2012 proved to be a strong year for Russian M&A.
The value of deals announced in Russia increased to USD139.5 billion, boosted by Rosneft’s headline grabbing USD56.0 billion acquisition of TNK-BP; the single largest deal ever in Russian M&A and the second largest deal globally during 2012. However, the real strength of the market was illustrated by the underlying activity – the value of deals announced excluding TNK-BP increased by 21% to USD83.5 billion while the volume of deals increased by 12% demonstrating the overall resilience of Russian M&A in light of the continued uncertainty in the global economy.
By contrast, the value of deals announced globally increased by just 2% in 2012 to USD2.59 trillion notwithstanding the three largest deals for a number of years – the separation of Abbott's research-based pharmaceutical and diversified medical products companies (USD66.4 billion), Rosneft’s acquisition of TNK-BP and the pending merger of Glencore and Xstrata (USD45.8 billion). Although deal value increased, the volume of deals globally fell by 10% to the lowest level since 2005; activity in the USA and UK declined by 5% and 4% respectively, while the rest of Europe saw deal volumes fall by 19% as confidence was knocked by the eurozone debt crisis that rumbled on throughout the year.
Though M&A in Russia remained heavily weighted towards domestic activity during 2012, the share of cross-border deals increased. The volume of cross border transactions announced increased by 10% to 124 deals, while the combined value of these deals increased by 27%, to USD33.2 billion, representing 40% of the Russian market (2011: 38%). The value of inbound transactions in 2012 totaled USD17.1 billion, an increase of 24% compared to an aggregate decline of 14% across the BRIC nations. Three deals accounted for 52% of all inbound investment in 2012; the secondary public offering (SPO) of Sberbank of Russia, initial public offering (IPO) of MegaFon, and the acquisition of SABMiller’s beer business in Russia and Ukraine by Turkey’s Anadolu Efes. The USA, UK, China and Japan were the most active inbound investors, announcing a combined total of 22 deals worth USD2.4 billion.
During 2012 there was a healthy diversification of deal flow away from the three energy and natural resources sectors, that have historically played a dominant role in shaping the landscape of Russian M&A, towards the communications and media, and financial services sectors. While the metals and mining, oil and gas and power and utilities sectors continued to account for a quarter of all activity in 2012, their share of total deal value declined to 31% (2011: 43%). This predominately reflects the continued absence of activity amongst the large coals miners and integrated steel producers amid falling commodity prices, and substantial existing capex programs. Altimo’s restructuring of its interests in the telecoms market and the acquisition of Scartel by Mr. Alisher Usmanov accounted for 77% of deal value in the communications and media sector. Meanwhile, the secondary public offering of Sberbank of Russia, its expansion into Turkey via the acquisition of Denizbank and conversion of Gazprombank’s subordinated debt to equity accounted for 76% of deal value in the financial services sector. Outside of the energy and natural resources sectors, real estate and construction was the only other sector to record a decline in deal value during 2012 as deal volumes remained flat.
Rosneft’s acquisition of TNK-BP will create the world’s largest publicly traded oil group, and at USD56.0 billion the transaction is more than ten times the size of the next largest deal announced during the year, and equal to 67% of the total underlying value of deals announced in Russia in 2012. The nine next largest transactions had a combined value of USD27.7 billion, or one third of the total value of Russian deals announced in 2012. Anadolu Efes acquisition of SABMiller’s beer business in Russia and Ukraine, and Vladimir Lisin’s acquisition of the remaining 25% of Freight One not already owned, were the only deals outside of the oil and gas, telecoms and banking sectors to make the top 10.
The Russian M&A market continued to demonstrate significant volatility during 2012 despite overall strong underlying growth. Deal volumes were 43% ahead of prior year by the end of Q1 2012 although this rate of growth slowed to 7% by November as the number of deals valued at less than USD100 million fell by half during the second half of the year. In spite of this, transactions valued at less than USD100 million continue to be at the core of Russian M&A activity, although as a proportion of total they declined to 68% (290 deals). The number of transactions valued in excess of USD1 billion increased by 18% during 2012, with the combined value of such deals increasing by 25% to USD41.1 billion. However, with only one deal valued in excess of USD1 billion in Q1 2012, the total value of deals fell by 42%. This compared to a further 19 deals of this size being announced following the presidential elections, which was a key driver of the 21% growth in underlying deal value by the year end. Two thirds of all announced deals valued in excess of USD1 billion were concentrated in the communications and media, financial services and oil and gas sectors. The average transaction value increased by 8% in 2012 to USD194 million.
State owned enterprises were the most active participants in Russian M&A during 2012. VTB Bank, Sberbank of Russia, Rosneft and Inter RAO UES were involved in a total of 45 deals with a combined value of USD18.9 billion, or 23% of the underlying value of Russian M&A. During the year, VTB Bank was involved in 14 deals, the most announced by any one party, while Sberbank of Russia was involved in the greatest value of deals at USD5.9 billion.
Rosneft and Inter RAO UES announced a total of 9 and 10 deals respectively, which in
common with the majority of serial participants in Russian M&A, were focused on their core markets. The majority of deals involving Sberbank of Russia and VTB Bank were outside of their core market, in part reflecting the continued divestment of stakes acquired during the financial crisis and their investment activities. There was a significant number of tender offers and squeeze out transactions during 2012 as shareholders sought to eliminate minority holdings.
As anticipated, the pace of privatizations gathered momentum in 2012. Apart from the SPO of Sberbank of Russia, privatizations raised in excess of USD5.5 billion, and were principally concentrated in two sectors. The USD1.62 billion privatization of the remaining 25% stake in Freight One was the largest deal in the transport, logistics and infrastructure sector, which also included the privatization of the gas transportation services company SG-Trans, and two ports – MMTP and Vanino Commercial Sea Port – which altogether raised USD1.3 billion. Meanwhile in the metals and mining sector, USD1.3 billion was raised from the privatization of stakes in the titanium producer VSMPO-AVISMA and fertilizer producer Apatit.
OutlookWe expect to see continued growth in the underlying value and volume of M&A in Russia during 2013, albeit at more modest rates than experienced in 2012.
The energy and natural resources sectors will continue to play an important role, although activity within each sector will result from different drivers. Given the outlook for commodity prices we expect activity in the metals and mining sector to remain subdued as the large and integrated players focus on cost efficiencies and capital deployment. Oil and gas major’s are likely to make further divestments of non-core assets in order to optimize portfolio returns, while foreign players will continue to seek opportunities to tap into Russia’s vast reserves, either through acquisitions or joint ventures. And we expect activity in the power and utilities sector will be driven by further consolidation of assets, ranging from generation through to distribution, by the State owned enterprises.
Further regional consolidation of broadband operators is likely in 2013, albeit at a much lower scale. More importantly we anticipate that the carve out of broadband assets by mobile network operators will be a key driver of growth within the telecoms sector, which in turn will drive the communications and media sector.
Public offerings of VTB Bank, the diamond producer Alrosa, shipping company Sovcomflot, and nanotechnology focused RUSNANO have been rumored for the Russian market in 2013, as the government pushes ahead with its privatization agenda. We also expect to see further privatizations in the transport, logistics and infrastructure sector during 2013, driven in part by the need to attract investors to modernize ageing assets. Many private companies that previously announced plans for an IPO will also be watching the market closely as their need for external finance remains. However, questions remain over price valuations and the capacity of the Russian equity markets to absorb such a large number of offerings.
Overall we anticipate the level of activity in the real estate and construction sector to remain fairly stable despite a number of large deals being expected to close in this sector during 2013, including the acquisition of the Metropolis shopping center by the Morgan Stanley Real Estate Fund.
Russia continues to attract interest from international investors, and sentiment appears to be improving across the global economy following the last minute deal by US politicians to avoid the fiscal cliff of tax and budget cuts, renewed optimism that the worst of the eurozone crisis may finally be over, and with equity markets rising. This combined with governments’ ongoing attempts to increase financial transparency and open up markets to greater levels of competition should continue to drive foreign direct investment, although the decline in the absolute number of inbound transactions during 2012 suggests that concerns regarding the perceived risks of doing business in Russia may have yet to be overcome.