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Russian M&A Overview 2016 PDF

32 Pages·2017·2.62 MB·English
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Russian M&A Review 2016 April 2017 KPMG in Russia and the CIS kpmg.ru Contents Overview 2016 2017 in Review Outlook 02 06 08 Methodology Appendices mMaecdriou mtre tnerdms afonrde casts 20 Appetite and capacity for M&A 21 Cross-border M&A highlights 22 Sector highlights 23 18 19 2 Russian M&A Overview 2016 Overview While 2016 only saw a modest increase in deal activity, the value of Russian M&A, leapt by 46% to USD75.8 billion. Much of this increase was driven by three deals in the oil and gas sector: the sale of a 19.5% stake in Rosneft, the headline deal of the year, the acquisition of signifcant minority stakes in India’s Essar Oil, and the privatisation of Bashneft. In general, investors started to understand and adjust to the changing outlook for the economy during 2016, and while not expecting a repeat of the previous boom conditions, are becoming more confdent that Russia can deliver above average returns over the medium to long-term. 46 USD75.8 bn 3 main deals: — Rosneft — India’s Essar Oil — Bashneft © 2017 KPMG. All rights reserved. Russian M&A Overview 2016 3 Russian M&A (2010–2016) The outlook 621 for 2017 56.0 14.4 470 481 The number of transactions 20.7 and the aggregate value 334 333 302 11.3 of deals will continue 266 to grow and show a 100.9 s 2t0r1o7n. g gain over 76.7 70.0 79.5 79.0 52.0 64.5 This is because the economy is now moving out of recessionary conditions 2010 2011 2012 2013 2014 2015 2016 and the government’s strategy for Deal value (excl. mega deals), Mega deals (>USD10 bn), Number of deals creating new longer term growth USDbn USDbn conditions, across a broader number of Source: KPMG analysis sectors, is becoming clearer and more credible. While geopolitical concerns are easing, the government does not expect any major change in sanctions And although there is clearly more from the region may still be waiting during 2017, and will continue to pragmatism in relations with western for sanctions relief before making the look east for major investments. nations, it appears that some investors decision to come to Russia. Russian M&A largest deals in 2016 Target Sector Acquirer Vendor ac quire%d UVSaDlume 1 RComsnpeaftn Oy il Oil & Gas IAn vCeosntsmoertniut mAu ltehdo briyty Qatar Rosneftegaz 20% 11,270 2 Essar Oil Limited Oil & Gas Rosneft Oil Company Essar Group 49% 6,328 10 largest The Federal Agency deals in period 3 Bashneft ANK Oil & Gas Rosneft Oil Company for State Property 50% 5,299 Management bUiSlliDon40.6 4 Polyus Gold Metals & Mining Polyus Gold PMoilnyoursi tGyo Sldh aInretehronldaetirosnal; 32% 3,735 5 Bashneft ANK Oil & Gas Rosneft Oil Company Minority Shareholders 31% 3,112 As % of total t inra 2n0s1a6ctions 6 Essar Oil Limited* Oil & Gas UAdnvitiesdo rCyapital Partners Essar Group 24% 3,101 7 Morton Group CRoenals Etrsutcatieo n& PIK Group Alexander Ruchyov 100% 2,235 53.7% Indian Oil Corporation (IOC); 8 Vankorneft Oil & Gas Oil India Limited; Bharat Rosneft Oil Company 24% 2,000 PetroResources Limited 9 Gazprom Oil & Gas Gazprom Vnesheconombank 4% 1,919 10 Uralkali Chemicals Dmitry Lobyak The ONEXIM Group 20% 1,650 *Refects United Capital Partners Advisory effective interest only, based on its ownership (49%) of an SPV set up with Trafgura (49%) and Essar (2%) to acquire a 49% stake in Essar Oil Limited for USD6.3 billion. © 2017 KPMG. All rights reserved. 4 Russian M&A Overview 2016 Middle Eastern USD21.2 bn We expect to see more deals & Asian 80 of inbound M&A announced in across a wider range of countries 2016 sectors in 2017, and spread through more regions of the country. In the past the major M&A deals have spending. E-Commerce is one of the deal was a clear driver of this, been heavily concentrated in energy fastest growing areas of the economy investment from India more than and extractive industries, and while and is expected to continue to attract tripled to USD4.3 billion. China has we expect to see this continue in the investor interest this year. Logistics, long been expected to be a bigger and future, we also see activity stepping up warehousing and transport services more prominent investor in Russia, and in sectors linked to the government’s are an integral part of e-commerce while expectations remain high in 2017, localisation strategy. These include and also a critical to the government’s these may be tempered by regulations agriculture, food processing and localisation strategy. Investment imposed by the State Council to manufacturing. Banking and Insurance activity is also starting to pick up in control outbound investments which are key sectors of the economy which these areas to support their further have seen a sharp fall in Chinese are emerging from recessionary development. foreign direct investment (FDI) since conditions and, with support and October 2016. The expansion of The government’s geopolitical pressure from the Central Bank of China’s ambitious One Belt, One Road diversifcation policy is also starting to Russia (CBR), should be more open for programme, much of which transits result in higher investment infows, changes and restructuring, including across Russia, may provide incentives particularly from Middle Eastern and foreign investment. for Chinese investors to look at Asian countries which accounted for opportunities in Russia, although so far, There should also be more interest over 80% of the USD21.2 billion of many projects have focused on other and activity in sectors associated with inbound M&A announced in 2016. countries. the expanding economy and the return While the involvement of Qatar’s to growth of personal and household sovereign wealth fund in the Rosneft Russian M&A deal value by type Russian M&A deal volume by type (2010–2016), USDbn (2010–2016) 16.3 71 12.3 74 18.4 12.4 4.6 65 5448 58 7.9 31.1 13.6 13.8 21.2 73 63 15.8 107.3 92.2 1 50..19 15.3 3592 7513 48 41 476 347 379 53.9 40.6 57.3 36.0 39.3 175 178 213 229 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 Domestic Outbound Inbound Domestic Outbound Inbound Source: KPMG analysis Source: KPMG analysis © 2017 KPMG. All rights reserved. Russian M&A Overview 2016 5 Russian outbound 2016 marked the frst time since international commodity trading M&A tripled in value to our annual review started in 2005, frm Trafgura2. Elsewhere, Rosneft that no Russian acquisitions were consolidated its interest in Egypt’s announced by US strategic investors1, Zohr oil feld by acquiring a further 30% symptomatic of the geopolitical and stake from Italy’s Eni for USD1.1 billion. USD15.3 bn sanctions concerns of this investor Despite the perceptible increase in group. And while the proportion of total optimism in the Russian economy, inbound M&A originating from Europe which, for example, resulted in the (67%) remained healthy, the aggregate RDX Index of Russian foreign listed value of such deals fell to USD1.4 billion depository receipts rising by more (7% of total inbound M&A – well below than 52% in 2016, concerns over the long-term average), as the average geopolitics and sanctions remain deal size fell by almost two-thirds to a reality which potential investors USD64 million, refecting the cautious take into account and add a greater Despite the perceptible nature of investors from the region. sense of caution to than economic increase in optimism in the Meanwhile, Russian outbound M&A expectations might otherwise warrant. Russian economy, concerns tripled in value to USD15.3 billion on But, as the backdrop remains stable, over geopolitics and the back of the Essar Oil deal, which as is expected, and the economy sanctions remain saw Rosneft acquire a 49% stake in drifts back to growth in the coming the integrated oil and gas company year, and the Administration focuses a reality. for USD6.3 billion, and United Capital more on economic priorities for the Partners acquire an effective stake next Presidential term, the trend in of 24.01% worth USD3.1 billion via M&A activity is expected to continue its interest in a consortium with the growing. 1Kraft Heinz acquisition of the Ivanovsky Baby Food Production Plant in August 2015, was the last deal announced by a US strategic investor. However, US fnancial investors, including hedge funds acquired 36% of the 5.2% stake in Moscow Exchange MICEX-RTS, sold by China Investment Corp in February 2016. 2On 15 October 2016, Trafgura (49%), United Capital Partners Advisory (49%) and Essar (2%) formed a consortium SPV that purchased a 49% stake in Essar Oil Limited for USD6.3 billion. © 2017 KPMG. All rights reserved. 6 Russian M&A Overview 2016 2016 in Review Despite the intensity of media headlines concerning Russia, much of which will have at least contributed to the perception of Russia risk and delayed some deals, 2016 was actually a much calmer year in terms of events and a year when many economic factors improved. At the headline level GDP is Agriculture was expected to have contracted one of the best 2b0y1 05.32. %Be, cloowm tphaarte wd atos a–2 s.i8g%ni ifnc ant performing divergence between the consumer sectors, posting and construction sectors and a year-on-year those areas of the economy which increase of 4.8 benefted from the weak ruble and import substitution. In the former category retail sales declined by over 5% last year as consumers continued to be squeezed in real terms and confdence indicators showed widely held concern about the future. Agriculture was one of the best performing sectors, posting a year-on-year increase of 4.8%. The agriculture sector specifcally benefted from the lack of imported competition, the weak ruble and the fact that it has been identifed as a high priority by the government. It is also a sector that remains in the M&A spotlight of many foreign players. 3 Details on macroeconomic trends are presented in Appendix Macroeconomic trends and medium term forecasts © 2017 KPMG. All rights reserved. Russian M&A Overview 2016 7 The main message concerning the economy is that it was pulling out of recession in 2016, with some sectors recovering faster than others, and that overall the position was a lot calmer. Although the budget defcit Improving business confdence was larger at 3.5% of GDP, it has been supported by the was covered by transfers from actions of the CBR, particularly the Reserve Fund and with little in reforming the banking and need to resort to debt fnancing. insurance sectors, and success Russia’s sovereign external debt of the Ministry of Finance in to GDP was only 4%, one of the managing public fnances lowest ratios in the world, while through the recession. Investors total external debt to GDP was were also greatly encouraged by an equally comfortable 35%. the evidence that the government The cost of debt servicing fell is now very focused on creating to USD27 billion, from USD60 and improving conditions to billion in 2015, and capital outfow boost investment and to create totalled only USD15 billion, or greater sustainable diversifcation one-tenth of the 2014 fgure. across the economy. The emphasis on creating geopolitical The ruble exchange rate was diversifcation and efforts to also much less volatile in 2016 ensure no further escalation of than was the case in previous the confict with Ukraine during years, which has also contributed 2016, also helped improve the to the improving perception of attitude towards Russia risk investment in Russia. Partly this amongst some investors, thereby was as a result of the rise in the fostering a greater willingness to average oil price over 2016. But look at investment opportunities the stability was also achieved as the year ended. because of effective CBR policy statements and monetary actions. One of the benefts of that effective strategy was to bring headline infation at the end down to 5.4 of last year, a record for modern day Russia © 2017 KPMG. All rights reserved. 8 Russian M&A Overview 2016 2017 Outlook 2017 looks to be a more promising year for The Russian government does not expect any investment activity and deal volumes. substantive changes in the important sectoral sanctions in 2017, a position supported by analysts and evidenced by the EU’s recent decision to extend restrictive measures until September. It is more likely that the subject will be more closely scrutinized in late 2018. Clearly what happens in eastern Ukraine will have a major impact on sanctions but most analysts expect to see a fresh catalyst for talks only after the EU elections. But the prospect of sanctions for longer is not expected to delay the recovery in FDI or in M&A deals, with US strategic investors the possible exception. In early February one of Russia’s biggest retailers, Detsky Mir, successfully raised USD355 million from In general, investors will be its IPO on the MICEX exchange, with 90% of shares encouraged by the fact that purchased by non-Russian investors, mainly investment the economy avoided the funds4. Looking at the concerns which have held back, or steep decline that many had slowed, investor activity over the past three years, this expected as a result could give added reason to be more optimistic as we move further into 2017. Despite the egregious international headlines of the oil price concerning Russia through the 2nd half of last year, sanctions & collapse analysts expect this year to be much calmer. Russian authorities have stated that they wish to concentrate more on preparations for domestic economic reforms while the new US Administration has made clear it The economy adjusted relatively quickly and intends engaging with Russia with greater pragmatism. calmly to the new situation and is now drifting Brexit and several major elections across the EU will back to growth in 2017. Also, fears that Russia mean that the focus of interest will be more inwards in would run out of money proved unfounded the region while the chorus of those looking to improve and the country’s balance sheet and its ability trade and political relations with Moscow is growing to fnance the budget expenditures have also louder. China will hold an important fve year People’s greatly improved. Congress in the autumn so no major changes to its Over the last three years the government foreign policy or activities are expected in 2017. has increasingly shifted its main focus from geopolitics to reforming the budget amid deteriorating economic performance, and in doing so, creating conditions to attract 4 (h UttKp :3//5w%w, wU.Sin 2te5r%fa,x E.cuormop/nee 2w0s%in,f R.aussps?iiad =107%33,2 o4t9h)ers 10% moeares uinrevse sthtmate wnti lsl pleeandd tion gg,r teoagterth eecro wnoitmh ic diversifcation and a higher level of sustainable long-term growth. © 2017 KPMG. All rights reserved.

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