Page 120 - IFR Opportunities in Russian capital markets

CHAPTER07
ifrintelligence reports/Opportunities in: Russian Capital Markets
Most of the trans-border deals involved banks: of the biggest were the acquisition of Russia’s Impexbank by Austrian banking group Raiffeisen, and the acquisition of a stake in Rosbank by French bank Société Générale. Foreign acquisitions accounted for 35.4% of all transactions by value and were worth US$4.7bn.
Analysts forecast that the volume of M&A deals will increase by a quarter in 2007, with most of the deals coming from the metals and mining, power and financial sectors.
Lending constraints
One of the most important factors containing the growth of the value of the deals is that Russian banks are already running up against the prudential caps on their ability to lend money to finance the bigger deals.
Russian bank loans to a single customer are capped at 20% of the bank’s capital, putting a de facto credit limit on deals financed by a single domestic bank of about US$100m. The two state-owned giants, Sberbank and Vneshtorgbank, can lend a maximum of US$200m. Beyond this, deals typically go overseas and are financed by syndicated loans among international banks. However, with the capital of the biggest banks doubling at the moment, their lending capacity is not running far behind the rising demand for capital by big corporations.
Table 7.2: Top 10 Russian M&A transactions, 2005 – 06 (US$m)
Transaction
Gazproms acquisition of Sibneft
The acquisition of ZAO Polyus by its shareholders
Rosneftagaz’s acquisition of Gazprom shares
The acquisition of Odmurtneft by Sinopac TNK-BP’s acquisition of SIDANCO (BP)
Evraz Group’s acquisition of Oregon Steel
The acquisition of Nelson Resources by LUKOIL Alfa Group’s acquisition of Turkcell
PKN Orlen’s acquisition of Mazelklu Nafta Pyaterochka’s acquisition of Perekrestok
Source: Citigroup
LBOs
Value Industry (US$m)
Acquired stake (%)
72.68 100.00
10.70
96.90 2.00 90.87 100.00 13.22
n/a 100.00
Jurisdiction
of the acquirer
Russia Russia
Russia
China Russia Russia Russia Russia
Poland Russia
Jurisdiction of the target
Russia Russia
Russia
Russia Russia USA Kazakhstan Turkey
Lithuania Russia
Acquisition method
Divestiture Acquirer is an investor group Share acquisition Divestiture Stock swap Tender offer Divestiture Share acquisition Divestiture Divestiture
Oil & gas Mining
Oil & gas
Oil & gas Oil & gas Metals Oil & gas Telecom
Oil & gas
Retail 1,477
13,101 12,867
7,136
3,500 2,546 2,088 2,000 1,602
1,500
Leveraged buy-outs (LBOs) are a classic form of M&A deal, but a recent innovation in Russia and almost all of those reported in 2006 involved foreign companies.
About a quarter of all M&A deals concluded in 2006 were LBOs, worth a total of US$11.6bn. The three largest LBOs were worth more than US$2bn each: the Bank of China issued a credit to Chinese company Sinopec for the acquisition of Udmurtneft for US$3.56bn; Polish PKN Orlen borrowed €1.6bn from international banks for the purchase of an 84.4% stake in Mazeikiu Nafta from Yukos for US$2.34bn; and Russian Evraz Group drew a syndicated credit worth US$1.8bn organised by Credit Suisse and UBS for the purchase of American Oregon Steel Mills for US$2.3bn. All of these deals had raised at least 70% of the financing through borrowing, using the purchase company as collateral.
As the scale of investments on the slate for 2007 is as big as those in 2007, analysts are expecting a lot more LBOs. For example, each of the mobile phone operators can raise about US$9–12bn to finance ongoing foreign expansion, while Rosneft will have to borrow tens of billions of dollars to finance the rest of the Yukos assets that are due to be auctioned in 2007.
Dealmakers will also be forced to find sophisticated ways to finance deals as the cost of companies is also going up fast. For example, mobile phone operator MTS paid US$315 per subscriber in the acquisition of Kuban GSM in 2002, but regional operators cost over US$500 per subscriber by 2005 and over US$800 per subscriber in neighbouring countries.
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