KPMG published research on the M&A market in Russia in 2011.
2011 was a rather disappointing year for M&A both globally and in Russia. Compared to the 6% decline in the value of global M&A deals, Russia’s M&A market experienced an even stronger reduction in value, by almost 28%. This is a sign of its continuing higher volatility, but also the result of fewer mega deals taking place than in previous years. The top of the league table, as well as overall activity, is dominated by domestic activity, reflecting the current low appetite of foreign investors in relation to acquiring Russian assets. The large share of oil and gas and metals and mining deals among the high-value transactions mirrors the industrial landscape of Russia. The significant outbound investment in social media and e-commerce businesses was primarily driven by one player, which we do not believe is indicative of a future trend in the Russian communications and media sector more broadly.
The impact of global political, economic and regulatory events was reflected in 2011 M&A activity. A total of 41,328 deals were announced globally during 2011, a fall of 3% – equal to half of the increase in activity recorded in 2010. The combined value of deals announced in 2011 totaled USD2.25 trillion, down by 7% compared to growth of 21% in 2010 deal value. Continued appetite for mega deals, those valued in excess of USD10 billion, in the US and Europe underpinned the high total deal value in 2011. The Russian M&A market has experienced considerably greater levels of volatility over the last five years compared to global activity. Russia saw a much more pronounced fall in activity during 2009, and whilst global volumes have remained above 2006 levels for the last two years, Russia is still below 50% of the 2006 level by number of deals. However, M&A activity in Russia demonstrated comparatively strong resilience in 2011 in a global context. The number of deals announced increased by 5% to 394, although unlike the US and Europe, M&A in Russia is dominated by seed capital (<USD10 million) and mid market (>USD10 million <USD250 million) transactions, which accounted for 85% of all deals. 2011 started as 2010 had ended, with almost two thirds of total deal value announced in the first half of the year (77% in H2 2010). Mounting concerns regarding the economic outlook in Europe coupled with the typical slowdown in activity ahead of Russian presidential elections resulted in the brakes being applied during the second half of the year though. As a result, the value of deals announced in 2011 totaled USD71.1 billion, which excluding the USD20.7 billion acquisition of Weather Investments by VimpleCom – one of the ten largest deals globally in 2010 – represented a fall of 8%.
M&A continues to be a largely domestic affair in Russia; inbound activity accounted for 20% of all transactions in 2011 (2010: 18%), whilst outbound activity rose to 10% (2010: 6%), driven predominately by the communications and media, and metals and mining sectors, which accounted for more than half of all outbound transactions.
Key players in Russian M&A during 2011 included Digital Sky Technologies, Gazprom, NLMK and VTB Bank, announcing 21 deals between them with a combined value of USD23.1 billion, or nearly one third of the total announced Russian deal value in the year. The largest player was VTB, which announced nine transactions during 2011 with a combined total value of USD10.0 billion, equal to 14% of the total Russian deal value. VTB’s largest transaction outside of its core financial services sector was the acquisition of a 20% stake in Metalloinvest for USD2.5 billion, partly through a debt-to-equity swap. Digital Sky Technologies, the Internet-focused investment firm, was a party to investor groups which announced six investments in global social media and e-commerce companies totaling USD4.45 billion during the year. Gazprom and NLMK each announced three transactions in their own core sectors during 2011, with combined values of USD4.0 billion and USD4.6 billion respectively.
The three energy and natural resources sectors – metals and mining, oil and gas, and power and utilities – dominated Russian M&A activity in 2011, accounting for approximately 45% of the total deal value and around 25% of the total deal volume, with a similar position in the previous year. The real estate and construction, transport and infrastructure, and financial services sectors saw a significant increase in their share of Russian deal value in 2011, whilst the communications and media sector accounted for a disproportionate share of deal value in 2010 due to VimpleCom’s acquisition of Weather Investments, as previously noted.
The top ten deals in Russian M&A during 2011 amounted to USD26.6 billion, equal to 37% of announced deals. Transactions in the energy and natural resources sectors accounted for seven out the top ten deals, including the largest and only inbound transaction, the USD4 billion acquisition of a 12.1% stake in Novatek by Total. Outside of the top ten, Luna Holdings (TPG Capital and VTB Capital) and the European Bank for Reconstruction and Development (EBRD) USD1.2 billion acquisition of a further 43.2% stake in Lenta, the Russian retail hypermarket and cash and carry chain, was the largest deal in the Russian consumer goods, retail and agriculture sector during 2011. The beginning of 2012 has been characterized by relatively low activity levels and the absence of large scale transactions. This was primarily due to the uncertainties surrounding the elections in Russia and the ongoing fiscal problems in the eurozone. Clarity over the economic priorities of the new government is expected to revitalize the markets.
Looking forward, we expect smaller domestic M&A deals to dominate the Russian market in 2012. These transactions will be driven by further consolidation in sectors such as retail, by ongoing vertical integration along the value chain in telecoms, and by the sale of non-core assets by the large industrial groups in oil and gas and potentially the metals and mining sector. Transportation and logistics deals are likely to play an increasing role, with some larger scale deals in this sector expected. In the financial services sector, smaller banks may engage in mergers to ensure they have the necessary scale to survive, while cross-border activity is expected to primarily be outbound and driven by the major state-controlled banks. The insurance market may experience some consolidation and potentially cross-border inbound interest. The revival of cross-border inbound transactions will very much depend on the overall development of the global markets, as well as improvement of the conditions for investment in Russia. Target sectors are mainly in the consumer and industrial markets (with the exception of natural resources and energy) and potentially the agriculture sector. Outbound activities will continue to be driven by downstream expansion along the value chain of energy and resource exports and the desire to acquire capabilities and know-how.
As in previous years, we do not expect a large uptake in large scale international private equity transactions in the short to mid-term. As Thomas Dix, Head of KPMG Transactions & Restructuring in Russia and the CIS noted: “For 2012 as a whole we expect generally moderate activity at the level of 2011, with an increase in transactions during the second half of the year. Whereas activity in 2011 started off strong and declined towards the end of the year, we expect 2012 to demonstrate the opposite, a mirror image of this trend – a slow start with a stronger finish.”