Russian M&A Overview 2016

32 Pages·2017·2.62 MB·English

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.