In contrast to other years, most 2011 deals did not involve foreign investors buying up leading assets.
Merger and acquisition activity inched up in 2011 in what some lawyers described as a recovery to pre-crisis levels.
Whether M&A activity has recovered to pre-2009 recession levels or not is debatable, but an increase in activity has been detected. And, undoubtedly, it is being driven by an oligarch spending spree rather than foreign investments.
It was foreign investments in Ukraine – largely multi-billion dollar acquisitions by European banks and world leading steel group ArcelorMittal – that fueled the 2005-2007 M&A boom.
In 20011, however, it was a billion-dollar shopping spree for industrial assets by two of the richest and most powerful oligarchs – both close to President Viktor Yanukovych – that accounted for the lion’s share of M&A deals.
Billions of dollars worth of assets changed hands, but some 60 percent ended up in Ukrainian hands.
There were a few M&A deals that could be categorized as promising foreign investments, but the majority of deals involved bigger oligarchs buying out assets from smaller domestic businessmen, further monopolizing their grip over Ukraine’s economy.
“We do not see many investors from foreign countries. Most of the investors are local,” said Oleh Malskyy, partner for Kyiv-based law group AstapovLawyers.
“At the moment and in the nearest future, Ukrainian financial-industrial groups and large companies seeking further consolidation on their markets will become the main buyers of assets,” said Maksym Cherkasenko, partner in Ukraine at the Arzinger law firm.
“Western investors are not showing great interest in Ukraine and will unlikely become active players on our market in the nearest perspective. This is connected with the overall situation in the global economy as well as poor conjuncture of the Ukrainian market formed due to internal political processes and risks related there within,” he added.
The year started off with the state privatizing fixed-line telephone giant Ukrtelecom in what some analysts described as a non-competitive tender. It was bought for $1.3 billion by Austria’s EPIC, seen by some analysts as a front for domestic oligarchs and politicians.
Dmytro Firtash, the Yanukovych-backing gas trading billionaire notorious in prior years for being the partner of Russia’s Gazprom in the supply of gas to Ukraine, further consolidated his control over the nation’s gas-guzzling chemical business.
According to Ernst & Young, he spent $500 million to buy Severodonetsk Azot and doled out $800 million for Cherkassy Azot. Both were sold by domestic businessmen rated lower in recent net worth rankings and less influential according to political analysts.
Rinat Akhmetov, a lawmaker in the pro-presidential Party of Regions and longtime Yanukovych backer, kicked off his spending spree later in the year. But he is nonetheless estimated to have outspent Firtash.
His $500 million acquisition of a 50 percent stake in steel mill Zaporizhstal further increased his Metinvest steel group’s control over Ukraine’s domestic metallurgy sector.
Closer to the end of the year, Ukraine’s government held another round of privatizations of assets potentially worth billions of dollars.
Akhmetov come out on top of all big sales.
Akhmetov also got Kyivenergo for what analysts say was a bargain price: $56 million for a 25 percent stake that brought the group’s interest up to 71 percent. Around $59 million was paid for a 40 percent stake in Donetskoblenergo, increasing DTEK’s interest to over 70 percent.
Akhmetov’s energy business got a further boost by winning the rights to export electricity generated in Ukraine. His companies were alloted 70 percent of the slots.
He beefed up his stake in electricity generator Zakhidenergo to a controlling one for $240 million.
Later, in early 2012, he amassed a controlling stake in Dniproenergo by buying an additional 25 percent share for about $22.5 million. He picked up a regional electricity distributor and is in the bidding for others that are up for grabs this year.
With these acquisitions, Akhmetov’s companies are today estimated to control more than 50 percent of Ukraine’s steel, ore mining, coal and electricity sectors.
Such trends – where domestic oligarchs amass monopolistic positions over entire sectors of Ukraine’s economy thanks to non-competitive privatization tenders – are expected to continue this year.
Ukraine’s government is pushing ahead with privatizations of electricity utilities, chemical plants and possibly ports. Bidding is expected to be limited to domestic oligarchs.
Ukraine’s newly emerging agriculture billionaires also made a mark last year.
Oleg Bakhmatyuk, the billionaire owner of London-listed Avangard, spent an estimated $70 million to buy two smaller agriculture groups called Rise and Dakor. Both assets were sold by domestic businessmen.
Bakhmatyuk also made a big leap into banking by paying $70 million to buy out the Israeli and Russian owners of VAB Bank.
Oleg Bakhmatyuk
Lawmaker Andriy Verevsky, who rose to prominence as the owner of leading sunflower oil producer Kernel Group, snapped up the troubled KDD Group real estate developer for $16 million.
Politician-businessman Petro Poroshenko boosted his presence in media by buying Korrespondent magazine, website and the Bigmir.net web portal from American Jed Sunden for an estimated $18 million.
Ukraine’s oligarchs were also making big purchases abroad, according to Oleksandr Romanishyn, M&A Manager at Ernst & Young in Ukraine.
Kernel Group, he said, purchased Russia’s Russkie Masla for $60 million. Mansvell Enterprises, an offshore vehicle controlled by billionaire Igor Kolomoisky, bought Denmark regional passenger airline
carrier Cimber Sterling for $32 million.
And Firtash’s Smortora Trading picked up a 38 percent stake in Italian Titanium factory Tifast.
While the billion-dollar oligarch buyouts may have captured most of the attention in Ukraine’s 2011 M&A show there were some noteworthy acquisitions made by foreign investors.
America’s Advent International, one of the world’s leading private equity firms, made its first investment in Ukraine by purchasing the ISIDA medical clinic at an undisclosed price.
Describing the deal as a pleasant surprise, Ernst & Young’s Romanishyn predicted that more badly needed investment could find its way into Ukraine’s healthcare industry.
“Clinics in cities with populations of a million or more – be they specializing in plastic surgery or reproductive healthcare – are very interesting,” Romanishyn said.
Dmytro Firtash
“The annual operating profit of such clinics is relatively large, offering return on investment period of 3-7 years,” he added.
Looking ahead, the hope is that M&A activity driven by foreign investment will pick up substantially.
Boris Krasnyansky, managing partner in Ukraine for PwC, said that Ukraine’s M&A market is on course to exceed pre-crisis levels within two-three years.
“Today, Ukrainian companies are the main buyers in the market,” he said.
“In the coming three to five years I expect a significant proportion of investment to come from Ukraine, Russia, Middle East countries, China. I expect [M&A activity] to not only to recover, but significantly exceed the pre-crisis level in two-three years.
The most attractive sectors most likely will be agriculture, oil and gas, utilities, services,” Krasnyansky added.
Armen Khachaturyan, senior partner at Kyiv-based law group Asters, said: “Energy, especially in oil and gas upstream and downstream and subsoil areas, remain to be among the most attractive investment and M&A opportunities.
Andriy Verevsky
Agriculture and food processing is on the rise as well. Other sectors of interest include infrastructure, chemistry, pharmaceuticals and fast-moving consumer goods.”
Some took a more cautious view.
Iryna Marushko, partner with Lavrynovych & Partners, said: “It is hard to expect the M&A market to recover to pre-crisis levels in 2012. I would take a longer perspective.
”Myron Rabij, partner at the Ukrainian practice of international law group Salans, said: “Yes – eventually, [the market will rebound,] but this is a long-term view. There are no easy fixes in the global economy and this extends to Ukraine.”
Petro Poroshenko
“I do not anticipate any earth-shattering developments in the next year or two that would suggest strategic changes. More likely prices will continue to gradually drop as Ukrainian seller expectations continue to keep dropping closer to the earth,” Rabij added.
Marc Lewis, partner in the Financial Advisory Services department of Deloitte, said:
“There is evidence that the Ukrainian M&A increased activity in the last half of 2011, though interest in Ukrainian assets remains far below pre-crisis levels.”
