Russia's M&A market was highly active in February 2014. The total amount of transactions estimated using AK&M Information Agency's proprietary method increased $4,212.5 million, 2.4 times more than in January ($1,791.4 million) and 1.6 times above the result achieved in February 2013 ($2,690.2 million), according to the recent issue of AK&M Information Agency's monthly bulletin MERGERS AND ACQUISITIONS MARKET (no. 194).
Furthermore, 51 transactions were finalized in February, their number increasing by 10% against January (46), by 24% against February 2013 (41 transactions), making this February the most successful second month in five years.
This pleasant result was achieved despite the US dollar appreciation against the Russian ruble (+10% to RUB 36.0501 on February 28 compared with RUB 32.7292 as of December 31, 2013), with about 10% of the transactions unable to reach $1 million in value to qualify for our statistics. However, the overall result was high.
The average deal value excluding the largest deals (worth $1 billion and more) also increased by 46% against the previous month, by 52% compared with February 2013, reaching $56.8 million.
Strange as it may seem, the February rally was mainly driven by negative events, AK&M analysts say, namely, the above-mentioned ruble depreciation and the lack of foreign policy stability as the Russia-Ukraine conflict flared up.
The weaker domestic currency forces companies to spend rather than save and to step up their M&A efforts if they want to secure themselves against the impairment of their financial resources.
As to the foreign policy landscape, the risk of tougher sanctions on Russia from the U.S. and the European Union (see issue 194 of the MERGERS AND ACQUISITIONS MARKET bulletin for details) spurs players to finalize deals as soon as possible, especially where acquisitions are funded with borrowed capital from foreign banks or where the deal structure involves foreign legal entities.
In March, the M&A market growth sped up. According to AK&M preliminary estimates, at least 30 transactions for a total amount of more than $12 billion were finalized including the purchase of production company RWE Dea by investment company LetterOne (established by Alfa Group owners) for EUR 5.1 billion including the amount of debt, the largest transaction of the first quarter of 2014.
However, how long this M&A feast on the verge of frenzy will continue remains to be seen. Just as in the previous months, there is no substantial base in the real sector to underpin a growth in the M&A market. In February, the industrial production index increased by 2.1% (as estimated by the Federal State Statistics Service). While this is certainly good news, it is not entirely clear if the growth will continue in March and April. In the meantime, HSBC's PMI index reflecting the business activity in the industrial production sector decreased to 48.3 points in March from 48.5 in February, primarily owing to a lower volume of new orders. Imported raw materials are growing in price in the wake of a weaker ruble, and domestic primary products follow suit, which is putting additional pressure on the financial capacities of enterprises.
The conflict between Russia and Ukraine has given rise to more dismal forecasts of the global economic situation. In particular, the World Bank lowered its growth forecast for Russia's GDP in 2014 from 2.2% to 1.1% (the upside scenario) or -1.8% (the shock scenario). Standard and Poor's has projected Russia's GDP to increase by 1.2% in 2014 and 2.2% in 2015, but the escalation of geopolitical tension will cut the growth rate to 0.6%, the rating agency believes.
Russia's Ministry of Economic Development expects the gross domestic product to increase by 2.5% in 2014, although this forecast may be revised. Elvira Nabiullina, the Governor of the Central Bank of Russia, voiced a much more pessimistic estimate: the GDP growth rate reduction to less than 1% in 2014 is becoming a reality.
Besides, the capital outflow is projected at ca. $100 billion resulting in shrinking investment, tougher lending terms, and slower growth of consumer demand.
Therefore, AK&M analysts do not see a steady base for a higher M&A activity. Furthermore, today's investments aimed to secure capital owners against deprecation of money may entail longer payback periods and underperformance of the assets acquired. Dealmakers are fully aware of these challenges, which is why the gap between the low-end and high-end transactions is growing. While major players effect billion-dollar transactions, medium market cap companies seem to prefer frequent but rather low-cost acquisitions.
The latter trend is exemplified by the growing share of low-price transactions ($1-10 million) in the total number of M&A events in February (57% compared with 42% in 2013 and 35% in January 2014). Instead, the percentage of transactions in the $11-50 million price segment plummeted to 19% from 39% in January and 31% for 12 months of 2013.
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