Russia-Focused Cross-Border M&A: Russian Companies Have Remained Acquisitive, But 2009 Outlook Is Bleaker

By Anna Gunning, Senior Account Manager, The PBN Company

Deteriorating market conditions in the second half of 2008 left many companies unable to raise capital and unwilling to undertake anything that could be perceived as a risky investment. However, accountancy firm KPMG’s latest Emerging Markets Acquisition Tracker shows that Russian companies have retained an appetite for cross-border M&A as companies from more developed markets have shied away.

Inward investment starts strong but falls off

In the first half of 2008 - when market commentators still spoke of “decoupling” - companies from developed markets continued to make acquisitions in Russia at a reasonable (albeit reduced) rate.  Some of the high-profile deals included PepsiCo’s $1.4bn acquisition of juicemaker Lebedyansky and Barclay’s $745m acquisition of Expobank.  With a total of 65 developed market acquisitions of Russian targets in H1 2008, there was a 35% year-on-year increase from the same period in 2007.

It is no surprise that deals tailed off in the second half of the year, as Russia began to feel the full effects of the global financial crisis and the Russian stock markets plummeted.  In H2 2008 there were only 33 developed market acquisitions, compared to 80 in H2 2007.  This 59% year-on-year decrease was well above the 37% decrease for emerging markets collectively.

Over the whole of 2008, there were 98 acquisitions in Russia - compared to a total 128 in 2007.

Russian companies retain appetite, but future is gloomier

Russian acquisitions of developed market targets, however, remained comparatively robust.  Although the second half of 2008 saw a 28% drop from the same period in 2007, there was a nominal increase in the total number of deals for the year to 32, compared to 31 in 2007.

Noteworthy acquisitions by Russian companies in 2008 included GAZ Group’s stake in UK truck maker LDV (although there is currently a management buy-out on the cards as it faces financing issues), and Severstal’s stake in Canada’s High River Gold Mines.

The recession continues, and Russian companies are likely to tread more carefully.  On the one hand, they will find it increasingly difficult to secure funding - there have been concerns over companies’ ability to repay a reported $500bn in foreign corporate debt.  On the other hand, existing owners are facing huge losses if they sell when the market is so low.

As Natalia Orlova, Chief Economist at Russia’s Alfa Bank, told Financial News, “It will take some time before owners accept such a large drop in valuations.  On the buy-side there is very little capital to make acquisitions, and the main source of money is from the [Russian] state.  Companies are suffering form the withdrawal of loans and a lack of demand.  Only companies with the support of the state are in a position to consolidate.”

The brighter spot this year for Russian companies is therefore more likely to be in domestic M&A, with 2008’s cross-border boost unlikely to continue.

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