finance & markets

M&A? What M&A?

19.12.2014 | By Serhiy Kukin

In October western observers noted that 2014 could become a record year for the global mergers and acquisitions market in two aspects. On the one hand a higher number of disrupted M&A transactions since 2008 is expected. On the other hand this sphere could register a peak value in terms of money indicators over the period of the financial crisis. According to Thomson Reuters over 9 months of 2014 the volume of M&A amounted to US $2.66 trillion globally, which is 60% than in the same period last year

FORMALIZATION OF THE PAST

Ukrainian industrial M&A only fit into the first of the two outlined trends. In 2014 the mining and smelting industry of the country essentially saw only one significant transaction in the part of partnership of Rinat Akhmetov and Vadym Novynskiys group Metinvest with Black Iron. The latter is a Canadian company that owned licenses for two iron ore deposits in Ukraine, but did not have enough funds to develop them. Creation of a mining and processing plant (MPP) with the annual output of 9.9 mn t at one of its deposits Shymanovske requires around US $1.1 bn. In spring 2011 Black Iron managed to attract US $37 mn through an IPO on Toronto Exchange. Later the Canadians began to seek a coinvestor among the domestic players. They found Metinvest and signed an agreement acquisition of 49% stake of the project for US $20 mn. The last tranche of US $5 mn from this amount was paid in the middle of this past summer.

Another summer closure, which can be formally attributed to M&A, is also linked to Akhmetov and Novynskiys group. In July the companies of the two businessmen SCM and Smart Holding completed the transaction on the merger of their specialized assets under Metinvest B.V. Smart transferred under control of the latter over 46% of shares of Pivdenniy MMP (around half of its authorized capital is owned by structures of Roman Abramovich, coowner of Russian Evraz).

The PMMP transaction completes a longer corporate story. It started in 2007, when the oligarchs announced a merger of a number of companies into one group.

This year has not been as successful in terms of new M&A in the Ukrainian industry. Russian Mechel owned by Igor Zyuzin actively sought a buyer for Donetsk Electrometallurgical Plant (DEMZ) all of last year and half of this year. By the beginning of August the company was not sold. Indeed this transaction would help Zyuzins group, which is on the verge of bankruptcy due to huge debts (around US $7 bn as of the end of November). Meanwhile, DEMZ has been idle since the start of the year.

INVESTMENT CALM

The example with Donetsk company is indirectly related to the corporate transaction, which one of the domestic players did manage to conduct in 2014, even though beyond the borders of Ukraine. In September Ukraines KVV Group acquired Latvias insolvent steelmaker Liepajas Metalurgs for EUR 107 mn having signed the agreement with the companys insolvency administrator. Meanwhile, back in the end of 2013 KVV Group, as several sources reported them, was almost named the new factual owner of DEMZ.

Owners of Ukrainian industrial assets are either not interested in selling them for a low price, or cannot find the buyer, believes analyst of CASE Ukraine Yevhen Dubohryz. The plant located in a combat zone is worth nothing.

The countrys risks considerably reduce the possible price of a mining and smelting company in general. This is relevant even for the companies located far from the military conflict zone. The indicator EV/EBITDA of our companies, whose shares are traded at foreign exchanges, dropped dramatically over this year. For instance Kostyantyn Zhevagos Ferrexpo had this indicator at 5 last year and now it is only around 2. At the same time the indicator almost did not change for the Australian or Brazilian ore producers, says Dubohryz.

The expert says that potential investors are ready to invest money into all other sectors of the Ukrainian economy, for instance IT, but not into mining and smelting industry. In a situation, when the prices for primary commodities are decreasing, it is difficult to find those willing to invest into the existing capacities or startups in metallurgy or mining industry. In truth the world oil price dropped by more than a third since the start of the year and price for iron ore raw materials dropped by nearly 50% since January. Foreign investors are mainly interested in the agrarian sector. Industry is of little interest for them taking into account that it suffered most from the events in the east of Ukraine, agrees Senior Analyst at Art Capital Oleksiy Andriychenko.

LOST YEAR

Unlike agrarians domestic industrialists cannot expect large foreign investments in 2015 as well, even if the military conflict in the east is resolved next year. One more condition must be fulfilled in order to activate the M&A transactions in the industrial sector, believes analyst at Eavex Capital Ivan Dzvinka, There must be a progress in reforms, including fighting corruption and deshadowing of the economy.

Representatives of the investment expert community CFA Society Ukraine said straight expecting economic reforms foreign investors are ready to reserve the funds for our country, however, for a term that does not exceed six months. Just as much time will be required for the procedural issues connected with M&A, they add. Even in the best case scenario there wont be M&A transactions (sale for debts is different matter altogether ) in the metallurgy until the beginning of 2016, sums up Dubohryz.

It looks like the next year will the ultimate redistribution of property in energy, chemical industry and heavy machine engineering of Ukraine. Not all attractive assets in these industries were transferred into the legal control of private capital in the past years.

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