M&A activity in Russia was hit hard in 2013. Deal figures saw a 47% decrease in value and a 25% decrease in volume compared to 2012. More than 1,900 deals involving a Russian target, buyer or seller were announced, with a combined value of over US$60 billion. The drop experienced in Russia far outstripped that in emerging markets as a whole (which saw a 5% drop in value and an 11% drop in volume) or in Europe generally (down 17% in value and 12% by volume).
No single factor accounts for the changes in M&A activity. The position varies from sector to sector and between foreign investment and domestic activity.
Russia was also the 8th most targeted jurisdiction for inward investments according to Thomson Reuters (down from 5th in 2012) with China being the top investor in the Russian economy. However, concerns around the political and legal landscape continue to undermine foreign investor confidence.
Outbound M&A activity dropped to US$2.8 billion in 2013, a 63% fall from the levels seen in 2012 and the lowest annual figures for outbound M&A since 2004.
EU countries were the most targeted jurisdictions by volume for outbound M&A, highlighting the trend of a gradual shift away from investments into the CIS countries
(such as Ukraine and Kazakhstan) towards acquisitions in EU countries, allowing Russian companies to access the EU markets.
Notably, 2013 also saw a large proportion of deals generated by the private equity sector, as Russian sponsors continue to target consortium deals with foreign private equity investors.
Overall we expect that, in the near term, deals made by state-owned enterprises are likely to continue to dominate Russian M&A activity.
Russian M&A deal numbers were largely driven by several "mega-deals" in the energy and power sector, continuing the trend of recent years. Activity in this sector alone accounted for 48% (or US$29.4 billion) of all M&A deals announced in Russia in 2013. The next three sectors were materials (14% or US$8.9 billion), telecommunications (12% or US$7.1 billion) and industrials (10% or US$6.1 billion).
Domestic activity continued to dominate the Russian M&A market, with Russian buyers involved in 82% of acquisitions of Russian targets. This is due in large part to the prominence of Russia's state-owned players (particularly in the energy and financial services industries).
Energy and power Materials Telecommunications Industrials
Financials Consumer staples High technology Healthcare
Consumer products and services Retail
Media and entertainment
RUSSIAN INVOLVEMENT ANNOUNCED M&A BY TARGET INDUSTRY (US$ BILLION)
Thomson Reuters, Emerging markets M&A review, financial advisers, full year 2013
ANY INVOLVEMENT ANNOUNCED IN 2013
REGION DEAL VALUE (US$M) % CHANGE FROM 2012 NUMBER OF DEALS % CHANGE FROM 2012
Emerging markets 675,215.6 -4.6% 12,748 -11.3%
BRIC 436,576.2 0.8% 7,464 -10.2%
Europe 910,580.6 -16.8% 14,603 -12.3%
Eastern Europe 108,109.1 -27.9% 3,358 -17.1%
Russia 61,628.7 -47.4% 1,927 -25.4%
Source: Thomson Reuters, Emerging markets M&A review, financial advisers, full year 2013; Thomson Reuters, M&A review, legal advisers, full year 2013
ENERGY AND POWER
In 2013, energy and power continued to be the most active sector by volume of announced transactions. Energy and power M&A transactions were valued at US$29.4 billion, representing 48% of all announced M&A involving a Russian target, buyer or seller
The oil and gas sector remains highly attractive for domestic and foreign investors. State-owned Gazprom and Rosneft continue to be the main drivers of M&A activity here. They have several advantages over the other market players:
access to low cost capital from state-owned banks
strong backing from Governmental agencies in terms of permits and regulations
preferential rights to get the biggest and the most attractive reserves
Despite that, both companies, and in particular Rosneft, have been partnering up with foreign energy companies to jointly finance
and operate the large upstream programmes in the newly created Russian Arctic province, stretching from the Barents Sea in the West to Sakhalin Island in the East. The technological complexity of these offshore projects and their large financial requirements are forcing the state companies to share the risks and the reserves with other investors, and this will continue to be the trend for the next decade until Russia develops its own heavy equipment production
facilities, shipbuilding capabilities and strong engineering and education base sufficient to support such operations domestically.
LNG is and will continue to be the flavour of the next 5-7 years, with several projects
announced. Novatek is leading the way with its Yamal LNG development programme. Gazprom and Rosneft will no doubt be quick to follow, with projects aimed at Asian and European markets. There are some concerns of whether the international gas market will need all this new liquefaction capacity when it comes onstream. To hedge the marketing risks the project sponsors will be looking to have long term offtake agreements put in place and to share the project risk by sharing equity in the project companies with the key LNG/oil and gas industry players. There is also some discussion of project financing; however, it remains to be seen whether the constrained financial market will find these projects bankable.
Herbert Smith Freehills advised China National Petroleum Corporation (CNPC) on the acquisition of a 20% stake in the South Tambeyskoye gas field project through the acquisition of shares in Yamal LNG from Novatek, Russia's largest independent natural gas producer.
The project involves the exploration and exploitation of the South Tambeskoye field in the Yamal peninsula of north-west Siberia and the construction and operation of an LNG plant and a port to transport gas to the market. CNPC's co-venturers are Novatek, which retains a 60% interest, and Total. The share purchase agreement for the deal was signed on 5 September 2013 in front of Russian President Vladimir Putin at the G20 summit in Saint Petersburg, Russia. The transaction was completed on 14 January 2014.
The Herbert Smith Freehills team was led out of the Moscow office with assistance from the Beijing and London offices and with the competition issues handled by the Brussels office.
ANNOUNCED RUSSIAN TARGET M&A: MOST ACQUISITIVE NATIONS, FULL YEAR 2013
Source: Thomson Reuters, Deal making in Russia, full year 2013
ANNOUNCED RUSSIAN OUTBOUND M&A: MOST TARGETED NATIONS, FULL YEAR 2013
ENERGY AND POWER (CONTINUED)
We have seen a clear trend of investment in the Russian Far East. Plenty of green field and brown field projects are unravelling in the energy and mining sectors there and we see a lot of interest from Japanese, Chinese and Korean investors and contractors. The scale of investment in this part of Russia may exceed many expectations as Russia looks to rapidly develop these previously neglected regions.
All of these trends are supported by the new tax incentives recently adopted by the Government and meant to incentivise investment in the difficult offshore and onshore areas and removal of some regulatory restrictions (for example, LNG export monopoly of Gazprom).
EMEA INVOLVEMENT ANNOUNCED LEGAL ADVISERS IN THE ENERGY AND POWER SECTOR (2013)
RUSSIA LEAGUE TABLE OF LEGAL ADVISERS TO M&A BY DEAL COUNT (2013)
RUSSIA LEAGUE TABLE OF LEGAL ADVISERS TO M&A BY VALUE (2013)
RANK FIRM NAME RANK FIRM NAME RANK FIRM NAME
Linklaters 1 White & Case 1 White & Case
Freshfields Bruckhaus Deringer 2 Herbert Smith Freehills 2 Linklaters
Herbert Smith Freehills 3 Skadden Arps Slate Meagher & Flom 3 Herbert Smith Freehills
Source: Thomson Reuters, M&A review 2013
Dentons 4 Zulficar & Partners
Freshfields Bruckhaus Deringer 5 Skadden Arps Slate Meagher & Flom
Linklaters 6 Akin Gump Strauss Hauer & Feld
CMS 7 Freshfields Bruckhaus Deringer
Hogan Lovells International 8 Allen & Overy
DLA Piper 9 Dentons
Clifford Chance 10 Conyers Dill & Pearman
Jones Day 11 Baker & McKenzie
Akin Gump Strauss Hauer & Feld 12= Davis Polk & Wardwell
Baker & McKenzie 12= Mannheimer Swartling
Cleary Gottlieb Steen & Hamilton 14 NautaDutilh
Latham and Watkins 15 Cleary Gottlieb Steen & Hamilton
Source: Mergermarket, M&A trend report 2013
INDUSTRIALS AND CHEMICALS
The industrials sector accounted for 10% of all Russian M&A announced in 2013. M&A activity in this sector has seemingly been less dependent on the state-controlled players compared to the energy and power sector, with private investors taking the leading role.
The sector continues to be attractive for Asian investors, particularly those from Japan and South Korea. These investors have access to both funds and the latest technologies within the sector, and offer expertise on both the production and sales sides of projects,
as well as a route to market for medium-sized manufacturers.
2013 saw increased activity in M&A transactions targeting pharmaceutical and biotech companies. Pharmaceuticals remains an area of close interest for the Russian Government, as demonstrated once again by its refusal to approve the proposed acquisition of vaccine producer Petrovax by foreign investor Abbott Laboratories (Petrovax has subsequently been targeted by Russian industrial group Interros).
Herbert Smith Freehills advised on two of the largest announced Russian M&A deals in 2013.
Herbert Smith Freehills advised Onexim Group on the disposal of its 37.78% stake in the London listed gold mining company Polyus Gold International Limited for an aggregate value of approximately US$3.62 billion*. The deal was lead out of the Moscow office with the London office assisting on Takeover Code matters.
Herbert Smith Freehills also advised Onexim Group on the US$3.54 billion* acquisition of a 21.75% stake in Uralkali, the Russian potash producer, from the Suleiman Kerimov Foundation.
* According to Mergermarket
ANY RUSSIAN INVOLVEMENT ANNOUNCED - TOP DEALS
TARGET (% SOUGHT/ACQUIRED) ACQUIRER ACQUIRER/TARGET
RANK VALUE (US$M)
TARGET MACRO/ MID INDUSTRY
RN Holding (15.3%)
Energy and power/oil and gas
Polyus Gold International (37.78%)
Materials/metals and mining
Tele2 Russia Holding (100%)
Telecommunications/ telecommunications services
Alliance Oil Co (56.8%)
Energy and power/oil and gas
Energy and power/power
Arctic Russia (60%)
Energy and power/oil and gas
NGK Itera (49%)
Energy and power/oil and gas
Taas-Yuryakh Neftegazodobycha (64.67%)
Energy and power/oil and gas
Energy and power/oil and gas
Chengdong Investment Corp
Materials /metals and mining
Source: Thomson Reuters, Emerging markets M&A review, financial advisers, full year 2013
TELECOMMUNICATIONS, MEDIA AND TECHNOLOGY (TMT)
In 2013, the rate of M&A activity in the telecommunications sector in Russia slowed from the level experienced in 2011-2012. However, it remains a top three sector, accounting for 12% of all Russian M&A deals announced in 2013. There were also several significant transactions in the media sector
During the past year there were only a few large scale transactions in the Russian telecommunications sector, worth a combined US$7.1 billion, which represents a decrease in value and volume from 2012. Notably, a single transaction – the US$3.5 billion acquisition of Tele2 by VTB Group - accounted for 50% of the value of deals in the sector.
Overall M&A activity in the Russian
TMT sector has been dominated by domestic players, demonstrating the low level of foreign investment in Russian telecom assets.
That said, in November 2013, Trivon AG, a company within the Virgin group, acquired MegaMax, a leading regional telecom operator. Private equity interest in regional assets appears to be one of the most significant components of the overall TMT deal flow in Russia. At the same time, the four major operators (Rostelecom, Megafon, VimpelCom and MTS) also continue to expand through acquisitions of smaller regional companies.
Amid the overall fall in M&A deals in the Russian TMT sector in 2013, the Russian
e-commerce market stands out as a notable exception. This market is experiencing rapid growth and is reported to be the fourth fastest growing market in the world. This is largely down to the increasing penetration of mobile handset devices, the expansion of the Internet in the Russian regions and the rapid growth of online shopping.
Equally, Russia's vibrant Internet sector continues to produce start-ups and junior companies which attract investments from specialised venture funds, keen to replicate the success of other Russian online businesses which have generated excellent returns for their venture capital and private equity investors.
We do expect the telecommunications segment to remain a very attractive sector for investment and we anticipate there being further transactions by major federal operators to consolidate regional assets. We also expect an increase in M&A activity related to businesses dependant on the Russian internet (or 'Runet'), which is already one of the largest in Europe (by number of users, based on 2012 figures) and growing at a significant rate each year. In line with this predicted growth, it can be expected that there will be a commensurate increase in
e-commerce and further internet start-ups keen to enter the market.
Herbert Smith Freehills advised ProfMedia, a leading Russian media holding with TV, internet, radio and film production assets, on the merger of its internet assets with online businesses owned by A&NN group whose assets include Gazeta.ru and LiveJournal. The combined group creates the third largest internet group by unique visitors and audience reach in Russia (Europe's largest internet market), with over 35 million unduplicated monthly visitors to the group’s sites. The combined business also becomes the market leader across several online categories, including news (Lenta.ru and Gazeta.ru), social media (LiveJournal), and entertainment and local information (Afisha). This is a significant transaction in the Russian internet sector - there are over 300 million Russian speakers worldwide, and the Russian language recently became the second most popular language on the web (by number of web pages created), second only to English.
In late 2013, Herbert Smith Freehills also advised Interros on the disposal of ProfMedia to Gazprom-Media Holding, one of 2013's largest media sector transactions.
In 2013, private equity deals accounted for a significant proportion of M&A activity
In recent years, the Russian private equity market has been transformed by the emergence of government-backed sponsors and financial institutions, such as the Russian Direct Investment Fund (RDIF) and VTB Capital, as Russia pursues its strategic objective of supporting the growth of a local private equity market. While many foreign private equity houses remain cautious about allocating resources to Russia, several foreign sponsors this year have used consortium arrangements with Russian players as a means of 'de-risking' deals. As foreign sponsors look to their local counterparts to assure governmental and regulatory support and to guard against perceived political risks, as well as to lower the size of their equity commitments (the lack of attractive debt financing remains as a key local feature of the market), we expect the increased use of consortium structures to continue in the near term.
Further, during 2013 RDIF announced a number of joint ventures with various national funds, which, in the coming years, will be focused both on attracting investment into the Russian Federation and making outbound investments into the economies of joint venture partners. These co-investment partnerships have the potential to further influence the landscape of the Russian private equity market in the near future (for instance, a joint venture between RDIF and China Investment Corporation, which was set up in mid-2012, completed its first acquisition in Russia in October 2013).
While Russia has yet to establish itself
as the go-to market for the many international sponsors now looking more actively at emerging economies, a number of rumoured high profile exits will be watched very carefully during 2014 by those hoping for a breakthrough moment for Russian private equity. Local sponsors highlight the re-opening of the capital markets to Russian IPOs, a track record of strong state support for attracting foreign private equity investment and the commencement of Russia's long-awaited privatisation programme as causes for optimism.
Herbert Smith Freehills advised both leading local and international private equity sponsors on Russian transactions during 2013, including:
Baring Vostok Capital Partners Russian Direct Investment Fund VTB Capital
Da Vinci Capital Goldman Sachs Vostok Nafta
One Equity Partners Horizon Capital