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Ukrainian agribusinesses eyeing vertical integration, international expansion

Ukrainian agribusiness

Strategic Considerations: Ukraine’s agribusinesses are eyeing expansion opportunities, looking atboth domestic growth to achieve vertical integration and international acquisitions.

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Source: REDD Intelligence

But inbound investment remains muted, with recent land reforms doing little to open the market for international players.

  • Around two-thirds of USD 159m worth of 1H20 M&A transactions were in agriculture sector
  • Major agribusinesses such as MHP are targeting vertical integration
  • Land reforms implemented, but limit ownership to 100 hectares and exclusively for Ukrainians

Amid a gloomy outlook for inbound investment into Ukraine, the country’s agribusinesses continue to seek opportunities to expand both domestically and internationally, market observers told this news service

Ukrainian M&A activity dropped sharply in early 2020 following the pandemic, according to a report published by KPMG in July. Deal volume fell 43% YoY in 1H20 to 25 announced transactions and deal value slumped 79% to USD 159m.

But despite foreign direct investment being in the doldrums, Ukraine’s agribusinesses are eyeing growth.

Major sunflower oil producer Kernel, for example, is seeking to use sunflower meals or other oil extraction by products to fuel an electricity production plant, noted Illya Segeda, M&A principal at KPMG, and has earmarked USD 170m over the coming years to fund such investments.

At the same time, Kernel is exiting some international investments, having sold its stake in Russia-based Port Taman to VTB earlier this year.

“One of the trends we are observing is attempts of […] companies to do vertical integration,” said Segeda. For example, poultry producer MHP is launching retail meats supermarkets in Ukraine.

As well as domestic expansion, MHP is also looking for opportunities abroad, said Segeda. “I know that MHP has been active for years looking into opportunities throughout Europe […] so they are on the lookout for quite a while.”

“I’m sure they will do more. They are too big to sit on what they have. They need to grow their business product, and the bigger you get, the harder to grow both top and bottom lines.”

Ukrainian meat producers KSG Agro and Pan Kurchak, as well as food producer
Delta Wilmar, are also targeting vertical integration, said Segeda. “Obviously at some point they will become too big to grow further in Ukraine and they will have to think about growing further abroad.”

Others are already looking further afield. Ovostar Union, another poultry and eggs company, plans to invest around USD 100m in egg production in Latvia.

Despite the muted M&A market, agribusiness activity remained comparatively resilient. Agriculture transactions accounted for nearly two-thirds of 1H20 M&A activity by value, compared to 23% last year, according to KPMG’s report.

“The sector is set to see further activity in 2H20, as local businesses seek to consolidate their landholdings before international players are able to enter the market,” the reports states.

Ukraine’s parliament passed a bill reforming the agricultural land market earlier this year. However, the legislation restricts the sale of land to Ukrainian individuals only and limits ownership to 100 hectares per person, severely limiting any M&A opportunities.

“It’s […] like a half-step toward liberalization of the market,” said Zoryana Sozanska-Matviychuk, head of M&A at Redcliffe Partners, which advised Saudi Arabia’s SALIC on the purchase of Mriya back in 2018. “It’s a half-reform, if not poor reform, so there’s not too much [international] interest.”

The IMF forecasts Ukraine could attract billions annually if the ban was lifted completely. But while the legislative landscape deters most international players, major domestic agricultural corporates appear content with the status quo.

“All major [domestic] agricultural players are happy the way things are today. They don’t own the land, but they control it. They do business without having title to the land,” said Segeda. “Some of them might be afraid that once land is a good, large international investors can come and buy it and interfere with the way they do business currently.”

Uncertainty around the land market is stalling major land market transactions, agreed Tim Kogan, an independent Ukrainian investment banker specialized in M&A.

“That imposed significant restrictions on international investments into Ukrainian agriculture, but still I would say that this market is interesting and we observe that some kind of M&A [is] happening between Ukrainian agricultural groups in terms of reshuffling their land banks and clusters,” he said.

Ongoing activity includes transactions in agriculture-related infrastructure, such as terminals or silos, agreed the experts.

“[Companies] have some land bank and they want to expand the business by adding infrastructure around this,” said Redcliffe’s Sozanska-Matviychuk, adding that her firm recently completed a due diligence report on behalf of an international buyer considering acquiring a terminal in Ukraine.

Some have tried to find creative ways around the recent regulations, she said, but room for maneuver is limited. In theory, companies could fund a few individuals who then each purchase 100 hectares to slowly create a land bank. “But I mean because of these restrictions […] there’s not too much room for a big M&A to happen right now unfortunately.”

Illya Segeda, M&A principal at KPMG in Ukraine

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