Russian M&A down by 29% to USD55.8 billion in 2015 as transaction volumes fell by 19% and average deal size was 11% lower.
Russian M&A saw 504 deals announced in 2015, worth a combined USD55.8 billion – although this represents a 29% decline in value terms, it was at the upper-end of our previous forecast for the year of USD40-60 billion. Transaction volumes fell by 19% due mainly to weaker domestic activity, while average deal size continued its downward trend of recent years, dropping a further 11% to USD157 million.
The economic downturn, falling oil price, and constrained access to financing, further eroded confidence amongst Russian deal-makers. This coupled with misaligned valuation expectations amid rouble volatility saw domestic M&A fall 37%, to USD36.1 billion – its lowest level in more than a decade – and outbound M&A down by 39% to USD8.6 billion. International players meanwhile sought to align the performance of their Russian assets with the new operational realities, leading some to review their market position and consider the likely mid to long-term returns of continued ownership.
Russian deal-making couldn't have been in more stark contrast to the global picture, as M&A increased by 30% to a record-breaking USD4.3 trillion, on 3% lower transaction volumes. Consequently, Russia's share of global deal value fell to just 1.3% – well below the average of 4.3% over the last decade. And although Russian M&A ranked second amongst the BRIC nations, it was dwarfed by China's USD491.4 billionof deals.
In value terms, 45% of Russian M&A was concentrated amongst the ten largest deals, up from 40% the previous year and compared to 19% globally. However, activity continued to be dominated by deals valued at less than USD100 million, which accounted for 51% of total deal volume in 2015 but only 12% of value.
Although oil and gas deals tumbled by 43% in 2015, to USD15.6 billion, in part due to the dramatic slide in the price of oil and impact of sanctions, it was still the dominant sector in Russian M&A. Real estate and construction remained the most active sector with a total of 88 deals, 55% lower than the prior year, with office, commercial, industrial and warehouse transactions accounting for two-thirds of total volume.
So, what does the outlook hold for Russian M&A in 2016?
Based on the consensus of low oil prices with further downside risk, it seems that the Central Bank's prediction of a further 2–3% contraction of the Russian economy in 2016 if the oil price averaged USD35 a barrel, could increasingly become a reality.
"With so many variables at play, it's difficult to predict specific trends however, if markets remain volatile and sentiment negative, we expect to see further consolidation in the financial services and consumer markets sectors as the situation bites further into profitability" said Lydia Petrashova, head of Deal Advisory for KPMG in Russia and the CIS.
Inbound investment from Europe and the US looks likely to remain depressed even if sanctions were to be lifted in the second-half of 2016 should the Minsk ceasefire agreement be fully implemented. Sean Tiernan, head of Advisory for KPMG in Russia and the CIS expects "a continued pivot to Asia-Pacific, and possibly the Middle-East, for investment into key sectors of the Russian economy, such as energy and natural resources, and potentially agriculture" during 2016.
The number of Russian companies rumoured to be for sale fell to the lowest level for five years in the second-half of 2015. Nonetheless, Robert Vartevanian, head of M&A at KPMG in Russia and the CIS believes that "a continued recession will see further opportunities for strategic investors with strong balance sheets, and financial investors sitting on dry-powder, to take advantage of financially distressed fire-sales". However, Robert added that "although valuations started to moderate to more realistic levels in 2015, we expect some continued disconnect between buyer and seller price expectations, which may see some transactions fail to get off the ground".
The appetite and capacity of Russia's largest listed companies for M&A improved noticeably in 2015, as market capitalisations stabilised following falls of nearly 50% in the previous year. Forward P/E ratios, a measure of appetite, increased by an average of 36%, with only the chemicals sector demonstrating a negative outlook. Similarly, net debt to EBITDA ratios, a measure of capacity, is forecast to improve by an average of 7% by the end of 2016, returning to 2014 levels, although the metals and mining, financial services, and automotive sectors reported reduced capacity.
With interest rates widely expected to be cut in 2016 as the headline rate of inflation falls, more capital projects should become viable, although the weaker economic outlook could still temper investment.
Overall Robert Vartevanian expects Russian M&A to soften further in 2016, "possibly by up to USD10 billion, due to lower average deal sizes, and to a lesser extent reduced volumes – domestic M&A will be most affected given the weak economic outlook". "Despite a depressed rouble, outbound M&A could be used to diversify treasury operations and funding sources, which remain more limited for purely Russian players" said Lydia Petrashova, adding "it remains to be seen if the momentum of inbound M&A from Asia-Pacific can be sustained in 2016, in the continued absence of western investment". We remain optimistic that the market could show signs of recovery from late 2016 if the oil price recovers in the second-half of the year.
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 Goldman Sachs, Citigroup, Bank of America Merrill Lynch and Morgan Stanley have forecast a low of USD20 a barrel, Standard Chartered a low of USD10 a barrel, and Barclays Investment Bank and UniCredit an average of USD37 a barrel in 2016