bulk of deals to be worth €100m or less.

• RussianM&Aactivityoverthecourseof2010ismost

likely to be driven by large corporates disposing of non-

core assets according to nearly half of respondents. Deal

makers across Europe have commented that the financial

crisis has forced many larger companies to revaluate

business strategies going forward resulting in an increased

focus on key operations and thus a rise in the number of

non-core asset disposals. “To survive, big corporates need

to dispose of their non core and non-performing business

assets,” one respondent said, while another commented

that “to meet the expenses of their core operations, larger

players will need to make non-core disposals.” It should,

however, also be pointed out that government initiatives

and distressed driven M&A situations are expected to play

a key role in driving M&A going into 2010.

4%

19%

12%

46%

19%

<€15m

€15m-€100m

€101m-€250m

€251m-€500m

>€500m

0 5 10 15 20 25 30 35 40 45 50

Cash rich corporateacquirers

Private equitydivestments

Undervalued targets

Distresseddriven M&A

Governmentinitiatives

Non-core assetdisposals by larger

corporates


12%

22%

21%

25%

25%

47%


36

More than half of respondents think that financing difficulties and the wider economic climate will constrain deal flow over the next year

Cross-border M&A activity is set to increase according to over three-quarters of respondents

What do you believe will be the principal obstacles to M&A activity in Russia over the next 12 months?

Do you anticipate an increasing number of cross-border acquirers to target Russian assets over the next 12 months?

• AcquisitiveRussianbusinesses’greatestchallengefacing

them will be the lack of financing options available say

65%. It is also interesting that despite respondents’

relative bullishness on Russian economic prospects,

more than half still flagged up economic uncertainty as

an obstacle to deal flow. One respondent explained that,

“Uncertainty in the economic condition is stopping the

investors from investing money in the market and that is

leading to financial difficulties” – an excellent summary of

the fundamental challenges Russian deal makers will be

facing over the course of 2010.

• Anoverwhelmingmajorityofrespondentsfeelthat,over

the course of 2010, an increasing number of cross-border

acquirers will be targeting Russian assets. Explaining this

phenomena, one respondent said that that those buyers

from outside Russia are looking at the Russian market “to

acquire companies with good growth prospects”; another

noted that, “Cross-border acquirers will try to capture the

Russian market as it has potential to grow in the future”. It

should be noted that two respondents referred specifically

to initiatives launched by the Russian government to

attract precisely such investors to the Russian market.

0 10 20 30 40 50 60 70

Vendor/acquirerprice dislocation

Political risks

Regulatoryissues

Economicuncertainty

Financingdifficulties


22%

21%

14%

65%

54%

23%

Yes

No

77%


37

Asia-Pacific businesses are likely to be the most acquisitive inbound buyers of Russian assets in 2010

Respondents remain undecided on whether cross-border deal making in Russia has become easier

Where do you believe the majority of cross-border acquirers for Russian assets will originate from over the next 12 months?

Do you agree that deal making in Russia has become easier for cross-border acquirers in recent years?

• Giventhemanycash-richandacquisitivecompanies

emanating from the Far East – particularly from China,

India and Japan – it comes as no surprise that close to

four-out-of-five respondents expect the majority of cross-

border acquirers for Russian assets to come from Asia

over the next 12 months. However, buyers from Europe

will also continue to scour Russia for suitable targets to

buy. Explaining the perceived lack of interest from North

and South American buyers towards acquiring in Russia,

one respondent explained that the “US has [to first

overcome] the effect of that crisis and the huge difference

in the currency conversion ratio,” presumably before

making any acquisitions in the country.

• Aslightmajorityofrespondentsbelievethatdealmaking

in Russia has become easier for cross-border acquirers

in recent years – some 43% agree, 39% are uncertain

while 18% disagree. A number of respondents who

don’t ascribe to this refers to the bureaucratic nature of

the state, noting that it continues to hinder deal flow for

cross-border acquirers. At the same time, there are also a

number of respondents who actually feel the government

is helping buyers complete deals in Russia. We can only

conclude that the perception on how easy or difficult it

is for cross-border acquirers to do deals in Russia and

how this process depends almost entirely on individual

experiences.

0 10 20 30 40 50 60 70 80

Africa

Middle East

South America

North America

Europe

Asia-Pacific


21%

10%

6%

2%

48%

79%

43%

39%

18%

Agree

Unsure

Disagree


38

Russian buyers of overseas assets are likely to target businesses in the Asia-Pacific region next year

More than half of respondents expect domestic acquirers to snap up overseas TMT assets

Which regions do you believe Russian acquirers will most aggressively target over the next 12 months?

Which sectors do you expect the bulk of Russian outbound acquirers to target over 2010?

• Interesting,accordingto88%ofrespondents,theAsia-

Pacific region will be most heavily targeted by Russian

buyers. Explaining the attraction of the space, one

respondent said that the regional “market is still in good

condition and has many opportunities”.

• OverseasTMTtargetswillattractthemostattentionfrom

Russian outbound acquirers over 2010 say just over half

of respondents, while foreign Energy, Mining and Utilities

assets also remain attractive for Russian buyers. To this

end, one respondent explained that the sector has been

the “least effected by the financial crisis” while another

said that “the whole of Russia depends on energy.”

0 10 20 30 40 50 60 70 80 90

Africa

Middle East

South America

North America

Europe

Asia-Pacific


13%

12%

5%

2%

45%

88%

0 10 20 30 40 50 60

Leisure

Construction

Transportation


BusinessServices

Industrials

Consumer

FinancialServices


TMT


51%

38%

33%

28%

23%

21%

18%

10%

10%

2%


39

More than three-quarters of those polled foresee deal financing to become easier next year compared to 2009

Perhaps surprisingly, two-thirds of respondents forecast that firms will use debt to finance M&A transactions

How easy or difficult do you expect Russian companies to find securing financing for deals in 2010 compared to 2009?

How would you expect Russian companies to finance M&A activity over 2010 given current market conditions?

• JustunderhalfofrespondentsexpectthatRussian

companies will find it slightly easier securing financing

for deals in 2010 compared to the year prior – in itself no

mean feat given that the bulk of respondents also consider

that funding a deal will be the greatest challenge to face

acquirers over the coming year. Indeed, one Russian deal

maker commented that while it has become slightly easier

to securing funding for deals, the process has also become

more and more complex, with this trend expected to

continue.

• Despitetheacknowledgeddifficultiesinobtaining

financing, a substantial 66% of respondents still believe

that Russian companies will use debt to fund takeovers

in 2010. It should, however, also be recognised that 46%

of respondents mentioned internal resource as a way of

paying for acquisitions. At the other end of the scale, just

7% of respondents apiece noted that Russian acquisitions

would be financed by economic stimulus packages or from

equity capital markets.

2%2%

49%

32%

Much easier

Slightly easier

No change

Slightly harder

Much harder

15%

0 10 20 30 40 50 60 70

Not sure

Depends on anumber of factors

Other

Equity capital markets

Governmentstimulus packages

Private equityfunds/investors

Internal sources

Debt


66%

46%

20%

7%

7%

4%

4%

3%


40

Deal structures will also probably become more exotic in 2010 say more than two-thirds of respondents

The fragile economic climate is considered the biggest concern when attempting to secure deal financing

Do you expect deal structures to become more creative to bridge the current liquidity gap?

What do you envisage will be the biggest challenge facing Russian firms looking to finance acquisitions over the next 12 months?

• Creatinginnovativedealstructuresasamethodof

overcoming challenging market conditions have frequently

arisen over the course of the year, so it comes as

no surprise that 68% of respondents feel that such

structures will be used to bridge the current liquidity gap.

Deferred earn-out clauses, vendor financing, high levels

of syndication and – in the case of private equity – large

equity tickets or entirely self-financed deals are frequently

given as examples of such creativity.

• 40%ofrespondentsbelievethatthewidereconomy’s

underlying weakness will pose the biggest challenge

facing Russian firms looking to finance acquisitions over

the next 12 months – a marked shift from similar findings

in 2008, when the single largest obstacle facing Russian

businesses looking to finance a deal was the cost of

leverage. In addition, just over one quarter (26%) expect

that company performance will hinder their ability to

secure financing. Interestingly, only 10% of respondents

feel that the cost of financing is now the biggest challenge

– perhaps highlighting the sharp shift in Russia’s deal

making environment compared to just a year ago.

32%

Yes

No

68%

10%

40%

26%

Underlying economic weakness

Company performance

Attitudes of lenders

Availability/cost of leverage

23%


41

Restructurings are likely to be driven by lenders pressuring businesses to alter capital structures

54% of those surveyed indicate that the number of defaults and restructurings will remain the same this year compared to 2009

Do you believe Russian firms are under pressure from lenders to alter their capital structure?

What do you expect to happen to the number of corporate defaults and restructurings in Russia over 2010 compared to 2009 figures?

• Asizable62%ofrespondentsbelievethatRussian

businesses are under pressure from lenders to alter their

capital structure. Most of those who believe this is the

case note that this pressure is chiefly to make companies

repay their bank debts. However, according to one

respondent, who noted that this pressure is not always

justified, explained that “there is too much of pressure

without any serious reason.”

• Morethanhalfofrespondentsfeelthatthepotential

number of corporate defaults and restructurings in Russia

over 2010 will remain similar to levels seen in 2009.

Last year, however, the majority -- 83% -- expected the

number to increase, perhaps suggesting that while the

worst of the credit crisis is over, the Russian economy

is not of the woods yet. This belief can be corroborated

by respondents’ comments, with one noting that the

“Russian economy is still under the effect of financial

crisis.” Another writes that “bad financial conditions within

companies are not expected to improve over the next year,

it will take its due course of time.”

38%

Yes

No

62%

4%

29%

13%

Increase

Remain the same

Decrease

Decrease greatly

54%


42

Close to three-quarters of respondents believe that corporate re-financings will ultimately be the most likely source of distressed situations

Respondents are split as to what the frequency of distressed acquisitions will be in the remainder of 2010

What do you believe will provide the most likely source of distressed situations in Russia over the next 12 months?

What do you expect to happen to the number of distressed M&A situations in Russia over the next 12 months?

• Distressedsituationswillpredominatelybedrivenbyre-

financings according to 71% of respondents – a marked

change to last year, when just 36% of respondents

thought this would be the case. However, in their

comments, many respondents also noted that the overall

financial and economic crisis would play a significant role in

driving Russian companies into distress.

• Unsurprisingly,giventhatthebulkofthosepolledconsider

that the frequency of corporate restructurings will remain

the same in 2010, the majority of respondents also think

that the number of distressed M&A situations will remain

the same in Russia over the next 12 months. Nonetheless,

a sizable 32% disagree, instead believing that this number

will increase. One of those respondents rightly points out

that pressure on companies to repay loans is increasing,

whether or not they actually can, which – if in fact, they

cannot – will lead to distressed situations.

0 10 20 30 40 50 60 70 80

PE portfoliocompanies

Corporaterestructurings

Privateplacements

Re-financings


31%

9%

11%

71%

1%2%

19%

32%

46%

Increase

Remain the same

Decrease

Decrease greatly

Increase greatly


43

Private equity deal making set to rebound in 2010 say 45% of respondents

Financial investment activity predicted to be focused in the TMT and Energy, Mining & Utilities spaces

What do you expect to happen to the level of private equity buyouts in Russia over 2010?

In which sectors do you expect the bulk of private equity buyouts in Russia to take place over 2010?

• Interestingly,closetohalfofrespondentsbelievethat

private equity activity in Russia would increase in 2010,

indicating that the asset class is certainly making a come

back. After all, the vast majority of funds are sitting on

large piles of dry powder which need to be invested. This

sense of confidence can be strengthened by the fact that

just around one-in-ten respondents consider that financial

investments in Russia next year will fall compared to

2009 levels.

• Respondentsalsoremainedbullishonbuyoutprospectsin

Russia’s TMT sector, with 43% of those polled considering

that private equity firms will undertake TMT purchases

over the year. Similarly consistent is the response that

the Energy, Mining & Utilities space will be of interest to

private equity investors, selected by 39% of respondents.

0 10 20 30 40 50

Leisure

Transportation

Construction


Industrials

Consumer

Business Services

Financial Services


TMT


43%

39%

35%

28%

25%

23%

16%

12%

8%

1%

2% 3%

9%

42%

44%

Increase greatly

Increase

Remain the same

Decrease

Decrease greatly


44

Respondents are split on whether foreign or local private equity firms will dominate the M&A landscape in 2010

Corporate divestments and public takeovers likely to be the most frequent sources of private equity acquisitions in Russia next year

Do you expect the majority of private equity activity in Russia over the next 12 months to be conducted by local private equity firms or international investors

Where do you expect private equity firms to source their acquisition targets in Russia over 2010?

• Respondentexpectationsastowherethemajorityof

private equity activity in Russia will come from – local

private equity firms or international investors – are almost

evenly split. 51% believe financial investments to mainly

come from local private equity houses while 49% believe

it will come from international players in the asset class.

• Privateequityfundsbuyingfromlargecorporateswill

offer other private equity funds the biggest investment

opportunities according to just under one-third of

respondents, while secondary buyouts and public

takeovers were also considered to be significant sources

of M&A deals in 2010.

• However,manyrespondentsstatedthattheexactwayin

which private equity funds will source their acquisitions

targets in Russia will depend on overall conditions in the

different sectors. A number also pointed out that while

divestments from large corporates as well as private equity

portfolio company sales offer great opportunities, it would

fundamentally be easier to buy a privately-owned business.

49%

51%

Local private equity firms

International investors

Very significant source Significant source Source

Insignificant source Very insignificant source

0 10 20 30 40 50 60 70 80 90 100

Privatecompanies

Privateequity exits

Public companytakeovers

Divestments fromlarge corporates

32% 21% 33% 13%

14% 28% 46% 11%

7% 31% 45% 15%

14% 22% 50% 13%

2%

2%

1%



45

Private equity firms in Russia will probably focus attention on their return on investments and due diligence exercises looking forward

Securing deal finance is highlighted by over 50% of respondents as at least a very serious obstacle facing private equity firms

In what ways has private equity’s investment strategy changed since the acute onset of the global financial crisis?

What are the most serious obstacles that private equity firms face when conducting acquisitions in Russia?

• Respondentsstatedthatprivateequity’sinvestment

strategy has changed markedly since the onset of

the global financial crisis, with 40% suggesting that

private equity firms are now more focused on returns

in investment and conducting a thorough due diligence

exercise when looking to transact, than before.

• Overhalfofrespondentsbelievethatthemostserious

obstacle facing financial investors active in Russia is the

difficulty in obtaining finance to undertake transactions

– with exactly one-third highlighting this as the most

serious issue facing the asset class. However, what stands

out here is that despite an ever-increasing number of

cash-rich trade buyers – who themselves reportedly feel

emboldened in the face of weakened private equity funds

– a mere 8% consider competition from trade buyers

to be the most serious obstacle to financial investors’

acquisitions strategy.

Most serious obstacle Very serious obstacle Serious obstacle Not an obstacle Not an obstacle at all

0 10 20 30 40 50 60 70 80 90 100

Resistance to handingover substantial

management control

Competition fromtrade buyers

Lack ofsuitable targets

Regionalpolitical instability

Unsuitable legal/regulatory framework

Securing financefor transactions

33% 22% 32% 13%

13% 25% 45% 14%

13% 25% 46% 9% 7%

9% 22% 48% 17% 4%

8% 23% 47% 17% 5%

5%6% 35% 43% 11%

3%


0 10 20 30 40

Other

No changes

Less risk

Less deal activity

More preparation/due diligence

Focus on ROI


27%

11%

7%

2%

33%

40%


46

IPO activity forecast to remain the same say nearly two-thirds of respondents

Russian business prefer listing close to home according to the bulk of respondents

What do you expect to happen to the number of Russian firms listing over the next 12 months?

What do you believe is the most attractive listing location for Russian companies?

• WhilethereareearlysignsofarecoveryintheglobalIPO

scene, the majority of respondents (63%) believe that the

number of Russian firms listing over the next 12 months

will remain the same. Many caveated this by saying

that only companies that have “good potential” or are

“established” will take the plunge and seek a listing.

• ThosebraveenoughtoattempttoIPOoverthecoming

year will do so in Russia according to the overwhelming

majority of respondents. UK exchanges are by far the most

popular out of all the foreign alternatives, with Hong Kong

and Chinese bourses seemingly falling from grace with

Russian businesses looking to list.

1%2%

3%

31%

63%

Increase greatly

Increase

Remain the same

Decrease

Decrease greatly

0 10 20 30 40 50 60 70 80 90

Switzerland

Hong Kong

China

USA

UK

Russia


9%

3%

1%

1%

27%

86%


47

Respondents are split over whether vendors are now considering IPOs as a method of exiting past investments

The volume of Russian rights issues is to remain the same in 2010 compared to the previous year, according to respondents

Do you believe the recent rally in global equity markets has meant that both financial investors and trade players are now seriously considering IPOs as a way of realising value from portfolio companies/non-core assets?

What do you expect to happen to the volume of rights issues undertaken by Russian corporates over the next 12 months?

• Exactlyhalfofrespondentsbelievethattherecentrally

in global equity markets has meant that both financial

investors and trade players are now seriously considering

IPOs as a way of realising value from portfolio companies/

non-core assets. However, despite this new-found

optimism, a sizable number of respondents remain

cautious with one saying that they “still need to be vigilant

about the deals,” and another adding that “there is still a

big chance to lose money.”

• Thevastmajorityrespondents–81%–believethat

volume of rights issues undertaken by Russian corporates

will remain the same over the next 12 months. According

to the respondents, these right issues will be driven by

“M&A financing”, “restructurings of capital structures”

and exercises to “repair the balance sheet”.

2% 1%

6% 10%

81%

Increase greatly

Increase

Remain the same

Decrease

Decrease greatly

50%

42%

8%Yes

Unsure

No

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LEADING IN EUROPEAN M&ACMS provides practical national and cross-border advice for mergers and acquisitions, corporate finance and privatisation projects. With over 2,400 lawyers in 47 cities across Europe, we have perfect solutions for all your legal and tax issues; wherever you are. Visit our website for more information.

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Key contact in Russia:John Hammond | Senior partnerT +7 495 786 4040E [email protected]

Mid-Market M&A 2009 up to USD500m, by deal count

LEADING IN EUROPEAN M&ACMS provides practical national and cross-border advice for mergers and acquisitions, corporate finance and privatisation projects. With over 2,400 lawyers in 47 cities across Europe, we have perfect solutions for all your legal and tax issues; wherever you are. Visit our website for more information.

— Germany, Spain, Italy – Advised Telefónica/O2 on the acquisition of German HanseNet from Telecom Italia

— Austria, CEE – Advised Advent International on the acquisition of the leading Bulgarian bottler of mineral water, Devin, from the Soravia Group

— Russia – Advised Banque PSA Finance on the acquisition of AIG's consumer finance operations in Russia

— Russia – Advised VTB Bank on a US$150 million investment to acquire 19.90% of Otkritie Financial Corporation

— Russia – Advised Gruner + Jahr on the sale of their Russian operations to Axel Springer AG

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Deal Drivers Russia - CMS · Deal Drivers Russia - M&A Review 3 Overall deal trends It is somewhat unsurprising that the contraction in the economy has had a negative impact on investment