Options as a Strategic Investment

Invest in Ukraine now as crisis creates good deals.

 I will share some reflections on the state of mergers and acquisitions (M&A) market and discussions on the impact of the crisis on the M&A landscape in Ukraine.

The M&A activity in Ukraine during recent years and how is the economic recession affecting M&A activity?

Despite the crisis, 2008 was the best M&A year in Ukraine’s history, both in the value of deals and volume of transactions. The M&A market grew by 20 percent with respect to 2007, with about $9.2 billion worth of deals conducted. In contrast, we see substantially less transactions closed in the first quarter of 2009, compared to the first quarter of last year.

This trend may be reversed later in the year, but could also signal a downtrend for 2009 versus 2008. Experts in the market signal that there are many M&A dialogues ongoing and the necessity to sell or restructure businesses is more pressing because of the crisis environment. The crisis is putting a lot of pressure on some companies. There is expectations amongst financial players that by the end of this year the number of transactions will have an upswing while the average deal value will be lower than 2008.

A crisis can be supportive to a certain category of M&A activity. Before the crisis, mergers and acquisitions were driven by foreign investment into Ukraine, which was seen as a promising emerging market. Now, M&A activity is more focused and may become more domestic driven on distressed companies or companies with liquidity needs but no access to the debt and equity markets. The crisis typically forces the business community to think harder about M&A options as a strategic tool to solve challenges, than a bull market does.

M&A deals ongoing in certain sectors

There are broad M&A activities ongoing now for the aforementioned reasons. In the banking sector we see some activity due to the current recapitalization needs. High levels of leverage are forcing parts of retail sector to restructure. Overall, consumer sectors will remain active for the simple reason that hryvnia devaluation is making most imports unsustainable. Companies with substantial imported goods before the crisis might look to buy domestic production to avoid the currency volatility. The agriculture sector is doing reasonably well due to capital need to meet both domestic but also international needs for products from this sector.

Valuations for Ukrainian assets have plunged

Valuations of assets have clearly taken a beating. The drop is driven by both the global environment and sector specific elements. In the financial sector, for example, valuations have dropped 70 to 80 percent. For consumer companies, it’s probably closer to 30-40 percent. Ukrainian valuations in the middle of 2008 were inflated, probably by as much as 30-35 percent. It was a premium which was not justifiable by the underlying drivers or structure of the Ukrainian economy at that time. Investors as well as financial institutions offering these assets underestimated or ignored the structural weaknesses of the economy, the lack of political unity and weak infrastructure.

Invest or wait?

This is the strategically right time for investment into Ukrainian assets. There are obviously risks but valuations are lower and assets are more available and there is larger competition to get hold of investors money, and this should drive the values down as well. At the same time, the mid-term prospects for Ukraine remain strong. In the near term, valuations will go up, in particular for those companies that will come out of the crisis stronger and especially after the global economy picks up, and when the elections are over. Said this, there is always a need to sort out the bad deals from the good ones. Transparency combined with underlying assets foundation is always good to look for when doing a deal in Ukraine. All too often deals are made on a too weak due diligence of the asset and its operations and ownerships, and fail from this.

Sectors to focus on

As stated above, finance, consumer related businesses and agribusiness are sectors on the top shelf at the moment. Emerging new energy companies would also be a strategically sound investment approach if you are in for the longer haul. Invest in sectors that are less export-oriented and in those companies that are focused domestic. Look at sectors where companies have steady cash flows and low debt levels.

M&A advisers in Ukraine

The Ukrainian M&A advisory market is still immature with not too many serious internationally experienced players in it. In general, there are mainly London-based banks with small operations or no operations in Kyiv and a number of local players with a business model historically built on a brokerage approach. Some few advisor companies have dedicated team based in Ukraine with international market deal experience. These latter ones are more willing to share the transaction risks with investors. This makes it easier to get investors to trust advices given, as the advisors take part of the risk in a deal as well.There is a broad variety of fee structures that are applied, fees are now more linked to the valuations that could be achieved combined with a fixed-fee component.

Do i recommend some advisors, certainly i do, give me a signal and i will share them with you, contact me at sak@ec-ba.com

You can also read more about me at www.ec-ba.com