Mergers & Acquisitions
Global Legal Insights
Mergers & Acquisitions - 2nd Edition, Chapter - Russia
Vladislav Zabrodin, Managing Partner of Capital Legal Services
Anastasia Fomicheva, Associate at Capital Legal Services
In the midst of worldwide decline of M&A activities as a result of the financial crisis, the Russian M&A market has shown relatively stable growth over the last two years. In this article we have analysed M&A market trends and the current state of the market in 2011 and 2012.
Compared to the previous year, in 2011 the number of M&A deals increased by 17.2%, up to 614 transactions amounting to an aggregate of US$76.2bn.
Despite the fact that in the first part of 2012 the number of M&A deals fell by 6% (compared to the same period in 2011) to 267 transactions, amounting to an aggregate of US$43.49bn, the reason for this decrease lies mainly in the growth of the US dollar exchange rate. The growing exchange rate caused the average volume deals not to reach the US$1m threshold used for including M&A transactions into statistics. At the same time, the total value of the transactions completed in the first half of 2012 is deemed by many to be significant for the Russian M&A market.
According to experts the main reason for the above stability lies in the fact that the Russian M&A market is mainly of an “interior” or “domestic” nature. In 2011 and in the first part of 2012, the major part of M&A transactions, including the most valuable deals, were conducted by Russian companies.
58% of all Russian M&A transactions were completed with only Russian companies participating. However, the greater part of domestic transactions were announced and completed among just a few key players such as Gazprom, Digital Sky Technologies, NLMK and VTB Bank. The announced deals among the mentioned companies composed one third of the total number of M&A deals in 2011.
Among the domestic deals, transactions with the participation of state-owned companies were a significant part of the Russian M&A market by the number and by the value of the deals.
The most notable by value was the acquisition of 80.57% of the shares of Bank of Moscow OJSC by the state-owned bank VTB OJSC, amounting to US$3.9bn in September 2011. VTB bank is considered one of the largest players on the Russian M&A market. In 2011 it announced 9 transactions for a total value of US$10bn. Another large transaction completed by VTB bank was the purchase of a 20% share in a major mining production company, Metalloinvest, for US$2.5bn. On the other hand, deals related to the transition of state-owned companies to the private sector (privatisation) comprised a much smaller part of the Russian M&A market.
The most significant transaction in this regard was the acquisition by Independent Transportation Company of 75% shares of First Cargo Company OJSC from the state-owned company Russian Railways OJSC in October 2011. The amount of the deal was estimated as US$4.2bn.
Foreign input into the Russian M&A market was and still is minimal. Inbound transactions comprised up to 15% of the market in 2011. And in 2012 the volume of cross-border transactions related to foreign acquisitions in Russia is fi ve times less than in 2011, while the number of transactions has increased. The amount of the largest deal with foreign participation announced in July 2012 was US$50m.
In 2012 one of the biggest mergers in Russia completed between beer manufacturers SABMiller and the foreign Anadolu Efes was announced. The merger involved transfer of Russian assets with the value of US$1.25bn to the foreign investor.
Considering the above numbers it would be fair to say that foreign investors are participating in a small share of deals in Russia, all the while being rather selective and prudent with investments in Russian business.
According to experts on the market, this selective approach of foreign investors is mainly associated with the ongoing effect of the economic crisis in Europe and a certain political instability in Russia related to the recent presidential elections.
At the same time, Russian investors are becoming more active on the foreign markets. According to statistics, the number of outbound transactions with Russian participation has increased over the studied period of 2011–2012.
Considering the aggregate amount of cross-border transactions with Russian participation of US$29.65bn, 38.36% of this amount is Russian investments into foreign companies, which is 46.72% of the overall number of transactions on the Russian M&A market.
One of the major Russian deals within the period of 2011–2012 was the acquisition by the Russian bank Sberbank of the Turkish Denizbank, estimated at over US$3.5bn.
As concerns the volume of deals completed on the Russian market in 2011, the larger part of the M&A market (85%) was represented by so-called “minor” deals (less than US$10m each) and mid-size deals (from US$10m to US$250m).
In 2012 the number of minor transactions decreased by 3.6%, while the number of mid-size transactions decreased signifi cantly by almost 10%.
Results of offi cial surveys as to the grounds for this market state in Russia point mainly to economical and political reasons. In addition, the unclear legal regulation of foreign investments in Russian business and company governance requirements should be mentioned as some of the reasons for the limited foreign participation in the Russian M&A market and the tendency to conclude minor deals instead of major ones.
One of the main reasons for the decreasing number of foreign investments is that the Russian M&A market has been experiencing a high level of volatility over the last few years, which is definitely something that foreign investors take into account.
Another factor having a negative impact on the Russian M&A market is that the information on the deals, the acquirers and the sellers does not have to be announced or disclosed to the public.
Since Russian law does not specify any requirements related to the transparency and availability of information of a deal, the information and the amount of most of the M&A transactions are not disclosed. In 2011 only 43% of the total amount of the deals were disclosed or announced within the public domain.
Nevertheless, taking into account the above circumstances the Russian market is still very attractive for US companies investing into Russian business, which in turn could have a significant impact on the Russian M&A market development in the near future.
Significant Deals and Industry Sectors Focus
Historically in Russia the major part of M&A transactions are concluded in the energy and natural resources sectors. Particularly, the oil and gas sector, metal and mining, power and utilities sectors are the most valuable ones.
In 2011 these three sectors covered 45% of the total number of M&A deals, and seven of the ten top deals on the M&A market were conducted in these sectors. The largest inbound deal was related to acquisition of a 12% stake of a major producer of hydrocarbons, Novatek, amounting to US$4bn.
At the same time, growth of the Russian real estate and construction sectors, as well as transport and infrastructure sectors, makes them a significant share of the Russian M&A market, showing permanent growth in the number and value of M&A transactions.
The financial services sector of the Russian M&A market is more dependent and sensitive to the worldwide financial crisis. However, in 2011 and 2012 even this sector made up a relatively larger part of the M&A market as compared to previous years.
In the meantime, the large transactions completed in the minor sectors of the market have a certain positive effect on the sector volume. Particularly, the transaction on acquisition by Luna Holdings (TPG Capital and VTB Capital) and the European Bank for Reconstruction and Development (EBRD) for US$1.2bn of a 43.2% share stake in Lenta, the Russian retail chain, the largest deal on the Russian retail and consumer goods market, brought the sector into the list of the main sectors of the Russian M&A market in 2011.
Fuel and Energy Sector
In 2011 fuel and energy became the leading sector on the Russian M&A market. A total of 19 transactions, which include the top ones by value, were completed for the overall amount of US$4bn.
Meanwhile, due to the general decrease of M&A activities in 2012, at present the sector occupies only the third place among other industry sectors. A total of 14 deals were announced thus far, for a total amount of US$3.4bn.
Among the most valuable transactions, the following had a significant impact on the sector growth and its share on the overall M&A market:
An outbound transaction initiated by Gazprom OJSC was successfully completed with acquisition of a 50% stake in Beltransgaz OJSC (Belarus) from the State Property Committee of Belarus. This transaction is remarkable both by its value of US$2.5bn and the transfer of rights to a foreign public company to the Russian Gazprom, the biggest state-owned company. Being already a 50% owner of Beltransgaz OJSC prior to this transaction, once the above transaction was completed Gazprom became the sole shareholder of Beltransgaz.
Another high-profi le transaction of the sector with the volume of US$1bn was completed in March 2012 by AK ALROSA OJSC, one of the largest diamond mining companies in the world with 97% of all diamond production in the Russian Federation and 25% of the world’s diamond production. The Alrosa group of companies participated in a takeover in an industry that is non-core for the company, acquiring 90% of Geotransgaz CJSC and 90% of shares of Urengoi Gas Company LLC, which are developing companies with the potential to become the largest gas production companies in Russia. At the same time, Alrosa made an announcement that the acquired non-core assets are subject to further sale or transfer to the strategic partner.
The significance of this sector is continuously growing on the Russian M&A market. The most active industries developing in this sector are fertiliser manufacturing, polymer industry and pharmaceuticals.
This sector was among industry leaders during the second half of 2011. On the M&A market this sector took up a significant part, representing 17 transactions amounting to US$3.6bn.
The largest deal in this sector completed within the contemplated period of 2011–2012 was an acquisition of 100% of SIBUR-Mineral Fertilizers OJSC, a major supplier of ammonium nitrate used for mining works.
This transaction is a domestic M&A transaction executed between two Russian holdings specialising in different industries. Under the transaction the shares were transferred from Holding SIBUR to Holding Company Siberian Business Union for US$1bn. As a result of the deal, the Holding Company Siberian Business Union becomes a union of first-rate companies specialising in coal mining, mechanical production and transport services that is also dominant on the ammonium nitrate production market.
Real Estate Sector
The real estate sector is remarkable by the volume of transactions completed. In the fi rst part of 2012 a total of 23 transactions in the sector were announced. Their total amount is US$3.3bn.
One of the most important deals for the Russian real estate sector was completed in January 2012.
The acquisition of the Gallery trading center, the biggest trading center in St. Petersburg, by a major international investment fund, Morgan Stanley Real Estate Fund (USA), is remarkable in its signifi cance for the Russian M&A market in total. Under the transaction the Morgan Stanley Fund acquired the complex of assets of the Gallery trading center for US$1.1bn.
Moreover, Morgan Stanley assessed the investment prospects of the above real estate as very high. This acquisition can be defi ned as a significant example of high-profile cross-border M&A transactions, with participation by US business, and is of importance for the Russian M&A market in general.
This specific sector of the Russian M&A market is mainly influenced by both the worldwide financial crisis and restrictions of the Central Bank of Russia which is empowered to regulate banking activities and to implement additional restrictions in the sector in general.
One of the top deals of the Russian M&A market was related to the outbound acquisition by the state-owner Sberbank, the biggest bank of the Russian Federation, of a 99% stake of the Turkish bank Denizbank and its subsidiaries from the Franco-Belgian group Dexia. The volume of the acquisition
is calculated as US$3.5bn.
This deal announced by Sberbank is one of the largest transactions in Europe in 2012. Currently the financial services sector is the most active sector on the M&A market, covering 18% of the total market.
In general, since the Russian M&A market is mostly developing internally with minor input of foreign investors, the recent amendments to Russian legislation are focused on improving the legal regulation for foreign investments in the Russian Federation.
Investments into the strategic sector
For the most part this is related to changes to Russian laws regulating foreign participation and investments in companies of strategic signifi cance for the country, such as gas and oil production companies.
The amendments to the legislation came into force on December 18, 2011 and excluded certain transactions with foreign citizen participation and transactions of Russian strategic companies with international fi nancial organisations from the list of deals requiring approval in advance by the Russian state authorities.
The amendments were adopted as a result of a court case initiated by the Russian limited liability company Kores Invest, which has been acquiring shares from minority shareholders of the Russian company JSC TGC-2, the biggest Russian energy generating company. The Russian court declared their transaction void, referring to the fact that Kores Invest had foreign affiliates in its group, and therefore a transaction on their acquisition of shares in a strategic company requires prior approval from state authorities. This decision of the Russian court was announced in the public domain and drew negative reactions on the foreign investments market in Russia, thereafter becoming the main reason for the said legislative amendments.
Although Russian corporate legislation has not recently experienced any amendments, the changes to corporate legislation over the last five years were focused on introducing additional instruments and provisions for parties to transactions that would prevent any violation of their rights.
To briefly outline the main changes in corporate legislation the following amendments should be mentioned:
Amendments to the legislation on limited liability companies to prevent hostile takeovers
In the beginning of 2009 amendments containing additional requirements for parties to a share transfer deal came into effect in Russia. Share purchase deals were at that point required to be certifi ed by a notary public who bears responsibility for the validity of certifi ed transactions.
Procedures for voluntary and mandatory offer to shareholders of joint stock companies
In 2006 the Russian Law On Joint Stock Companies was amended with new provisions of voluntary and mandatory offer to minority shareholders on the sale of shares and further forced sale and squeeze-out procedures. The form and structure of the amended provisions copy those provided by US corporate legislation.
In 2009 additional provisions related to shareholders’ agreements were written into Russian corporate legislation, providing the shareholders of a Russian company with the right to structure the internal governance and regulation of the Russian company.
Russian regulation of the M&A market is still notable for its mainly imperative nature, which does not provide the investors with enough flexibility in structuring and arranging deals. Additional regulation is required with reference to the disclosure and transparency of M&A deals.
The Year Ahead
Most players in the M&A market expect significant growth of Russian M&A, since the economic situation in Russia is rather stable and signifi cantly improving over the studied period of 2011–2012.
As follows from the analysis of top deals completed in Russia during 2011 and the first half of 2012 and amendments to Russian laws, an increase in foreign investments, particularly US investments, is expected.
We can anticipate that certain sectors of the Russian M&A market will increase significantly, such as the energy and natural resources sectors and the financial services market.
Moreover, Russia’s accession to the WTO is an important step toward an open economy model of development and will have signifi cant effects on many aspects of the Russian economy. Besides the changes to tariffs on goods and services, Russia’s accession to the WTO is expected to trigger a wide range of reforms, such as liberalisation and modernisation of customs, transport, IPR (intellectual property rights) and trade legislation, as well as standardisation regulations. As a consequence, the Russian M&A market is likely to undergo changes as well.