M&A activity in Russia – A fist full of cash

An abundance of cash in the Russian economy is fuelling M&A activity, but transparency can be a problem for businesses planning to enter the market. M&A’s Andrew Macleod reports.

A handful of emerging sectors “ripe for M&A activity” have been identified as future drivers of the booming Russian economy by leading business advisers based in Moscow.

KPMG predicts that the “Hot Five” could soon overtake the traditional powerhouses of growth, which for a decade or more have been the bedrock of Russia’s emergence as a modern global economy.

Wilfried Pototschnig, head of the firm’s mergers and acquisitions group in Moscow says energy generation, industrial enterprises, media, and transport “ as well as the real estate, construction and hospitality sectors“ are fast establishing themselves alongside, and in some cases outperforming, traditional wealth creators, such as metals and mining, gas and oil, and consumer goods and retail.

“For the past few years, Russia has consistently remained among the fastest-growing economies globally, and one of the most attractive markets for investment,” says Pototschnig.

The figures tell the story. M&A activity in Russia increased 47 per cent â“ in deal numbers and value â“ in the first half of 2007 compared to the same period last year, although this statistic may be distorted by the increasing transparency of the market, which has resulted in transactions being recorded this year that would not have been disclosed previously.

KPMG state that more than 400 transactions were reported in the first half of 2007, with a total value of US$67.1 billion (£32.7 million). Even after discounting the US$31.5 billion (£15.3 million) generated by the break up and sale of the former Yukos oil empire, the figure remains impressive.

So too are figures regarding cross-border deals, which are up by 52 per cent. Pototschnig says: “The favourable macroeconomic environment is stimulating, and the signs are that business is progressing to the next stage.”

Particularly encouraging is evidence that M&A activity is not just confined to the major centres of Moscow and St Petersburg.

“The Russian regions are starting to play a significant role,” Pototschnig says.

He adds Russia accounts for some 2 per cent of global M&A (6 per cent of European activity), and predicts that will soon rise to around 2.6 per cent to 2.8 per cent, continuing the explosive growth since the turn of the century.

“The figures sound tiny but you must remember we have a short history of mergers and acquisitions in Russia. They only really began taking off in 2002.”

The activity has been fuelled by an abundance of cash in the Russian economy.

“The money is here,” Pototschnig adds. “Absolutely. There are plenty of cash-rich Russian groups â“ blue chips â“ that are also able to raise capital on the Western markets as well as having access to Western financial services.”

Not all companies can look West for finance, however, which is a factor that has impacted on the MBO scene locally. Although buy-outs are fairly commonplace, the cost of borrowing in Russia can be a prohibitive 8 to 10 per cent, resulting in such deals being routinely financed from profits.

Gratifyingly, the publicity generated by deal-making helps raise standards across the board, he says, demonstrating to others the value of transparency in matters of due diligence, reporting standards, and professional management â“ areas where many Russian companies are still sadly wanting.

“Transparency is a real problem,” Pototschnig observes. “We often find ourselves working for clients whose main complaint is that they don’t know the real owners of the business they are seeking to buy.

“There is still a tendency for vendors to try to hide the bad news during the due diligence process. They are often reluctant to provide relevant information, allowing details to come out at a later stage, presumably in the belief that any buyer will have enough cash to fix whatever is wrong.

“Sometimes the management accounts are in such a bad condition that it takes a firm like ours to really understand the business and the issues.”

He adds: “My general advice to any company looking at the Russian M&A market is to get professional advice. There are plenty of people out here who can help.

“We see a lot of companies entering the market without the proper support, because they have done something similar in Malaysia or some other part of the world.

“But Russia is very different. I advise companies to speak to professionals, to others who have already been down this road even their competitors.”

“Just don’t do it alone,” he adds.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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Management buyout