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Despite Russia’s reputation as a difficult venue for M&A, the majority of respondents to a straw poll as part of mergermarket and CMS’ Deal Drivers Russia 2011 research report state that it is no more difficult to do a deal in Russia than it is elsewhere. Further, the vast majority (84%) feel that the deals they have done in Russia have lived up to their expectations and fulfilled their objectives.
To get a better understanding of the current state of the M&A market in Russia as well as the current deal drivers and deal obstacles, CMS commissioned mergermarket to garner the opinions of 25 representatives from the Russian deal making community. In addition, a further 100 Russian M&A practitioners were surveyed on their outlook for 2011.
The forecast for the Russian economy is largely optimistic moving into 2011, with 79% of respondents expecting economic conditions to improve against the previous year and 74% expecting inward investment to increase (as against 60% last year). On the other hand the straw poll findings indicate that despite this positive outlook, bureaucracy and legislation issues are still regarded as key challenges faced in operating in this market. This sentiment is mirrored in the market outlook survey, where 49% collectively attribute political and regulatory issues as the primary obstacles.
“The report shows M&A activity bouncing back in 2H 2010 with deals such as PepsiCo’s acquisition of Wimm-Bill-Dann evidencing a new maturity in the market.”
John Hammond, Senior partner, CMS, Russia.
“The survey findings are striking in that they reiterate the uniqueness of the Russian market and how, despite its complexities, it can offer savvy investors significant deal making opportunities.”
Catherine Ford, Managing Editor (Remark), The Mergermarket Group
Key drivers behind primary market activity: Government initiatives and cash-rich corporates
Nearly one-quarter of respondents (23%) in the market outlook survey believe government initiatives will be the primary deal driver in Russia over the course of this year. Following this, more than one-fifth of respondents believe cash rich corporates will generate the most significant deal flow this year. Interestingly, despite the large number of Russian businesses that have moved into lender ownership via a debt-to-equity swap less than one-tenth of respondents identify distressed M&A as a primary market mover of 2011, representing a steep drop from the one-quarter of respondents who expected this to be the case for 2010. The question has to be, how do these respondents expect banks to exit their holdings? Furthermore, non-core asset disposals, arguably a hallmark of the financial crisis, are also much further down the list of top drivers, a clear sign that the tide has changed and the Russian market is emerging from the impact zone of the financial crisis.
Additional findings:
• Securing finance has, in the opinion of 74% of survey respondents, become easier than it was a year ago – but 65% stress that the difficulties have only eased slightly.
• While the majority of survey respondents (79%) predict more creative deal structures to bridge the funding gap, aside from vendor financing little evidence of them in practice.
• Pressure on Russian businesses from their lenders to alter their capital structures is strong, according to 70% of respondents.
• Aside from the traditionally ‘hot’ sectors in Russia Transportation could be the sector that sees the next concentrated burst of deal flow, according to the mergermarket Heat Chart, which tracks potential M&A activity, and 52% of respondents also name the Technology, Media & Telecommunications (TMT) space as a potential hub of activity in Russia.
• In terms of deal size, Russia has historically seen the majority of deals on the lower end (€15-€100m). However, respondents tip a shift towards slightly bigger deals in the €101-€250m bracket.
For more information, please contact:
CMS, Russia
Olga Masek
T: +7 (495)786 4054
E: olga.masek@cmslegal.ru
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