Dealmaking In Frontier Markets: Ukraine

KIEV, Ukraine -- Ukraine, the former Soviet State, is ranked at a difficult 145 for doing business on a report compiled by the World Bank earlier this year, well below many of its frontier market peers.

One senior financial adviser said: “Ukraine can be a tough, tough place to do business”.

But there is still potential for deals to be done, with plenty done already this year. Real GDP is forecast to grow by 4.5% this year and by 4.9% in 2012, according to the IMF.

Agricultural industries dominate Ukrainian deals, given the country’s expansive tracts of fertile soil and relatively well-developed agribusinesses.

Deals also take place in extraction, consumer and financial sectors.

Biggest deals this year

The sale of state-owned telecoms firm Ukrtelecom to Austrian investment firm EPIC for $1.3bn was the largest piece of M&A in the country this year.

The privatisation deal was agreed at the turn of the year, with EPIC the only bidder for the privatisation tender after rivals were excluded by the government. The deal was tied up in March.

Another significant deal was the $537m purchase of Donetsk Electrometallurgical Plant, a Ukrainian steel plant, by Russian coking coal and steel producer Mechel.

Citigroup worked on a project for a Korean-based consumer electronics firm to establish an on-shore presence in Ukraine earlier this year.

The firm previously had sales in the country north of $500m per year up until the financial crisis, although it saw its earnings slump by half in the downturn.

Citi helped the firm to establish a local presence, then provided corporate banking services, including cash and liquidity management, working capital financing, foreign exchange risk management and hedging strategies.

Fernando Iraola, head of global subsidiary for Western, Central Eastern and the CIS at Citi, said: “It was an industry trend. Many of the company’s competitors looked to do the same thing".

First, to protect their business locally, and secondly to continue driving sales and market share in Ukraine.

It gets them closer to their distribution channels and gives them a better understanding of their businesses.

“We came in as a banking partner to help them to understand the local market environment and to provide them with services and solutions that contribute to business expansion on the ground and also plug into global strategy.

“Our knowledge of the local market makes us pretty unique in terms of what we could bring to the relationship.”

What's the outlook?

Several bankers said Ukraine would continue to see a steady flow of deals, primarily in the agricultural, industrial and consumer space.

International consumer firms are following a trend to enter the Ukrainian market by setting up local subsidiaries or partnering with local firms, meaning plenty of corporate banking activity in the country is yet to come.

Fitch Ratings earlier this year upgraded Ukraine's economic outlook to "positive" from "stable", maintaining its B rating, citing government progress in reducing the country's budget deficit.

The UEFA Euro 2012 football tournament, due to be hosted in Poland and Ukraine, has already brought added investment to the country, and could add more as a result of the economic benefits of hosting the competition.

Who’s already there?

Swiss bank UBS has generated the most in fee revenue from mergers and acquisitions in Ukraine, having taken $53m in fees since 2005, according to Dealogic.

BNP Paribas entered the Ukrainian market in 2006 when it bought a 51% stake in local bank UkrSibbank.

The French bank later upped its stake to 99.9% in 2010. Crédit Agricole and Societe Generale have offices in Kiev.

Deutsche Bank has operated a subsidiary in Ukraine since 2009, having first opened a representative office in the country in 1993.

Credit Suisse has a representative office in Kiev. Citibank has operated a subsidiary in Ukraine since 1998.

Deal-making tips and stories from the frontier

Having a partner in the country can help to smooth a deal, in order to help you to negotiate the local political and legal environment – which can be choppy.

Jon Clark, oil and gas transaction leader at Ernst & Young, said: “Most people successful in investing in emerging markets do so with a local partner. Instead of coming in to take 100% of a project, you take a majority stake.

“You have to be careful when picking local partner with the new UK bribery act. If someone you’re associated with has done something they shouldn’t, you’re in trouble too. If you have a local agent and they’re paying bribes, you can’t say ‘it wasn’t me, it was my local agent’.

“Diligence on your partners has always been important, it’s now more important under the bribery act.

Corporate hospitality in Ukraine can be an interesting experience for deal makers, according to Edward Bibko, head of capital markets at Baker & McKenzie.

He said: “In the CIS region, there is a very strong cultural idea that if guests come you need to provide hospitality for the entire stay. If people come to London to do a deal then maybe you'll have one dinner out with them. In the CIS they feel strongly that they have to programme every minute of your time there.”

While on the deal, the group of investment bankers and lawyers were taken by their clients to stay with a settlement of Cossacks in an agricultural region of eastern Ukraine.

A group of Cossacks put on a show for the visitors, in which Bibko volunteered to have a man whip branches out of his hands with a bull whip.

He said: “He’d come running at me and pretend to do it, and I thought I would lose an eye or hand but I wouldn’t flinch.”

Some advisers note that clients in Ukraine can, at times, be partial to a drink. One comments: “They just love to drink. We decided that we weren’t going to let them bring out the vodka until at least 5pm. The management kept saying; ‘wouldn’t it be more pleasant if we brought out the vodka?’ when we were in diligence meetings.

“At 5pm they finally brought it out and we had to do an elaborate toast where each organisation has to give a toast.”

Source: Financial News