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KPMG, a global network of firms providing audit, tax and advisory services, has published the results of a survey of Russia’s M&A market in 2010 and Q1 2011.
After only the first quarter of 2011, significant inbound M&A activity has already been witnessed, accounting for 47% of the total M&A deal volume in Russia, compared to roughly 14% of total investments in 2010.
2010 was clearly a year of recovery for Russia’s M&A market, which almost doubled in size, growing from USD 48.8 billion to USD 95.6 billion. For the remainder of 2011 KPMG expects increasing investor confidence to generate more inbound deal activity from strategic trade buyers, particularly in sectors such as consumer markets.
Despite the significant upturn, the market remains well down on its pre-crisis level, and its share of the global M&A market in 2010 (3.85%) was less than it was in 2008, when the market was valued at USD122.4 billion and its share of the global market was 4.96%.
The bulk of Russia’s M&A market remains driven by a few very large deals. The three largest accounted for roughly a third of the market’s size in monetary terms in 2010: VimpelCom announced a merger with Egypt’s Weather Investments, Lukoil bought out its own shares from ConocoPhilips, and Uralkali acquired Silvinit.
At the same time, Russia’s M&A market is primarily reliant on domestic transactions. If transactions accounting for more than 15% of a market segment are excluded (on the grounds that such major transactions are too rare to include in an analysis of the trend), it becomes clear that in terms of its structure and growth Russia’s M&A market is driven by domestic transactions – the figures once the biggest transactions have been removed from the equation show 49% growth in the volume of domestic transactions in 2010.
The same also applies to specific sectors. If the biggest deals are ignored, the structure in 2010 remains the same as it was in 2009, with oil & gas, metals & mining, the consumer sector, retail & agriculture dominating.
Investors focused on strategic rather than speculative transactions as the global markets stabilized. For example, metals & mining companies and communications service providers entered into deals as part of vertical integration to strengthen their position in terms of distribution, logistics and supply of raw and other materials. In other sectors, such as oil & gas, most of the major deals were linked to consolidation and the future growth of major national companies.
Although innovation and modernization are government priorities, the relevant programs, including the new privatization program, have yet to have any significant effect on the conclusion of major transactions and the M&A market as a whole. The government is considering various methods to accomplish the privatization of its stakes. The planned privatization relates to stakes in companies such as Vneshtorgbank (VTB), Sberbank, Russian Railways, Sovkomflot, Rosneft and RusHydro. For a number of smaller, state-owned oil & gas assets, the government plans to fully privatize these enterprises in 2011.
With regard to market growth in the short term, the number of transactions involving foreign investors is expected to increase in 2011-2012. The number of deals where a Russian company acquires an asset abroad is also anticipated to increase, especially in the oil & gas industry, as well as in other industries where access to advanced technology will be possible.
Shawn McCarthy, Partner, M&A Group at KPMG in Russia and the CIS, commented:
“M&A activity will continue to be driven by trade buyers looking at transactions that underpin their respective growth agendas in the region. We expect more inbound deals as investor sentiment warms, partially as a result of the government’s efforts to attract foreign investment and improve the perception of Russia as an investment destination. While recovery has generated increased interest in almost all industry sectors, save for real estate which remains soft, we see a significant uptick in the number of opportunities emerging in the consumer and natural resources spaces.”
It is notable to see large inbound investments during the first quarter of 2011 on behalf of leading global companies, including the likes of BP, Total and TPG Capital. KPMG believes that foreign buyers will continue to find compelling acquisition and investment opportunities in Russia during the remainder of 2011 and expects M&A volumes to substantially outpace 2010 results.
About the Survey
KPMG’s survey on the M&A market in Russia is an annual publication on M&A transactions involving Russian companies. The study is based on analysis and partial validation of data from the Thomson Deals and Mergermarket databases, as well as analysis of press releases from the companies involved in the deals, in order to identify basic M&A market trends. The analysis includes both successfully completed transactions and those that have been announced, but are yet to be completed. The survey covers deals announced in the period from January 1, 2010 to March 31, 2011.
About KPMG in Russia and CIS
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 150 countries with 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG has been operating in Russia for twenty years. For the last years KPMG in Russia and the CIS has been one of the fastest growing practices in KPMG worldwide.
In the CIS, KPMG now has offices in Moscow, St. Petersburg, Yekaterinburg, Kazan, Nizhny Novgorod, Novosibirsk, Rostov-on-Don, Krasnoyarsk, Kazan, Almaty, Astana, Atyrau, Bishkek, Kiev, Donetsk, Lviv, Yerevan and Tbilisi, employing together over 3,000 people.
