The year of 2016 was marked by relatively low M&A activity in Ukraine. Although transactions were carried out in almost every industry, their total number turned out to be quite moderate.
Here we should distinguish transactions relating to the Ukrainian market only and transactions that were affected on a global scale containing, however, a Ukrainian element. If we speak of Ukrainian transactions only, a number of banking transactions are worth mentioning – in particular the acquisition of Ukrsotsbank by Alfa Group. Also, we witnessed a certain number of transactions in the agricultural sector (the sale of Creative Group, for instance), the IT segment (Soros’ investment in Ciklum), and the investment of Horizon Capital, a private equity fund, in Rozetka.
A huge event in December was the state’s sudden nationalization of PrivatBank, the largest bank in Ukraine. Its consequences for the country remain yet to be seen.
Unfortunately, no deals were concluded in the engineering and heavy industry sector, and the FMCG segment also reported no intense activity.
The pharmaceutical market became a noteworthy exception with a number of transactions, with Farmak’s investment in Poland the most distinguished. This investment of a Ukrainian company into Eastern Europe became a pleasant exception at a time of low business activity and general exits by Ukrainian companies from the Russian and Crimean markets. A vivid example of this exiting phenomenon can be found in MHP’s withdrawal from Russian business by means of an exchange of its assets in Russia for the Ukrainian assets of the Agrocultura Group.
The infrastructure segment, particularly seaports, whips up more and more interest. The establishment of a joint venture between TIS Group and Cargill, the world’s agro-industrial giant, may serve as a model here. As far as we know, Ukrainian and foreign investors are also discussing a number of transactions related to port infrastructure and transshipment terminals.
The dramatic increase of activity in the non-performing loans (NPLs) market (i.e., the market for secured or unsecured default loans) became a new trend this year. Although the targets of such transactions are rights of claim under loan agreements, in fact such transactions are M&A transactions typically of an unfriendly or opportunistic nature.
Unlike the Ukrainian M&A market, the global M&A market once again looks likely to reach a stratospheric level in terms of total transaction value. The USA remains the leader in the value and the number of transactions. These transactions sometimes involve Ukraine, if only from the merger-control clearance perspective (if new financial thresholds are exceeded). Some transactions (e.g., IT transactions) are even more tied to Ukraine, since many of the specialists employed by IT companies are concentrated here. An excellent example of such a transaction can be found in the acquisition of Lohika, a premier software development firm, by Altran, a global leader in innovation and a high-tech engineering consulting company. Headquartered in Silicon Valley, Lohika is a leading software developer most active in North America, with experienced delivery teams in Ukraine and Romania consisting of more than 700 employees, most of them software engineers.
What has not happened so far?
First, everyone expected massive privatization to be launched in Ukraine. Unfortunately, that has not happened so far, although two attempts were made to sell the Odesa Port Plant in 2016. Privatization of energy companies has also been postponed until 2017. At the moment, privatization of Ukrspyrt is being actively discussed, though it has not yet been initiated. Although there are undoubtedly a number of reasons for these delays, the market continues to hope for one or more successful privatizations in the coming year.
Second, the Ukrainian Deposit Guarantee Fund has not started to sell its assets actively, even though by now it has accumulated an enormous volume of assets previously owned by liquidated banks. The Fund has already carried out an inventory of available assets, however, and, its representatives report working on the creation of transparent sales mechanisms involving the use of auction marketplaces, including the ProZorro system.
Headwinds
Both economic and psychological factors operate to restrain M&A in Ukraine.
Economic factors include the low purchasing power of the majority of Ukrainian investors and the absence of high-quality assets for sale. On some level, this is a repetition of the situation in 2009 when a great many companies became insolvent, but their owners refused to sell them at actual market value. However, as compared to that previous crisis, Ukrainian banks this time are more aggressively disposed and ready to enforce pledged assets, so it is definitely good news that Ukrainian bankruptcy and financial restructuring laws have been actively evolving.
The restraining effect of the foreign exchange restrictions in Ukraine serves as an unconditional limiting factor. However, gradual liberalization of these restrictions – namely the permission to pay out dividends in part – is definitely having a positive impact.
The procedure for purchasing rights of claim under loan agreements has a number of drawbacks, which certainly restrict the free sale of default loans and serve as a restraining factor for foreign investors.
One should also consider psychological factors, since the fear of corrupt Ukrainian courts still prevails. However, these fears may be gradually dispelled upon the successful implementation of judicial reform in Ukraine.
Unfortunately, the conflict in Eastern Ukraine, the annexation of Crimea, and potential Russian aggression still puts considerable pressure on the Ukrainian investment environment. Yet, as we can see, Ukrainian investors have already come to terms with this factor, while foreign investors are getting used to it.
Legislative Background
During the past year, the legislative environment experienced a number of changes that, in particular, had a positive impact on the M&A market, including:
- the significant decrease of regulatory requirements in Ukraine
- the increase and enhancement of financial thresholds for merger control purposes
- the adoption of critical changes to the Law on Joint Stock Companies that entered into force on May 1, 2016
- the cancellation of the requirement to register foreign investments in Ukraine
- the adoption of legislative amendments aimed against raiding, in particular the introduction of mandatory notarization of documents changing directors or making other changes in membership.
It is also crucial to highlight a number of draft laws submitted to Parliament for consideration, including a draft Law on Limited Liability Companies, draft Law on Shareholder Agreements, and draft Law on squeeze-out/sell-out. The adoption of all these draft laws should improve the quality of corporate legislation in Ukraine.
By Mykola Stetsenko, Managing Partner, Avellum
