You're reading: Positive signals from government will boost M&A – eventually

The playing field for mergers & acquisitions is being fundamentally altered. The new government of Prime Minister Arseniy Yatseniuk has not only declared that eliminating corruption and protecting property rights are among its priorities, but it has taken steps towards cleaning up the business environment.

The legal community is pleased with this movement towards greater transparency and sees great long-term prospects for Ukraine. However, the questionable stability of the new regime, threats from Russia and the long laundry list of reforms the government needs to implement have created too much uncertainty to see much merger & acquisition activity in the short term.

It is no secret that Ukraine is starved for investment, receiving a paltry $5.68 billion in 2013 in foreign direct investment, while neighboring Poland got $6.62 billion (on a slow year) and Russia took in $94 billion.

M&A is one of the leading investment channels for any country, and so can serve as an indicator of a nation’s investment climate. Last year saw little M&A activity in Ukraine relative to its emerging market peers.

This is not expected to change in the short term, but the seismic shift for the better in the business environment as a result of regime change is bringing about a reassessment of Ukraine’s investment potential.

The legal and investment communities alike are excited by the changes they see taking place in how the government does business, which should lead to an improved investment climate and eventual growth in M&A opportunities.

According to Volodymyr Sayenko, partner of the Kyiv-based legal firm Sayenko Kharenko:

“Of course, corruption was so endemic that it needs to be eliminated everywhere, from procurements to the judiciary. So far, the government has been doing the right things, like the new tax administration head, Victor Bilous. He might not have much actual administrative experience, but he knows the law and appears to be independent. He is professional.

I also like Economy Minister Pavlo Sheremeta. There has been some progress in legal areas, but it should be remembered that these are early days.”

Graham Conlon, partner of the international legal services firm CMS Cameron McKenna, agreed. “The government needs to show that it is making positive steps to eliminating corruption. So far, it looks good. It looks better than after the (2004) Orange Revolution.”

The abrupt change of government does not seem to have frightened away investors. All the legal firms that the Kyiv Post spoke to stated that all the M&A deals begun before the anti-government demonstrations started last November continue undisturbed. A number of investment brokerages are, in fact, seeing renewed interest in Ukraine.

Foyil Securities analyst Yaroslav Udovenko said that, after the overthrow of President Viktor Yanukovych, his firm was receiving many calls from potential foreign investors about possible acquisition targets.

However, the Russian occupation of Crimea put an end to that. Nevertheless, political uncertainty has limited new interest in Ukraine. Above all, all the legal specialists and financial analysts the Kyiv Post interviewed agreed that the new Ukrainian government must demonstrate its stability and ability to push through reforms that will improve the investment climate and make doing business in Ukraine easier.

Key milestones along this road include the presidential election scheduled for May 25 and the next parliamentary elections, as they will validate any new government. “It should be kept in mind that the provisional government of Prime Minister Arseniy Yatseniuk has a limited mandate for reform, since everything he does will need final approval from a newly elected parliament,” Udovenko said. “Foreign investors will probably wait until after the presidential and parliamentary elections to eye business opportunities in Ukraine, since at the moment too much uncertainty reigns.”

However, not just stability, but “positive stability” must rule before investors return, said Margarita Karpenko, managing partner of the law firm DLA Piper. “We had a type of stability under Yanukovych, but it was very complicated to do business,” Karpenko explained. “The system needs to be deregulated, simplified and made sustainable. I believe the government understands this, and if they do these tasks quickly, Ukraine will have a good future.”

Conlon said that, despite the enormity of the work ahead of the government, it will not take very much to invigorate foreign investment.

“Few changes are needed to the laws. What is needed is the rule of law and enforcement of property rights.” Sayenko agreed, adding “on the whole, the Ukrainian laws are fine, but we must have predictability and independent courts, while corporate law needs to be more flexible.”

Companies related to agriculture and foodstuffs should remain the main targets of M&A this year. “These sectors have become Ukraine’s main economic drivers and their indicators should only improve with the promised greater access to Europe via the Association Agreement,” argues Udovenko.

Dmytro Churin of Eavex Capital believes that the banking and financial sector should continue to consolidate as banks with foreign capital exit the market. One sector that might reinvigorate M&A in the longer term is energy. The Ukrainian government’s stated ambition to become energy independent coupled with Russia’s unfriendly attitude and Ukraine’s vast energy resources have attracted investor interest in the past, but an improved investment climate and the sale of state energy-related assets could lead to large real investments. “Energy companies and their support industries plus natural resources should become very appealing,” Conlon argues.

Ukraine continues to remain a land of vast investment potential. “Ukraine is the last great Emerging Market in Europe with little relative FDI to date, so many companies looking at it,” Conlon says. “The bottom line is that assets in Ukraine are underfund and undervalued,” Sayenko says. “There should be many bargains.”

What could spur revival of M&A are donor and international investment organizations, like the International Monetary Fund or European Bank for Reconstruction and Development, or rather the confidence their money would bring to the investment climate.

“It would mean that essential economic reforms are getting done,” Sayenko said, “and that would bring not only confidence, but also security that the investment will be protected.”

Yevhen Kravtsov, partner of the Asters law firm, said: “Activation of the donor money on one hand will be a very good signal for international investor and on another hand will add liquidity to Ukrainian economy. Both factors will be very positive for stimulation of the M&A activity.”

The shifting of the playing field for business, which implied less corruption and dependence on personal patronage, could lead to surprise deals.

“One thing we can expect is many local assets, once belonging to those close to the Yanukovych family, to change hands” Sayenko said. “Assets could suddenly appear on the market without warning because of this, although I cannot speculate which ones. Because the system was so dependent on the personal chain that led up to the presidency, changes in local administration and cleaning up of the system means that those businessmen no longer have the ‘uncompetitive’ advantage over potential rivals. So, it might not be worth it for them to retain certain assets.”

In 2013, three of the top 10 deals by value involved Serhiy Kurchenko, who has since fled the country, while the biggest deal involved Group DF’s purchase of Inter Media Group, whose owner Dmytro Firtash was arrested in Austria on March 13 on a range of corruption charges.