Catalyst Russia Country Report 2012


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In this country M&A update published in Autumn 2012, we look in more detail at the impact of inbound and outbound M&A in Russia, one of the world’s fastest growing economies. We focus on valuation, trade buyers, private equity investors, and finally on recent deals with our predictions for activity in 2013.

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Catalyst Russia Country Report 2012

  1. 1. Country Report - Russia M&A update Autumn 2012M&A to increase as companies capitalise onRussia’s growthRussia is now a strategically important market for foreigncompanies. As the world’s sixth largest economy withgrowth amongst the fastest globally and now accessionto the WTO, opportunities across a range of sectors aresignificant. This will lead to rising levels of M&A.The key observations from our research: The Government is introducing a range of legislative and regulatory reforms to build on its position as the sixth largest economy. These are aimed at attracting foreign companies, increasing economic growth and diversifying the economy away from natural resources. “Many people seem unaware The opportunities in Russia are broader than just oil. Over US$1 trillion that Russia is the world’s is being invested in upgrading infrastructure and US$24 billion invested in preparation for the 2014 Winter Olympics and 2018 Football World Cup. sixth largest economy and that unlike some BRIC Russian consumers have the highest disposable income and fastest countries, Russia is an open growth in consumer spending of all the BRIC economies. With almost three-quarters of the population living in urban areas, foreign companies market in which both large have been investing in Russia both through acquisitions and directly to and small foreign benefit from rising demand for domestic and foreign-branded goods. corporations have made The most successful foreign companies are those who are locating a lot of money in the production and distribution in Russia, often using M&A and joint ventures. last 20 years” We believe this strategy will be used by more companies looking to take Mark Bond, Managing partner, advantage of Russia’s economic growth. Catalyst Corporate Finance LLP 2012 NorthStar Corporate Finance
  2. 2. Country Report - Russia M&A updateLow debt and healthy President Putin “It is imperative that we trade surpluses encouraging foreign increase investment by supporting financial 2018 to 27% of GDP. stability private investment By 2020, Russia must be Over the past ten years the Russian among the top 20 nations economy has undergone a significant with the most comfortable transformation to become the sixth largest economy globally (purchasing business climate” power parity basis). President Vladimir Putin, St. Petersburg International Economic Forum, June 2012 Real GDP grew by 4.2% in 2011 compared to global and European GDP growth rates of 2.7% and 1.5% investment-led growth. President Putin has respectively. Figure 1 illustrates Russia’s stated publicly that he wants investment in rapid move up the GDP rankings. Russia to increase from 20% to 27% of GDP by 2018. The initiatives designed to Russia has almost no sovereign debt, achieve this goal represent opportunities large foreign exchange reserves, for foreign companies. moderating inflation rates (currently 5%-6%), a strong labour market Four-year privatisation plan which (unemployment is currently around may include strategic sectors of the 6%), consumption growth and a economy. Large foreign strategic positive balance of trade. An increase in investors will be allowed to participate the oil price has benefited the balance in these privatisations. of trade which has been positive since the early 2000s. Raising Russia’s ranking from 120th (of 183 countries) to 20th by 2020 in the The size of Russia’s economy, its World Bank’s “Ease of Doing Business” US$1 trillion geographical scale, high level of GDP and index. Roadmaps for three problematic disposable income per capita relative to its areas – access to power grids, infrastructure largely undeveloped manufacturing and construction regulation and customs investment by 2020 service sectors means there is a focus on procedures – have already been created. Figure 1: Russia is now the worlds US$1 trillion investment in infrastructure until 2020. Public and private sixth largest economy by GDP (PPP) partnerships (PPP) are regarded as one of the most efficient instruments $16 1.7% prospectively in funding projects. The $14 government is actively looking to bring 9.1% foreign investment to Russian $12 infrastructure to develop roads, $10 rail, airports and utilities. US$trillion $8 2011 GDP growth amongst highest Catalyst Corporate Finance LLP 2012 of leading economies Full membership of the WTO (ratified $6 -0.7% 6.9% in August 2012) which will dismantle £4 3.0% 4.2% 2.7% 0.7% 1.7% foreign trade barriers and reduce tariffs. 0.4% $2 This will help attract more foreign capital to Russia, boost trade and investment, $0 promote industrial reform and s ina ia n y ian il St ted ce UK ly az ate an pa I nd Ita an Ch ss Br i rm accelerate the formation of a Ja Un Fr Ru Ge transparent and open market Source: World Bank environment (see page 4).2
  3. 3. Country Report - Russia M&A updateDistinguishing Upgrading infrastructure is a top priority and Russia is actively encouraging Russia set to become involvement from foreign companies.opportunities from For example, Bombardier Europe’s largest auto Transportation has signed co-operation market in 2012myths agreements with Russian rail manufacturer Uralvagonzavod to jointlyThere are several myths associated develop and sell metros and trams,with doing business in Russia which establish local production facilitieswe examine below. and transfer Bombardier technology.Myth 1: The opportunities in Russia Russia is hosting the 2014 Winterrest on oil Olympics and 2018 Football World Cup. Some US$24 billion is being invested inAs the world’s largest oil producer, infrastructure including the constructionmuch attention has been focused on the of new motorways, railways and touristopportunities for foreign companies to gain facilities, and the construction andaccess to Russia’s exploration and reconstruction of football stadia inproduction supply chain. However, there are 13 Russian cities.many other sectors which are developingquickly and have attractive growth Three-quarters of aircraft in Russia areopportunities. currently foreign-made. While Russia is building its own fleet of aircraft, strong Russia’s automotive market is the air passenger growth (13% 2010-2011) second largest in Europe after Germany means that partnerships with leading with over 2.6 million new cars sold in foreign companies continue to be vital. 2011. With light vehicle density at just Boeing for example, has a production 250 cars per 1,000 people compared to joint venture with Russian Technologies, 643 in the US, the potential for growth Ural Boeing Manufacturing, through is significant. As shown in Figure 2, a which it procures titanium parts for range of foreign manufacturers have the 787 Dreamliner. meaningful market share. In 2011, locally-produced foreign brands Myth 2: Foreign companies can’t including Ford, Renault and VW make money in Russia German companies dominated car sales (40%). The performance record of foreign very successful in companies in Russia is evidence that Russia Figure 2: Foreign brands accounted success is achievable and meaningful. for 72% of passenger car sales in For example, E.ON Russia, the electricity 2011 producing arm of the German utility provider, reported 2011 profits of 25% US$495 million. 20% German companies have been particularly successful (see figure 3). They view Russia 15% as a strategic market and have invested progressively over a number of years. Catalyst Corporate Finance LLP 2012 10% Companies typically invest in phases, 5% building on proven demand for their products and then combining plant 0% investment with strong commitments to training staff and developing sophisticated da i ult san ota rd oo z KI A da t VW logistics systems to support component Ga ole Fo ew La na un Toy Nis evr Re Da Hy imports and local distribution. ChSource: Ernst & Young, AEB,Otkritie Capital Research 3
  4. 4. Country Report - Russia M&A updateFigure 3: German companies are making a significantcommitment to Russia Sector Company Approach Automobiles Volkswagen Locally-based manufacturing in Kaluga. Significant investment training mechanical and auto-mechanical engineers partly by apprenticeships at its Kaluga plant. Currently 4% market share in Russia. Consumer goods BSH Bosch and Siemens Locally-based manufacturing capability for washing machines, freezers, refrigerators near St. Petersburg. household appliances Established logistics center. Acquired 25% stake in Power Machines in 2006. Industrials HeidelbergCement €600 million investment in a state-of-the art cement factory in Tula region, TulaCement. The company will be the only local cement producer supplying high-strength cement types to the local Moscow regional market, which represents 85% of TulaCement sales. TulaCement will benefit from the upcoming expansion of greater Moscow. Industrials Schott Two manufacturing sites based near Nizhny Novgorod, a centre for the pharmaceutical industry in Russia, producing 590 million ampules and bottles annually for the country’s pharmaceutical industry. Myth 3: The Russian economy is 25% to 5% by 2018. This will increase Automobiles, too volatile demand for foreign cars which the government will attempt to control viamanufactured goods recycling fees and by supporting the The government has established two funds and telecoms to to reduce the impact of volatile oil and gas localisation of production for foreign export earnings on the economy. The brands and the creation of joint ventures benefit from WTO with foreign producers. For example, US$60.5 billion Reserve Fund, built on oil membership and natural gas revenues, ensures the the Russian automotive group Sollers’ financing of federal budget expenses in partnerships with Ford, Mazda and the case that oil and gas budget revenues SsangYong. decline. The US$85.6 billion National Manufactured goods. A general Welfare Fund, used to support the pension reduction in tariffs with the average system, has the ability to lend money to falling from 10% to 7.8%. Russia has Russian banks and can be used to absorb committed to join the information excessive liquidity. technology agreement which provides Membership of the WTO should help to for duty free treatment of relevant goods create a diversified economy. This binds (e.g. computers) within three years. Russia to a series of trade rules and Telecoms. Increased market access commitments which should create a more Catalyst Corporate Finance LLP 2012 to the telecoms sector with a current transparent and predictable environment for foreign equity ownership limitation of business. Sectors that will benefit from 49% being phased out over four years WTO membership include: from accession. Russia has agreed Automobiles. WTO membership will to abide by the WTO’s basic halve car import duties to 15% by 2019. telecommunications agreement aimed Import duties for trucks will fall from at promoting fairness and competition.4
  5. 5. Country Report - Russia M&A updateThe rise of the “We believe in Russia’s huge Global consumerRussian consumer long-term potential, that’s companies using why we continue with Nestlé M&A to tap growth inSubstantially increased earnings andlow income tax have boosted spending investments into the consumer spendingpower in Russia’s underpenetrated development of localconsumer market. Russian consumershave the highest disposable income production facilities.”and fastest spending growth of all Stefan De Loecker, Chief executive officer of Nestlé Rossiya.BRIC markets (see figure 4). Source: “Nestlé to Create a Greenfield Factory in Unbranded goods dominate total Vladimir Region,” Nestle press release, 15 June, 2010, consumption at low levels of household income and for essential goods and services. However, as income starts to rise, the preference for branded goods increases and at affluent levels, premium brands attract greater market share (see figure 5). Foreign brands and companies including BMW, Nivea, Adidas, and Sony are taking advantage of the growth potential for international brands in the discretionary space. Figure 4: Russia has the highest proportion of high income households and fastest rate of consumer spending in the BRICs 25% % of households earning >$2,000 per month Average growth in consumer spending 2000-2010 21% 19% 19% 13% 12% 10% 10% Catalyst Corporate Finance LLP 2012 Russia China India BrazilSource: World Bank and Credit Suisse Emerging Consumer Survey 2012 5
  6. 6. Country Report - Russia M&A update Stable demand for locally-branded with total investment in the country Foreign companies essential goods and services across the adding up to more than US$12 billion income curve is driving acquisition in the past two decades. attracted to activity by foreign companies. PepsiCo’s well-positioned 2010 acquisition of Wimm-Bill-Dann local brands gave the company ownership of two Figure 5: Brand market penetration leading dairy brands. PepsiCo’s according to income group products are now sold in 98% of retail outlets across Russia. Nestle has been 60% % penetration at lower income linked to the potential acquisition of % penetration at higher income Russian baby-food and juice producer 50% Progress, having already made acquisitions in Russia (for example, 40% Ruzskaya Confectionary Factory). 30% Foreign companies are looking for local brands with a strong market 20% position, growth potential and positioned to take advantage of the shift 10% from unbranded to branded products. 0% For example, Russia accounts for Dairy: Autos: Cosmetics: Sportswear: TV: Fashion: about 40 per cent of Carlsberg’s Domik v Derevne Lada Nivea adidas Sony Zara (Renault) (Beiersdorf) (Industria de sales. The brewer is close to finishing (PepsiCo) Diseno Textil a US$1.2 billion purchase of minority stakes in its local subsidiary, Baltika, Source: Credit Suisse Emerging Consumer Survey 2012 Sporting success for Adidas Adidas, the world’s second largest corporately owned stores and 13,000 sporting goods manufacturer, employees (Nike currently has around expects the Russia/CIS region to 100 stores in Russia). The company has become its third largest market its head office and distribution center in globally behind the United States Moscow, and regional offices in seven and China with annual sales of Russian cities. Adidas brands Reebok and over US$1.3 billion by 2013. Sales Rockport also have their own chain of are expected to increase by a stores in Ukraine and Kazakhstan. Adidas double-digit average growth aims to have 1,200 stores by 2015. rate annually to 2015. Source: “Adidas Group sales in Russia/CIS to exceed €1 billion by 2013 and grow double-digit Adidas is the market leader for sporting yearly till 2015,” Adidas press release, 10 October, goods in Russia/CIS with over 700 2011, Catalyst Corporate Finance LLP 20126
  7. 7. Country Report - Russia M&A updateA perspective on How should foreign companies approach Russia? Interest in Russia’sM&A trends in Russia Nick van den Brul: Working with a good large consumer partner is vital. High profile corporate activity market is drivingNorthStar is Catalyst’s partner in such as TNK-BP, an example of a 2003 jointRussia. Mark Bond, NorthStar’s activity venture that has resulted in widely reportedChairman and Managing Partner, and shareholder conflict, can put off foreignNick van den Brul, Partner, have over 50 companies who do not yet have a footholdyears’ combined experience working in in Russia.Russia. They discuss M&A trends andshare their insights about how foreign A suitable partner will ensure the investorcompanies should approach Russia. retains control of investment and operating decisions. The many German companies investing in Russia are good at this as they How would you describe the take a long view, even if they are eventually M&A market in Russia? surprised by the size and quickness of the returns. The recent Carlsberg bid for the Nick van den Brul: There has minority stakes in its Baltika beer business, been a significant increase in which has a 38% market share in Russia inbound and outbound M&A and accounts for 40% of Carlsberg’s enquiries this year. As Russian global sales, shows how this can pay off. businesses mature we are All successful investments have beenseeing a shift away from new greenfield structured this way whether by purchaseinvestments to acquisitions of fully-fledged of the operating company or by acquisitionbusinesses, such as PepsiCo’s purchase of of the assets.the Wimm-Bill-Dann food producers andUnilever’s acquisition of Concern Kalina. Mark Bond: Interest in Figure 6: Domestic activity currently Working with a Russia’s large consumer dominates M&A but inbound and suitable partner market is driving a lot of the outbound activity is increasing activity. We expect continued is vital interest in acquiring businesses 80%serving Russian consumers and general 70%add-on acquisitions by companies whichalready have a local presence. It is 60%surprising that there is not more interest in 50%the mining sector given the recent positivechanges in legislation regarding the bidding 40%for licences. 30% 20% 10% 0% Catalyst Corporate Finance LLP 2012 Domestic Inbound Outbound 2010 2011 Source: Catalyst Corporate Finance 7
  8. 8. Country Report - Russia M&A update What should companies be officials and politicians. Also, the increasing Rigorous due aware of when transacting number of Russians who go to European and American business schools means that diligence is critical a deal with a Russian many managers are now willing to look at company? Western corporate incentive arrangements, including share option schemes. Nick van den Brul: Rigorous due diligence to check whether a potential partner has a disreputable background is vital. Fundamental due diligence on critical What are the typical market areas such as asset title, potential tax entry strategies used by exposure or outstanding or potential litigation should also be conducted. The companies? absence of GAAP or IFRS accounting Nick van den Brul: The auto market is a standards (apart from in the financial sector) good example of how companies can work means that a proper view of the operating successfully in Russia – imports initially, then situation can only be achieved through a component manufacture followed by the detailed review of the management development of sophisticated logistical accounts. This can mean longer transaction systems. German companies have been timetables. It is helpful that Russian sellers present in this sector and logistics are open to the use of English law in M&A companies such as DHL and Rhenus transactions and to the use of offshore have followed them. The infrastructure for acquisition vehicles. successful business operations is getting better every year. Mark Bond: Strong personal relationships are important. As with other emerging economies, it’s important to build relationships with local administrative Case study: GRUMA’s acquisition of Solntse Mexico In July 2011, NorthStar advised Solntse Mexico, US$9 million. The acquisition gave GRUMA entry into Russia’s leading tortilla manufacturer, on its sale Russia. GRUMA had a presence only through exports to Mexican tortilla producer GRUMA. Founded in prior to the acquisition. 1949, GRUMA is one of the worlds leading tortilla and corn flour producers and owner of the brand How the deal was transacted Mission Foods. The company has operations in the The deal involved multiple jurisdictions, cultural and time US, Mexico, Venezuela, Central America, Europe, differences. The Mexican management of GRUMA dealt Asia and Australia and exports to 105 countries. through their American subsidiary based in Texas, GRUMA has approximately 20,000 employees USA, the legal jurisdiction was the law of England and 96 plants. and Wales with the legal firm based in London, while Catalyst Corporate Finance LLP 2012 Solntse had its holding structure in the British Virgin Reason for acquisition Islands and Over two thirds of GRUMA’s sales come from its non- on-the-ground Mexican operations. Solntse Mexico introduced tortillas operations in and corn chips to the Russian market and grew to Russia. become the market leader with net sales in 2010 of8
  9. 9. Country Report - Russia M&A update What types of companies are Russian investors acquiring? Russian companies looking overseas toMark Bond: There is a strong interest inbuying companies in natural resources and acquire newmanufacturing. This is being driven by the technologydesire to increase market access andgain operating synergies, acquire tradingoperations, and to acquire newtechnologies. For example, the Russiangroup Digital Sky Technologies acquiredstakes in a number of high-profile UStechnology companies (Facebook, Zynga).TNK-BP made a hinterland acquisitionbuying Vik Oil in Ukraine and has made “80% of our business growthother acquisitions internationally. Sberbankacquired Troika Dialog in Russia and has is going to come from high-also acquired a bank in Turkey, Deniz Bank. growth areas identified as BRICs. Our footprint will How is private equity correlate with the ring of approaching Russia? growth in various placesMark Bond: Private equity firms operating around the world, providingin Russia add a useful dimension since, like they have good openthe Russian partners and entrepreneurs, markets.”they are interested at the outset in a clear Lloyd Blankfein, Goldman Sachs chief executiveroute to potential exit. Many Russian St. Petersburg International Economic Forum, June 2012companies lack financial sophistication andthis means that constructing exit strategiesin order to avoid a potentially costly disputeis a key part of any investment.There is now around US$5 billion of foreign US$5 billion ofprivate equity funds dedicated toinvestment in Russia, as well as the large foreign private equityamount of investment by Russian-owned funds are investedfunds. For large deals involving a foreigninvestor where the investment is greater in Russiathan US$100 million, the Russian DirectInvestment Fund (RDIF), established bythe Government in 2011, is a very helpfuldevelopment. We have already seen a jointventure announced between the RDIF,BlackRock, Goldman Sachs and Templetonto invest in leading Russian companies Catalyst Corporate Finance LLP 2012preparing for IPOs in Moscow. 9
  10. 10. Country Report - Russia M&A update Figure 7: Selected recent M&A transactions Date Target Company Country Target Activities Acquirer Country Deal Value Deal Type (US$m) Jun-12 Stream LLC Russia Digital content Sistema JSFC Russia 15 Domestic delivery services May-12 Denizbank Turkey Turkish bank owned Sberbank Russia 3,542 Outbound Anonim Sirketi by Franca- Belgian Dexia Apr-12 OOO BAW-Rus Russia Manufactures SUVs, Beijing Automobile China ND Inbound Motor Corporation minivans Works Mar-12 Open Joint-Stock Russia Engages in the Rusenergo Fund/ Russia 750 Financial Company Enel generation and Russian Direct Acquisition OGK-5 wholesaleof electric Investment Fund power and heat Mar-12 Natur Produkt Russia Over-the-counter Valent Pharmaceuticals Canada 185 Inbound International, drugs, generics, JSC and food supplements Feb-12 JSC Tascom Russia Wireless broadband Moscow City Telephone Russia 55 Domestic service Network Jan-12 Facebook, USA Various US based Digital Sky Technologies Russia N/A Outbound Twitter, leading online Zynga companies Dec-11 Concern Kalina Russia Russias largest Unilever UK/ 694 Inbound personal Netherlands care company Nov-11 RTS Russia Merger of two Russian Micex Russia N/A Domestic stock exchanges Oct-11 Plastic Logic UK Develops and RUSNANO Russia 150 Outbound commercialises plastic electronics Aug-11 Lenta Russia Chain of supermarkets TPG Capital USA 1,100 Financial Acquisition Mar-11 Novatek Russia 12% stake in Russia’s Total SA France 4,000 Inbound second-biggest natural-gas producer Feb-11 Wimm-Bill-Dann Russia Produces dairy PepsiCo Inc USA 1,356 Inbound Foods OJSC. products, juices, mineral water and baby food Catalyst Corporate Finance LLP 2012 Oct-10 SevenTV Russia General entertainment Walt Disney Co. USA 300 Inbound television channel Jan-10 Vik Oil Ukraine Fuel stations and oil TNK-BP Russia/UK 302 Outbound depots in the UkraineSource: Catalyst Corporate Finance10
  11. 11. Country Report - Russia M&A updateProspects for M&A Legislative reform such as the Third Anti-Monopoly Package and general Positive outlook changes to civil legislation should allGiven the long-term drivers discussed improve deal making conditions and for M&Aabove, we expect to see a rise in M&Aover the next 18 months. encourage inbound M&A. WTO membership will prompt domestic While the State retains overall control consolidation in certain sectors, of strategic sectors including oil and especially in telecommunications, gas (above a certain size), the insurance and other financial services, defence industry and certain areas in while legislative and regulatory initiatives infrastructure such as railways, there should encourage inbound M&A. are many opportunities to invest in consumer industries, manufacturing, Further investment and acquisition infrastructure and many areas of activity by private equity, especially natural resources, such as coal, by those companies already active gold and other metals. in Russia. Given the strong outlook for local brands in essential goods and services, foreign companies will acquire local brands. Find out more Catalyst and our partner firm NorthStar work with companies, owners and entrepreneurs looking to access the fast-growing Russian market. In particular, we offer: Acquisition search assignments Advice on structuring and completing deals Information on sector trends and valuations Access to corporate decision-makers and owners NorthStar’s senior advisers have dedicated their careers to Russia and Central Europe and have significant experience in completing deals. Contact Mark Wilson, Catalyst Corporate Finance LLP 2012 Partner, Catalyst Corporate Finance +44 (0) 20 7881 2960 11
  12. 12. Award-winning international corporate finance advice Catalyst’s focus is on advising management teams, private shareholders and corporates on: Buying businesses (MBOs/MBIs/BIMBOs) Selling businesses Searching for businesses to acquire, both in the UK and overseas Investment opportunities for private equity firms Maximising shareholder value This is all we do and all we want to do. ‘Mid Market Adviser of the Year’ 2011 International experience Through our international partnership, Mergers Alliance, we provide: Access to overseas buyers International M&A Research Local knowledge of M&A culture Identifying targets overseas and tactics and executing acquisitions London Birmingham Nottingham Catalyst Corporate Finance LLP 2012 5th Floor 9th Floor, Bank House 21 The Triangle 12-18 Grosvenor Gardens 8 Cherry Street ng2 Business Park London SW1W 0DH Birmingham B2 5AL Nottingham NG2 1AE Tel: +44 (0) 20 7881 2960 Tel: +44 (0) 121 654 5000 Tel: +44 (0) 115 957 8230Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Services Authority (number 478406)