Aalto Capitalilla on ilo kutsua Teidät Venäjä-aiheiseen aamuun. Tilaisuudessa pureudumme Venäjän talouden näkymiin talouskriisin jälkeen ja saamme paikallisen toimijan näkemyksen Venäjän yrityskauppamarkkinasta. Eduskunnan ajankohtaiset terveiset tulee kertomaan kansanedustaja Ilkka Kanerva.
Ravintola Savoy, Salikabinetti
20. toukokuuta 2010 klo 08:30 – 10:30
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CORPORATE FINANCE
M&A in Russia: General Outlook
USD bn Number of deals
180 600
159.4
160
500
140
486 122.4
120 400
100 344 380
300
80 63.5
273 228
60 238 46.1 200
40.5
180
40 22.8
19.3 100
20
0 0
2003 2004 2005 2006 2007 2008 2009
Value of deals (L-axis), USD bn Number of deals (R-axis)
Source: KPMG, M&A Journal, Mergermarket
M&A deals breakdown by industry
2008 2009
9%
10% 4%
5%
Oil & Gas
44%
Oil & Gas
Telecom 9%
9%
Telecom
Metals & Mining
Metals & Mining
Consumer & Retail
Consumer & Retail
Finance
50% Finance
19% 23%
Other industries
Other industries
9%
9%
Source: KPMG, M&A Journal, Mergermarket
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NORTHSTAR
CORPORATE FINANCE
Mergers and Acquisitions in 2009
The M&A market crumbled as the financial crisis ushered in higher levels of
uncertainty about future economic development, increased risk aversion, a larger gap
in valuation expectations between buyers and sellers, and a liquidity crunch that
made it difficult to fund deals.
Among the sectors most influenced by the crisis — and therefore showing the largest
declines in M&A activity — were consumer goods and retail, financial services and
metals and mining, which were all down by about 80 percent.
Relative bright spots were the oil and gas sector, as well as communications and
media, which were the best-performing parts of the Russian M&A market.
Topping the list of big consolidations last year was the merger of VimpelCom and
Kyivstar, worth $5.5 billion.
The transactions that took place in 2009 were relatively small in size and limited in
number. Many of the deals that occurred included on the buy side either government-
affiliated entities, or cash-rich companies that could take advantage of distressed
situations.
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CORPORATE FINANCE
Largest M&A Deals by Foreign Acquirers in 2009
Bidder Target Stake, % Value, EUR m Sector
Weatherford International TNK BP International
100 % 346 Oil & Gas
Ltd Ltd (Oil field services)
Viktor Pinchuk (private
OSAO Rossija 100% 241 Finance
investor)
Standard Bank Group Troika Dialog Group 33% 237 Finance
OAO Bereznikovsky
Solvay SA 97% 155 Consumer & Retail
Sodovy Zavod
Central European
Russian Alcohol Group 12% 109 Consumer & Retail
Distribution Corporation
European Bank for
Reconstruction and Promsvyazbank 12% 107 Finance
Development
TPG Capital OOO Lenta 35.4% 77 Consumer & Retail
China Investment
Nobel Oil 45% 67 Oil & Gas
Corporation
Colussi SpA Infolink 100% 54 Consumer & Retail
Source: Mergermarket
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Largest Foreign Acquisitions by Russian Acquirers in 2009
Bidder Target Stake, % Value, EUR m Sector
Vimpelcom Kievstar GSM 100% 3,637 Telecom
Surgutneftegaz MOL Hungarian Oil and 21.2% 1,415 Oil & Gas
Gas Public Ltd Company
Lukoil OAO Lukarco BV 46% 1,094 Oil & Gas
Lukoil OAO Total Raffinaderij 45% 431 Oil & Gas
Nederland NV
Mechel Mining OAO Bluestone Coal Group 100% 410 Energy
TMK NS Group Inc 49% 396 Industrial services
OJSC Polyus Gold KazakhGold Group 50.1% 358 Mining
Sberbank BPS-Bank 93.3% 191 Finance
Gazprom Neft Sibir Energy Plc 7.8% 172 Oil & Gas
Source: Mergermarket
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CORPORATE FINANCE
Some Finnish-Russian M&A Deals
Year Bidder Target Stake, % Value, EUR m Sector
2009 Tikkurila Oy Polimerbyt 30 n.a. Industrial
2008 Itella Mail Communication Connexions 100 n.a. Advertising
2008 Atria Oyi CampoMos 100 75 Consumer & Retail
2008 CapMan Group Norum Russia Fund 100 7 Finance
2008 Itella Corporation National Logistic Company 90 200 Logistics
2008 Oriola-KD Corporation Vitim & Co, Moron Ltd 75 85 Pharmacy
2008 Poyry Plc Giprobum - Poyry 30 n/a Engineering
2008 Puukeskus Oy Intekso n/a n/a Building materials
2008 Fortum Oyi TGK-10 up to 76% 2100 Energy
Multi-Link Terminals Ltd
2007 N-Trans Group (Russia) 50 140 Logistics
(Finland)
2007 Fortum Oyi TGK-1 26.3 243 Energy
2007 KONE Corporation RSU5 90 n/a Engineering
2007 Sanitec Oy Della 60 n/a Ceramics
2007 Fazer Bakeries Ltd Volzhsky Pekar n/a n/a Bakery
2006 Tikkurila Oy Gamma 70 n/a Paint manufacturing
2006 Norilsk Nickel MMC (Russia) OM Group Inc (Finland) 100 318 Metallurgy
2006 Nordea AB Orgresbank 75 246 Banking
St Petersburg Generating
2006 Fortum Oyi 12.5 120 Energy
Company
2006 Rautaruukki
Source: Mergermarket Oyi Ventall 100 128 Steel construction
Recently a new market in Belorussia has opened up for Finnish companies:
Ingman Ice Cream – Gomel Ice Cream Factory in 2009
Olvi – Lidskoe Pivo in 2008
7. Page 7
NORTHSTAR
CORPORATE FINANCE
Russian vs. European M&A Environment
European M&A environment Russian M&A environment
Substantial growth (but from a low base) given
1. Current levels Relatively subdued given economic uncertainties
continued domestic consolidation and foreign direct
of activity and low economic growth rates
investment
Transaction timeframes are relatively quick Transaction timing can often be in excess of a year;
2. Time frames
(usually up to 6 months) building relationships is important
3. Transaction Established history and usage of M&A; Russian parties being unversed in deal-making, and
process ‘standardized’ transaction procedures frequently do not seek professional advice
Structures more complex, often with the use of off-
4. Deal Predominantly ‘clean’ transactions with a single
shore vehicles for tax, ease of exit, financing
structures purchaser selling a 100% stake
considerations
Mostly cash consideration;
5. Financing A variety of financing options available Sophisticated financing instruments emerging, yet
legislation lagging behind
Market data (in terms of market size, growth,
Market data less readily available and is often out of
6. Market data market shares etc) readily disclosed and
date given rapid changes in market place
available
8. Page 8
NORTHSTAR
CORPORATE FINANCE
Russian vs. European M&A Environment (con’d)
European M&A environment Russian M&A environment
Liquid M&A market facilitates benchmarking Minimal disclosure of deal details complicates
7. Valuation to comparable transaction multiples benchmarking valuation
Focus on earnings / cash flow multiples Traditional focus on book values (slowly changing)
Mid size companies do not have IFRS and quite often run
Strong financial / management information on management accounts
systems in place; reliable historical data
Generally weak finance functions
Analytical review and performance
8. Financial data
monitoring along a range of key performance Analytical review and performance monitoring focused on
indicators a small number of key performance indicators
Rigorously assessed future projections Future projections are rarely forecast in detail and are
often not fully thought through
Tend to be commercially focused and ‘result- Negotiations may concern objectives which are not
9. Negotiation
driven’ purely commercial
Rapidly improving, but still opaque by international
standards
Minimal interference on private deals
10. Regulatory Numerous regulatory and corporate compliance
Regulations highly transparent
Environment requirements (antimonopoly approval of transactions,
Usually easy to enforce Federal Financial Markets Service filings etc.)
Low level of enforceability
9. Page 9
NORTHSTAR
CORPORATE FINANCE
Greenfield Versus M&A: Pros & Cons
Type Pros Cons Balance
Greenfield Control… Time required for licenses/utilities Was major entry strategy for
MNCs in 1990s
Control… Need to handle government relations/
administrative issues Now slowly replaced by M&A
And Control!
Financial and operational risks
Need to recruit labor
JV Financial risk sharing Corporate governance risk Not frequent except for PSAs
Russian partner handles Technology and brand transfer issues Control is a difficult issue
administrative/license issues
Control may be lacking
Ready source of skilled labor
M&A Time saved Difficult to negotiate transfer of control M&A increasingly used entry
strategy in recent years
Buying established company “Skeletons in the closet”
A lot of due diligence needed,
Could still be reasonably Post-integration difficulties unless nothing could be taken for
cheap Russian target was built and operated granted
to Western standards
M&A market becomes better Quite often easier to do an
established Corporate governance and counter- asset-based deal
party risk
Ready source of skilled labor
10. Page 10
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CORPORATE FINANCE
Where do you start?
As of 2010, Russia has a 20 year history of foreign direct investment
− …with most of the required elements in place, and with important lessons
learned
These elements include:
− Fairly sophisticated investment and joint-stock company legislation
− Established business services industries such as auditors, strategic
consultants and headhunters (including both domestic and international
names)
− Dynamic corporate finance and M&A advisory industry
− Large selection of legal firms with M&A and investment experience
− Offshore holdings with strict shareholder agreements could prevent
greenmail and other minority shareholder threats that would be otherwise
present in the Russian company
Depending on whether your investment is a “greenfield” project or
acquisition or joint venture with an existing company the roadmap is
different
11. Page 11
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CORPORATE FINANCE
Expectations of Target Companies
Do deal without (or with limited) due diligence
Do deal quickly
Lack of understanding: Quite often fuzzy differentiation between debt and
equity
Mostly limited understanding of procedures, lawyers, due diligence, closing
etc.
Distrust of due diligence, as it is regarded to be just an opportunity to learn
more about a competitor
Local companies often change their minds every other day. Lack of ability to
concentrate on long term strategy
Fire fighting: Will only become active when there is a crisis
NSCF: “No we will not be able to sign a deal tomorrow”
12. Page 12
NORTHSTAR
CORPORATE FINANCE
“Dust off Your Walther PPK” (AK47s are better)
A very subtle blend of confirmed interest with caveats which are
not too strong
AK
-4
7S
Ability to get over lack of trust and get beyond statutory company
ov
documents to actual operating data & management accounts
iet
PK
A
ss
rP
Confidentiality agreements in Russia are perceived as
au
he
lt R
meaningless
alt
ifle
W
Trust factor most important
Dogged Detective Work
Market knowledge is key, but contacts on the right level are critical
Information gathering is a very difficult and time-consuming process
Role of financial advisor:
– Identify and approach potential targets/buyers
– Advise on the basic structure of the Transaction and tentative terms
– Prepare valuation of the Target and the underlying financial model
– Coordinate, and (where necessary, instruct) other professional
advisers, including lawyers, accountants, “background check”
agencies, PR -advisers, etc.
– Assist in the negotiation of final transaction terms, documentation and
closing of the Transaction
Confidential inquiries
13. Page 13
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CORPORATE FINANCE
Price Assessment
The gap between Russian and foreign partner’s view of value is typically greater than in the West
Often the seller declares a fixed price at the very beginning: either take it or leave it
Non-transparency of M&A market makes comparison of the deal value difficult
Under-valuation of Russian assets is well-known, therefore the seller usually starts with a higher
price
Readiness to pay 30–40% control premium is often desirable
Brand, IT, investments in management processes (especially in banking), sales chains and
client base are often over-valued
Use the traditional techniques:
Multiples (P/E, EV/EBITDA, EV/EBIT, EV/Sales)
– Multiples (Comparable transactions) – Emerged vs. emerging
markets
– Multiples (Comparable traded) – Emerged vs. emerging
markets
DCF methods, WACC and/or APV
______________________________________________________
Bottom Line: Valuation is maximum price that can be paid.
14. Page 14
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CORPORATE FINANCE
Due Diligence
Objectives of Due Diligence
Seller: Buyer:
“Fresh Look” at the Company Obtaining Objective information and identification of
Obtaining Possibility for “Pre-sale Preparation” Legal Risks
Use of the Report in Negotiations with Potential Buyer Adoption of a Decision on the Visibility of the Transaction
and its terms
Preparation for Due Diligence on the part of the Buyer
Arguments for Negotiations
Transaction Structuring
Determination of Conditions Precedent of the transaction
Specific Risks Emerging From the Due Diligence Process
Legal issues in privatization documents / Legal issues in the previous acquisitions
Most companies were involved in aggressive tax optimization schemes over recent years. Significant tax risks may be
inherited
Long outstanding receivables with insufficient allowance for doubtful accounts
Poor inventory management and stock obsolescence problems
Some companies have significant volumes of off-book transactions
In most cases the companies do not follow debt covenants
No detailed and thoughtful budget for capital expenditures often indicates inadequate future development planning
Some companies incur significant expenditures on the maintaining of social infrastructure and have unrecorded social
obligations
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CORPORATE FINANCE
Key Due Diligence Issues
Understanding of cash flows, profit and cost centers
Financial/
Identification of liabilities
Accounting
Accounting impact
Identification of risk areas
Tax
Ring-fencing
Subsidiaries ownership & title, licences, permits
Legal Related party contracts
Litigation
Restructuring restrictions
Social Costs
On-going cost structure
Legacy issues/related liabilities
Environmental
Benchmarking of Russian/Western practices
Time consuming process due to unreliability of information and
a need to cross check from multiple sources
16. Page 16
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CORPORATE FINANCE
Key Due Diligence Issues
COMMERCIAL
CORPORATE ISSUES ASSETS PRODUCTION ACTIVITIES
Establishment of the Real Estate: Licenses/Permits Purchases
Company
buildings, facilities Certification Sales/Distribution
Privatization
land Environmental Issues Logistics
Reorganization
Mineral Licenses Employment Relations Credits and Loans
Amendments to Foundation
Production Assets Social Obligations Cross-Border Operations;
Documents
Intellectual Property Other Industry-Specific exchange regulation
Authorized Capital
Information
Investments customs issues
Securities
Antimonopoly Requirements
Shareholders/ members
Other Business Activities
Corporate Governance
Approvals for Transactions
Net assets
Greenmail Risks
17. Page 17
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CORPORATE FINANCE
Tax Issues
Historic tax risks bounded by three years of statute of limitation affect the
purchase price, as well as distort the target's financial performance as
shown in the statutory accounts
Buyer is usually indemnified against previous misdemeanours by
escrow/pledge/ collateral structure as a part of consideration. Some
cases require non-standard indemnification e.g. personal liability of seller
Cessation of tax optimisation schemes may make the company
uncompetitive against less honest rivals meaning that extensive due
diligence is priority procedure for foreign buyers.
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CORPORATE FINANCE
Contractual Rights & Incentives
Contractual protections are sought, as is common in the West, usually under a
foreign law jurisdiction
However, difficult to rely purely on contractual protections. Appropriate structuring
of transactions – such that economic incentives are aligned – is of major
importance
Such incentives may take different forms:
– Payment overtime/milestone payments/earn-outs
– Cash vs. non-cash consideration
– Sharing of economic benefits/costs
– Management incentivisation schemes
– Etc.
Example: Rautakesko, (subsidiary of Kesko), acquired Stroymaster, the Russian chain of
DIY stores in the St. Petersburg area, from TECS, for a maximum consideration of EUR
19.6m, including a maximum earn out payment of up to EUR 6.9m. contingent upon the 12
months revenue of Stroymaster. (March 2005)
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CORPORATE FINANCE
Scenarios
Foreign investor must form a view on the environment which drives optimal
participation strategy
They must also be aware of alternative scenarios in order to structure their
investment to be as robust as possible keeping in view the range of potential
outcomes
Western businesses
Local and Western Westerners can
strongly
partner can work in compete on merit. All
disadvantaged. Loans
balanced partnership. local expertise
Characteristics
and operating
Contractual rights can achieved by hiring
environment cannot be
be enforced staff, consultants, etc
relied upon
Westerners can
Western businesses
explicitly lead Russian
may be discriminated
operations but material
against but legal
involvement of
environment provides
Russian partners still
some protection
valuable
1 2 3 4 5
Implications
Ownership
ca. 50% with
Blocking
Zero to small detailed Control
minority 100%
minority agreements 75%
(25% +1)%
sharing control
20. Page 20
NORTHSTAR
CORPORATE FINANCE
NorthStar Corporate Finance in Brief
Established in 1998 as joint venture NorthStar Corporate Finance Locations
between British and Finnish
investment banks;
Since 2006 NorthStar has been
independent and privately owned
corporate finance advisory firm;
Since 2008 NorthStar has been a
Moscow
member of Mergers Alliance (global
network of independent advisors); London
Stuttgart
Currently one of the leading cross-
border M&A boutiques in Russia;
Unique blend of local expertise and
market knowledge with top-tier London, United Kingdom Stuttgart, Germany
Moscow, Russia,
international customer relationships Main Office
and premium investment banking
products;
Main geographical focus on
transactions between Russia & CIS
and Northern Europe.
21. Page 21
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CORPORATE FINANCE
NSCF Corporate Finance Services
Mergers and Acquisitions
Identify and approach potential targets/buyers
Advise on the basic structure of the Transaction and tentative terms
Prepare valuation of the Target and the underlying financial model
Coordinate, and (where necessary, instruct) other professional advisers, including lawyers,
accountants, “background check” agencies, PR -advisers, etc.
Assist in the negotiation of final transaction terms, documentation and closing of the
Transaction
Fundraising
Private equity
Bank financing
Structured and project finance
General advisory on Market Entry
Market research
Analysis of competitive environment
Financial modeling
22. Page 22
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CORPORATE FINANCE
Selected References
Ingman Ice Cream OY, M&A
NorthStar CF advised Ingman Ice Cream Oy on its acquisition of Gomel Ice Cream factory, the fourth largest ice-cream
producer in Belarus, through joint venture with a local partner - the state-owned diary holding Rumyantsevskoye. May
2009
Aladdin Oil & Gas Company ASA, Financial Advisory
NorthStar CF has advised on an initial $ 25 m investment commitment by an intenrational investment group in Norwegian
publicly traded oil company ALADDIN, focused on Russia. November 2008
Olvi Oyj, M&A
NorthStar CF acted as financial advisor to Olvi Oyj in its acquisition of 51% shares of Lidskoe Pivo, a Belorussian brewery
in October, 2008
Itella Mail Communication, M&A
NorthStar CF advised Itella Mail Communication in its acquisition of OOO Connexions in Russia, the core competence of
which includes consulting and campaign management services for customer relationship marketing (CRM). October 2008
Mitsubishi Corporation, M&A
NorthStar CF acted as financial advisor to Mitsubishi Corporation, the major Japanese trading house on a global basis, in
the acquisition of Vis Nova Trading GmbH, German pellet producer. July 2008
Atria Plc, M&A
NorthStar CF acted as financial advisor to Atria Plc in its acquisition of 100% shares of Vastse-Kuuste, an Estonian meat
producer in June 2008
ADR-Haanpää, M&A
NorthStar CF acted as financial advisor to ADR-Haanpää, the leading haulier of liquid chemicals
in Scandinavia and the Baltic Region, in the acquisition of the business of Rona Trans, a Russian liquid cargo
transportation company. January 2008
Holcim, M&A
NorthStar CF advised Holcim, one of the world's leading suppliers of cement and aggregates, on the acquisition of
minority stakes in OAO “Volskcement” and OAO “Shurovsky Cement”, Russian cement companies. 2007
23. Page 23
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CORPORATE FINANCE
Selected References
WestCall, Financial Advisory
NorthStar СF advised WestCall Telecommunications on the sale of a minority stake to Russia Partners II (a Russia-
focused private equity fund of US-based Siguler Guff & Co) and on fundraising of USD 30 million in the next three years
for the development of WestCall’s operations. July 2007
Hansastroi, Financial Advisory
NorthStar СF advised Hansastroi, a Finnish construction company focusing on construction services and real estate
development in Russia, on fundraising of EUR 20 million of equity and more than EUR 30 million of debt. The equity
investors are Quadriga Capital Russia, EBRD, DEG and private investors. March 2007
Baltic Commerce, Financial Advisory
NorthStar СF advised Baltic Commerce, a St. Petersburg based development company focusing on construction services
and real estate development in Russia. In the fundraising, Baltic Commerce raised funds for the development of an
85,000 m2 shopping center in St. Petersburg. 2007
Atria Plc, M&A
NorthStar СF acted as financial advisor to Atria plc, Finland's leading meat processing company, in its acquisition of 100%
of the shares of Pit Product Group, one of Russia’s largest meat producers in St. Petersburg in June 2005
ABB, Financial Advisory
NorthStar СF advised ABB, a global leader in power and automation technologies, on the sale of 1.4 million shares in
ChEAZ, one of the largest electrical engineering companies in Russia. May 2005
Fazer, M&A
NorthStar СF advised Fazer Group on its acquisition of OAO “Experimentalnyi Konditersko-Bulochny Kombinat
”Zvezdny”, a Russian bakery operating in the Moscow area. Fazer Group operates in three business areas; Amica
(catering), Fazer Bakeries (bakery products) and Candyking (confectionery), in a total of nine countries. April 2005
Mint Capital, Placing Agent
NorthStar СF acted as the exclusive placement agent for MINT Capital, a $66 million Russia-dedicated private equity fund
focusing on investments in media, internet and new technology. April 2005
Orkla Foods, M&A
NorthStar СF advised Orkla, one of the largest listed companies in Norway, on the acquisition of a minority stake in OAO
Volzhanka, a Russian confectionery company belonging to the Sladko Group. December 2004
Nokian Tyres, Structured Finance
NorthStar CF acted as financial advisor to Nokian Tyres, a Helsinki listed tyre manufacturer, in arranging lease finance for
the company's Russian joint venture with Amtel Tyres. February 2004
24. Page 24
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CORPORATE FINANCE
Contact Information
NorthStar Corporate Finance
Ambassador Office Centre
Prechistenski per. 14, bld. 1 Contact persons:
Moscow 119034
Russia Mark Bond
Chairman, Managing Partner
Internet: www.northstar-cf.ru +7-495-937-5855
mark.bond@northstar-cf.ru
Petteri Pekkanen
Senior Partner
+7-495-937-5855
petteri.pekkanen@northstar-cf.ru