M&A market in Ukraine

At the same time as the global M&A value reached new record level, with over EUR 4.3 trillion in 2015, driven by several mega-deals, value of Ukrainian M&As reached its new low with a mere EUR 503 million.

The main reasons for very low M&A activity in Ukraine are the political instability and war in the East of the country. There is little interest from foreign investors, and even those who have Ukrainian assets are looking to divest them. This gives opportunity to Ukrainian buyers who try to benefit from the situation and often acquire such assets with very significant discounts. It is expected that the significant number of distressed assets will likely attract aggressive foreign buyers to enter the market with the purpose of acquiring undervalued assets but this has not yet become a massive trend.

M&A Ukraine.I

Source: EMIS

2014 market overview

Ukrainian market of mergers and acquisitions experienced an unprecedented crash in 2014 when the value of all deals reached only one sixth of the value in 2013, according to EMIS. In addition to number of deals more than halved valuations also significantly decreased. In previous years Price/EBITDA multiplier amounted between 8 and 10, and in 2014 prices dropped to below 4 times EBITDA.

The rare deals that were concluded in 2014 were ones negotiations on which started in the previous year or the deals that were forced.

The most notable among the transactions that started in 2013 was sale of Ukrainian subsidiary of Bank of Cyprus. Bank of Cyprus decided to sell its loss making subsidiary in Ukraine following its policy of focusing on core businesses and markets. Ukrainian crisis at the end of 2013 only accelerated the implementation at a faster pace than what is anticipated in their Restructuring Plan. The bank was acquired by Russian Alfa Group, which is using current conditions to strengthen its presence in Ukrainian banking sector.

Forced deals relate mainly to the Russian owned companies that were heavily influenced by anti-Russian sentiment. After numerous cases of boycott of petrol stations Russian Lukoil had no other choice but to sell its Ukrainian subsidiary to Austrian based AMIC Energy Management. For the similar reasons Ukrainian assets were sold by Russian companies such as truck producer KAMAZ, who had in Ukraine a network of retail and service shops and insurance company Rosgosstrakh that owned insurer Providna. However at this moment these are only individual cases and we can’t yet talk about mass exit of Russian investors.

An ever increasing part of M&A market in Ukraine are IT-startups. Three notable transactions in 2014 valued at EUR 2-3 million included SoftTechnics, an Odessa based producer of mobile apps and games, which was acquired by US-based Intersog. Advice Wallet, who created a client loyalty app, and was sold to Russian venture fund Life.SREDA and Gill Business Systems who created an app for sale of bus tickets through internet and payment terminals, which also attracted funds from Russian venture funds.

2015 market overview

Despite increase in number of deals, the value of deals in 2015 decreased by 40%. This tendency is a result of significant decrease of transactions when expressed in euro, as well as lower profitability due to the currency devaluation and general economical decrease.

The main sectors by value were Financial and Telecom&IT. The largest deals in this year were acquisition of IT-startup Looksery inc. by US-based Snapchat, Turkcell’s acquisition of the remaining 45% of Astelit from Rinat Akhmetov’s SCM Holding and acquisition of the remaining 29% of TV Channel Inter by Dmitriy Firtash’s Group DF.

A recent trend in the market is so called package deals, where for example the share in equity is exchanged for financing (e.g. loan for working capital). Such transactions are less risky for investor, as they offer guaranteed income or equity seen as a mechanism for the return of investment.

M&A Ukraine.II

Sources: CMS, EMIS, Capital IQ, M&A Ukraine, Dealogic

Prospects for 2016 and beyond

2016 started with signing of an agreement that was in the making in 2015: transfer of 99,8% of PJSC “Ukrsotsbank”, UniCredit’s subsidiary in Ukraine, in exchange for a minority 9,9% stake in ABHH, a Luxembourg-based investment holding company, part of Russian billionaire Mikhail Fridman’s Alfa Banking Group. The conclusion of the deal is expected in 2016 after obtaining all the necessary regulatory approvals.

Given the continuing political unrest we see 2016 being similar to 2015, with a few strategic exits and a number of high profile deals carried out by Ukraine’s elite. The most attractive sectors in 2016 will continue to be financial services, agriculture and telecoms & IT.

Ukrainian assets are currently significantly undervalued, and this is likely to result in significant increase of M&A activities once there is more certainty regarding the conflict at the East of Ukraine, as it is expected that the government will continue efforts to improve the investment climate, including reforms in the agriculture, energy and banking sectors and enforce anti-corruption measures implemented in 2015.