russian m&a review 2019 · 2021. 1. 12. · 8 luxoft innovations & technology dxc technology...

Russian M&A Review 2019February 2020

KPMG in Russia and the CIS

kpmg.ru

http://www.kpmg.com

Foreword

We are pleased to present you with the fifteenth anniversary edition of our annual KPMG Russian M&A Review.

The past year witnessed the most positive trends in investment activity for the whole post-sanctions period. This was reflected in an increased number of deals, growth in average deal value, and greater foreign investment – not only from the East (which has become the main focus of investment relations with Russia), but also western companies. We have observed that, despite some issues persisting vis-à-vis internal and external political and economic plans, investors are now more confident about executing their deal strategies within a stabilising Russian environment.

A further shift in focus by the government, towards strengthening the economy, boosting production, and raising living standards, will, if achieved, provide a further stimulus to investment activity. Also, in the absence of any additional negative events, we expect growth in investment activity – not only in traditional sectors such as oil & gas, but also in IT (which, thanks to digitalisation, has recorded impressive growth in the past two years) as well as the consumer markets and real estate sectors.

This year has already seen a number of M&A market studies being released, which underlines the importance and relevance of understanding its changes. At the same time, each study comes to a markedly different conclusion, and we wish to draw our readers’ attention to which analysis methodology is used. KPMG has been releasing the Russian M&A review for 15 consecutive years, consistently applying the same methodology. Our conclusions and forecasts are based on a thorough analysis of M&A market data and our extensive experience in supporting M&A deals and processes across the Russian market.

In this edition of the Russian M&A Review we reflect on key recent trends and how these will influence M&A in upcoming years. In addition to the statistical analysis, we again share our insights into the key trends being seen in the main economic sectors: Oil & Gas, Innovations & Technology, and Real Estate & Construction.

We hope that you enjoy reading this anniversary edition of our KPMG Russian M&A Review. We will be happy to answer any questions that you have.

Lydia Petrashova

Head of Deal Advisory

Russia and the CIS

Partner

Lydia Petrashova

© 2020 KPMG. All rights reserved. 2 • Russian M&A Review 2019

ContentsOverview

2019 in review

Outlook for 2020

Key M&A drivers in 2019

Oil & Gas sector: unleashing the pent-up demand

Innovations & Technology sector deals

Taxation aspects of M&A deals involving innovations & technology companies

M&A trends in Real Estate & Construction

Methodology

Appendices

Macro trends and medium-term forecasts

Cross-border M&A highlights

Sector highlights

4

6

10

16

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26

28

34

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© 2020 KPMG. All rights reserved. Russian M&A Review 2019 • 3

Overview

While 2019 saw only a modest increase in deal activity, by 3%, the value of Russian M&A leapt 21.5%, to almost USD63 billion.

$63billion

21.5%

Much of this growth was driven by large deals in the oil & gas sector1. This demonstrates that the Russian oil & gas sector continues to be highly attractive for investors (we look at this trend in detail later on).

The economic slowdown in 2019 did not stop investors from being active. In general, investors are more confident that the Russian economy is less exposed to sanctions and oil price fluctuations, and hence is less dependent on foreign capital or debt financing, and can deliver above-average returns over the medium to long term.

19%M&A activity grew not only in terms of domestic investment, which saw 19% growth in deal value, but also in terms of inbound investment, which jumped almost 50%.

49.5%

The foreign direct investment confidence is improving, as companies realise that they can live with the status quo, resulting in a high level of portfolio investment and attractive 3% yields on rouble assets.

We expect moderate growth in deal activity in 2020, due to the commencement of a new six-year investment cycle and a respective boost in domestic projects.

Russian M&A (2013–2019)

Source: KPMG analysis.

Number of dealsDeal value (excl. mega deals), USDbn

Mega deals (>USD10 bn), USDbn

2013

2014

2015

2016

2017

2018

2019

100.9 14.4

79.0

51.8

64.8 11.3

55.3

51.7

62.8

333

621

470

482

552

652

670

1 The acquisition of a 30% stake in Arctic LNG-2 by Japan Oil, together with Mitsui&Co, CNOOD, and CNODC; the designated sale of Gazprom’s minor shareholdings to an undisclosed buyer for the total amount of USD5.1 billion; the new LUKOIL’s share buy-back announced in 2019 for the amount of USD3 billion.

2 The Defending American Security from Kremlin Aggression Act, introduced by the US Senators on August 2, 2018.

The key factors that will determine trends in 2020 comprise the following:

whether the National Projects Programme, which is a catalyst for economic recovery, will be implemented more aggressively

whether the oil price will remain at current high levels, and hence continue to be a boost for the economy

whether the revised DASKA2 bill or other sanctions are enforced further

whether there will be any meaningful improvements in the business climate

how successfully the new government meets the challenging targets set by the President at the start of the year


# Target Sector Acquirer Vendor % acquired USDm

1 LUKOIL* Oil & Gas LUKOIL Minority shareholders 5.1% 3,000

2Gazprom Oil & Gas Single Undisclosed Buyer Gazprom 3.6% 2,941

Gazprom Oil & Gas Single Undisclosed Buyer Gazprom 2.9% 2,202

3

DKBR Mega Retail Group (Joint venture between DIXY, Krasnoe i Beloe, Bristol)

Consumer Markets DIXY Group; Krasnoe i BeloeDIXY Group; Krasnoe i Beloe 51%/49% 2,656

4 Arctic LNG-2 Oil & Gas China National Offshore Oil Corp (CNOOC Ltd.) Novatek 10% 2,612

5 Arctic LNG-2 Oil & GasJapan Oil, Gas and Metals National Corporation; Mitsui & Co Ltd

Novatek 10% 2,612

6 Arctic LNG-2 Oil & Gas China National Petroleum Corp (CNODC Ltd.) Novatek 10% 2,612

7 Tele2 Russia Telecom Communications & Media Rostelecom VTB Bank; Rossiya Bank; Invintel BV

55% 2,095

8 Luxoft Innovations & Technology DXC TechnologyExisting shareholders 100% 2,006

9

Joint venture for food-tech and mobility services (combining Delivery Club, YouDrive, DC Daily, Performance Group, Foodplex)

Innovations & Technology Sberbank; Mail.ru Group Joint venture 100% 1,566

10 MegaFon* Communications & Media MegaFonGazprombank; Minority shareholders

20.4% 1,271

* LUKOIL announced a buy-back on the open market of its common shares and depository receipts for an aggregate amount of up to USD3 billion; MegaFon repurchased its own shares,

representing in total 20.4% of its share capital, for USD1.27 billion.

Russian M&A largest deals in 2019

$25,573 million

10largest deals

40.7%as a % of total transactions in 2019


Overview

2019 in review

2019 was expected to be the final transitional year for the Russian economy, as it should have already been responding to the National Projects Programme as well as other incentives. However, 2019 did not live up to expectations – GDP growth in 2019 was tepid, and, after an exceptional rise in 2018 (to 2.3%), GDP growth is forecast to slow to 1.3% in 2019.

2.3% 1.3%GDP growth is slowing-down

2018 2019

After a rally in 2018 in fixed investment and industrial output (which both saw growth in 2018 of around 3%), 2019 looks weaker, as several major projects reached the end of their cycle. Estimates put investment for 2019 at 1.6% growth, while industry posts a better 2.7%. This is primarily due to the National Projects Programme failing to kick in sufficiently; positive effects from the programme may only be seen in the second half of 2020.

Despite the economic slowdown in 2019, investors have been optimistic. The RTS equity index rose 45% last year and was the best-performing major index in the world due to a drawdown in country risk,

an accumulation of capital, and growth in dividend yields on a number of Russian stocks. This positive momentum has continued in early 2020.

Pent-up investment demand, which was building after the imposition of sanctions, began to abate in 2019 due to clear indicators that the Russian economy has successfully adjusted to the sanctions and is not as dependent on high oil prices. This resulted in a 19% rise in aggregate domestic M&A deal value, which reached USD40.1 billion in 2019.


Deal value by sector: 2019 vs. 2018, USDbn

Deal volume by sector: 2019 vs. 2018


Oil & Gas

Innovations & Technology

Consumer Markets

Real Estate & Construction

Communications & Media

Metals & Mining

Transport & Infrastructure

Chemicals

Power & Utilities

Banking & Insurance

The rally seen in the past two years in innovations and technology, media and communications, and consumer markets continued in 2019. The consumer markets sector witnessed a number of large deals, including a joint venture between DIXY and Krasnoe i Beloe, which will become the

third-largest Russian retailer. Another huge joint venture went ahead in the IT sector: Sberbank and Mail.Ru established an online-to-offline joint venture for food-tech and mobility services, which will combine existing food delivery, car ride, and booking platforms of the deal participants.


2019 in review

32

59

113

90

8068

134

46

5353

1018

48

77

98

53

123

51

4343

17

13

Other

14.2

21.7

3.83.2

7.5

5.2

8.15.3

2.0

4.8

2.41.3

1.2

3.3

1.31.5

6.0

5.55.4

4.7

1.5

4.5

Other

2018

2019

Oil & gas contributed over 34% to the total deal value of Russian M&A. While M&A deals in 2019 were on average worth USD90 million, oil and gas deals averaged three-to-four times that amount.

53% oil & gas sector growth

Russian M&A deal value by type (2013–2019), USDbn


Russian M&A deal volume by type (2013–2019)

2013

2014

2015

2016

2017

2018

2019

92.2 4.6 18.4

57.3 13.8 7.9

35.9 5.1 10.8

39.3 15.3 21.5

38.7 5.2 11.4

33.7 4.1 14.0

40.1 1.9 20.9

2013

2014

2015

2016

2017

2018

2019

229 41 63

476 74 71

347 58 65

379 48 55

394 48 110

493 72 87

528 45 97

However, the most substantial growth was recorded in the traditional oil & gas sector, both in terms of value (by 53% y-o-y, reaching USD21.7 billion) and number of deals (from 32 in 2018 to 59 in 2019).

$20.9billion

49.5%

Russia raised USD20.9 billion in foreign investment in 2019, which was 49.5% higher than inbound investment in 2018.

Apart from the acquisitions of three 10% stakes in LPG-2 by CNOOC (jointly with China National Offshore Oil Corp), Japan Oil (with Mitsui & Co Ltd), and CNODC (with China National Petroleum Corp), major deals with foreign capital comprised:

— The acquisition of the international IT giant Luxoft (established in Moscow in 1995) by the US IT solutions provider DXC, for USD2 billion.

— The acquisition by the South African company Naspers of a 29.1% stake in the Russian e-commerce platform Avito, for USD1.2 billion.

— The acquisition by Austrian OMV of a USD1 billion stake in Gazprom’s upstream assets.

foreign investments in 2019

Domestic Outbound Inbound


2019 in review

In addition to Asian investors, which were mainly focused on oil & gas assets, US and European investors were also active in 2019.

The acquisition of Luxoft by DXC Technology was a clear driver behind this, but overall M&A activity from US and Europe reached USD6 billion in terms of deal value in 2019 (almost 10% of the aggregate value of the Russian M&A market), notwithstanding a number of issues, such as sanctions, which are still in force in Russia.

Middle-eastern investors continued to show interest in Russian assets in 2019, with a notable acquisition, worth USD637 million, by Mubadala Investment Company in the shopping mall Galeria in St. Petersburg.

$4.1billion

20182019

$1.9billion

Russian outbound investment continued to decline, both in value terms (from USD4.1 billion in 2018 to USD1.9 billion) and in the number of deals (from 72 to 45 individual deals).

The largest outbound deal was the acquisition by LUKOIL of a 25% stake in Marine XII license, a Congo-based oil exploration license, for USD800 million.

The opposite trend was seen last year, that is, a successful exit of Russian capital from foreign assets (in accordance with established methodology,

such deals are not included in Russian M&A statistics), which can lead to the freed-up funds being reinvested in domestic assets. This trend was chiefly observed in the IT and telecommunication sectors (e.g. the sale of Bulgarian Telecommunication Company by VTB Capital). We cover this issue in detail later in our review.


2019 in review

Outlook for 2020

The GDP growth outlook in 2020 is rather tepid. The strong consensus view is that after the 2.3% rise recorded in 2018, GDP growth will slow to 1.3% in 2019, and then demonstrate positive dynamics, climbing to 1.9% in 2020 after the National Projects Programme kicks in and on the back of lower inflation and real wage growth.

up to1.9% GDP growth forecast

Average growth rates will then continue in a range of 1.8% to 2.8% over 2020–2024. Currently there is a shift in policy taking place, from stringent austerity measures to greater social spending, which should in turn encourage domestic demand, consumption, and investment.

Since the introduction of the Fiscal Rule the federal budget has been less susceptible to oil price volatility. The budget assumes an average price of under USD43 per barrel, while macro-economic advisors assume an average price of USD63 per barrel in 2020. The expected surplus will provide a boost to the economy: consumer sectors will benefit from higher disposable incomes and construction / infrastructure sectors from catalyst programmes.

As such, we can expect more deals in consumer markets, as well as real estate and construction deals in the coming year, attracting both domestic and foreign investors. We look at this aspect later.

For 2020 inflation is projected to be at an average level of 3.4%, and at the year-end stand at 3.6%. At the beginning of 2020 inflation could fall to around 2.5% (given the high base level at the start of 2019) and then average 3.5% for the remainder of the year, climbing to just 3.6% by the year-end. A low and predictable inflation level, combined with a strong rouble, will positively impact the economy and, together with good levels of FX reserves and low public debt, create a solid foundation that will be attractive for investors.


The start of the National Projects Programme has been slower and less effective than hoped for. Accelerating the realisation of the programme is the other economic priority for the year ahead.

₽26trillion

estimated volume of investments in national projects

The government is aiming to have total new spending of RUB26 trillion over the six-year period of 2020–2026 (3.6% of GDP p.a.), with RUB7.5 trillion of this coming from private investment (about 25%)3.

The headline numbers look huge, but, when spread over six years, the direct impact on the economy could prove to be rather low. Whatever form the implementation takes, direct impacts and knock-on effects will entail a lag period of nine-to-12 months, therefore any positive impacts (e.g. an extra 0.1% or 0.2% of growth) will mostly be felt in 2020.

Around 25% of the spending is earmarked to come from private investment, however, up to now there has been little private investment into the National Projects Programme and domestic fixed investment has had a poor seven-year run.

Almost half of total spending has been earmarked for road infrastructure and 20% for the environment. Demography (i.e. encouraging births via social spending policies) accounts for 13% of total spending, while healthcare is overall set to receive RUB1.7 trillion, or 6.5% of the total package. The level of social spending appears healthy, but represents only 0.1% to 0.3% of GDP. The digital economy should be allocated RUB1.6 trillion, or 6.4%, of the package. Housing and education are each set to receive around 4% of total spending. SMEs will receive RUB400 billion in support, or 1.5%.

Recently we have seen positive signals from Europe, in particular France, related to changing attitudes towards Russia, following lobbying from European business associations. Sanctions have a negative general impact on business development, and the entire European economy suffers from restricted access to Russia. Constrained towards US and European markets, there is a shift in focus for Russian investors towards Asia. And in view of the populations, size of the economies, and GDP growth rates in India and China, this could be an exciting development for Russia. At the same time, with Russia making inroads in the east, the geopolitical situation in general is changing.

As the Russian economy has adjusted to the 2014 round of US and EU sanctions perceptions have changed, and many companies have stated that the sanctions, although a negative factor, did not directly damage underlying business. The fear of additional US sanctions began to fade in 2H19, on the assumption that the US Congress would be too distracted by internal issues. Many investors have drawn the conclusion that the passing of the anti-NordStream2 sanctions (passed as an amendment to the National Defense Authorization Act (NDAA) in December 2019) signifies that there will be no further measures in this area.

National Projects Programme Sanctions

A revised DASKA draft law remains a threat, but we presume that unless there is a fresh catalyst it will not be enforced further.

DASKA

Overall, macro-economic advisors expect that any further US sanctions will be limited in scope and have a negligible impact on the Russian economy, which is reflected in the published forecasts for all indicators, including GDP, the rouble, and inflation.

3 Hereinafter: Information materials on 12 National Projects and the “Comprehensive plan for the modernisation and expansion of the main infrastructure for the period until 2024” prepared by the Government of the Russian Federation.


Outlook for 2020

CoronavirusA decline in trade, falling consumption, and investor concerns have already led to lower economic growth in China and the devaluation of the yuan. And, given that China is deeply integrated into the world economy, particularly when it comes to production chains, the economic consequences could be significant. One of these consequences is likely to be local regroupings of producers and changes in logistics routes.

For the Russian economy, the situation will chiefly have an impact on tourism-

related revenues, both in terms of reduced revenues from Chinese tourists (which bring in about USD3 billion per annum) and a general drop in tourist traffic. The steel industry could also be affected, as China is a key consumer and producer of steel; since the start of the epidemic, the metal price index (compiled by Moody’s) has fallen 7.1%. In the near future we can also expect a drop in oil prices, due to fears of lower demand as a result of the Chinese slowdown.

The coronavirus epidemic began at the end of last year and, according to the IMF, will impact the entire global economy.

Sector outlook

The key areas of interest for investors in the coming year will be concentrated in the oil & gas sector (where possible in terms of sanctions), IT, and consumer products.

Oil & Gas

The oil & gas sector remains the main strategic industry in Russia, and typically comprises around 20% of GDP and 60-70% of the value of exports. In 2019 this sector profited from stable oil prices after the price crash in 2014/2015, and the consensus for the Brent Crude price is that it will stay above USD60 in the coming years.

Major public and private investments have been allocated to this sector, especially LNG, for which demand is expected to grow continuously in the coming decades. The recent launch of the Arctic LNG 2 development, with capital expenditure of USD21.3 billon, is one of many ongoing projects. Sanctions have made financing and working with foreign companies more difficult, although the bulk of projects (especially those with non-Western companies) continue to exist. We can also expect a rise in investors interest in onshore arctic projects.


The digital economy has been allocated RUB1.6 trillion, or 6.4%, of the National Projects package and this will support the sector as well as the digitalisation of the economy, in addition to announced improvements to IT infrastructure, updating respective regulation so that it is more competitive, and the digitalisation of public administration.

The digital economy is growing in Russia and the e-commerce market is a good example of this: e-commerce has seen accelerated development in recent years and growth rates for the sector have typically ranged between 20-30% p.a., with some leading companies growing by more than 50% each year. E-commerce still only accounts for around 5% of total retail sales, however, the figure is projected to reach 10% by 2022–2023.


Outlook for 2020

Consumer Markets

Russia’s population is 144 million, the ninth-largest in the world. However, the population fell by 218,000 in 2019, despite inward migration, owing to weaker birth rates. Over 2018–2019 greater purchasing power among consumers stemmed from increased credit levels and declining savings. Consumer credit was rising faster than 20% in the past 18 months, and much of this growth was unsecured. The CBR is aiming for consumer credit growth to decline to 15-20% in 2019 and 11-16% in 2020, and would like to see a knock-on effect on certain types of consumer spending: mortgages, cars, and large household durables.

With disposable income still 10 percent less than it was in 2013, it was a recovery in real wages in 2016-17-18 that cushioned the consumer and helped consumer product companies.

However, wages account for only 66% of overall disposable income, and other activities, such as rental income, entrepreneurship, and FX activities have all stagnated in the past year and constrained the disposable income figure. Real wage levels and retail sales numbers are probably the best proxy for consumer sentiment. The figures for retail sales were moderate/lukewarm and in the low single-digits in 2019, however, Rosstat may be not be fully recognising e-commerce activity and hence the retail figures could be underreported.

The Russian consumer market has been transformed in recent years, and while brands can still sell well, companies must work harder to explain their brand proposition. Russian retailers are modernising and consolidating, but face tremendous

pressure from the consumer, a drive towards promotions and digitalisation, and e-commerce platforms. Retailers may benefit in the short and medium term by acting as pick-up points for digital, however, whether this will ultimately help or cannibalise their business remains to be seen.


Outlook for 2020

Real Estate & ConstructionThe construction sector is key to the Russian economy and employs around six million people. Real estate has lagged in recent years and the sector experienced a tough 2018, however since then it has increasingly attracted investment, which has fostered expansion and growth. Modernising logistics and investments in housing are major priorities. The National Projects Programme will help the sector in coming years, as significant resources go towards modernising Russia’s infrastructure. And innovation does not stop at the real estate and construction sector, especially for large-scale projects: material requirements planning, building information modelling (BIM), cloud technology, and a general accompaniment of digitalised business practices for projects have become best practice in the industry.

Transport & InfrastructureInvestments in transport and logistics infrastructure are a key government priority. Almost half of total National Projects spending has been earmarked for road infrastructure, and further investments are planned in high-speed trains, rail, increasing capacity at ports, and refurbishing almost 50 regional airports.

One trend being seen is that traditional distributers are increasingly coming under pressure, as many companies restructure and consolidate supply chains. However, logistics companies that oversee several parts of a company’s value chain holistically will remain competitive; those that are digitalised will especially be in a good position to boost their market share.

Agricultural

The agriculture sector witnessed strong growth in 2015–2017, boosted by a weak rouble and the Russian ban on imported food. The Russian import substitution policy has directly benefited the agricultural sector as well as related ones, such as food processing and food packaging. Interest from Western investors has been relatively high, and sales of production equipment to enhance import substitution have been solid. Continued expansion in the agriculture sector and in food processing remain high priority themes for the state. One government strategy entails increasing grain production to 150 million tonnes by 2035 and making improvements to related infrastructure (USD70 billion investment). And digitalisation does not stop at agriculture: dynamic warehousing methods and how harvesters and distribution are organised are increasingly being controlled by tech.


Outlook for 2020

Chemicals

Russia is striving to process more minerals and extracted materials within the country in order to boost value-added exports. Investments in chemical and petrochemical facilities have grown and, according to a preliminary disclosure of National Project priorities, this remains a key area in terms of future growth. However, Western investment levels are sometimes restrained by global business patterns, excess capacity, and the steep cost of major plant investments.


Outlook for 2020


Oil & Gas Group

Deal Advisory

Director

Robin Matthews

Oil & Gas sector: unleashing the pent-up demand

The past year was marked by a high level of interest from investors, primarily foreign, in the Russian oil and gas industry. And in the future we expect Russian exploration and production assets to continue to be a focus for foreign investors seeking to quickly replenish their resource base and production volumes.

$9billion

The Russian oil and gas industry became particularly attractive to international investors after 2014. Inbound investment in the oil & gas sector peaked at USD17 billion in 2016, while 2019 saw a second record year, with inbound

investment of USD9 billion. At the same time, both external investment in the industry and the share of oil and gas transactions in the total value of M&A transactions in Russia grew for the second consecutive year.


Inbound investment in the oil & gas sector in 2019

M&A transactions in the Russian oil & gas sector in the past decade


Share of oil & gas deals in the total deal value*

Domestic, USDbn Inbound, USDbn

18%

17%

55%

23%

31%

22%

49%

2010

2011

2012

2013

2014

2015

2016

12

2017

2018

2019

3 6

65

123

17 2

4 6

12 17

4 2

7

12 9

14%

31%

36%

* The share of oil and gas deals is calculated as the ratio of inbound and domestic investment in oil & gas assets to total Russian inbound and domestic investments in USD.

7

Investments growth

Immediately after the drop in oil prices in 2014–2015, nearly all global oil companies cut exploration spending, which resulted in the global oil and gas industry in 2016–2018 demonstrating the worst reserve renewal results in the past 70 years. In 2016, as oil prices began to pick up, global players realised that they had to rapidly build their resource base, and they began looking more closely at regions with large oil and gas reserves.

Out of the countries with the largest proven hydrocarbon reserves, Russia is the most attractive for investment, having a stable political regime, a willingness on the part of state and large companies to work with foreign partners, relatively low production costs, a developed infrastructure, and a lack of red tape and regulatory barriers hindering the exploration and development of new fields.

These features are complemented by effective state support for the industry and a relatively low entry threshold, with the cost of proven and probable reserves of USD2.8 per barrel of 2P reserves – significantly lower than in other oil and gas-rich regions of the world.

Cost of 2Р reserves, 2015–2019: Russia has the lowest costs, $/boe

7.5

7.55.3

4.9

4.7

Europe

Asia and Australasia

Russia

South America

North America

Africa and Middle East

2.8

Source: KPMG analysis.* Median values



In addition, the cost of Russian 2P reserves proved stable against a backdrop of oil price fluctuations: the 2014 crisis had practically no impact on the cost of a barrel of oil equivalent in Russia, which is testament to the investment attractiveness of the Russian oil and gas sector. There was also a rise in the value multiplier for a barrel of oil equivalent for gas projects in the past three years, mainly as a result of interest from foreign investors in Russian LNG projects.

Movement in the cost of 2P reserves against oil prices in the past decade*


Cost of 2P reserves, $/boe Brent price, $/boe

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

80

111

112

109

99

52

44

54

71

64

0.6

2.8

1.7

1.3

1.5

2.7

2.6

2.4

2.7

3.7

* Median values are given for the cost of reserves.

Sanctions are seen as one of the hurdles to foreign investment in the Russian oil and gas sector, perhaps even the key one. However, despite some foreign companies pulling out of sanctioned projects, most majors are maintaining Russian offices so as to be able to continue to work on current projects and seek new project opportunities.

Impact of the sanctions: change in investors’ shares in Russian oil and gas sector, by regions*

Europe and North America

2010–2014 2015–2019

89% 33%– Total

– North Atlantic Drilling

– Repsol

– Glencore

– Total

– OMV

11% 41%

Asia

2010–2014 2015–2019

– CNPC

– Tupras

– Oil India

– Indian Oil, Oil India, Bharat PetroResources

– CNOOC

– CNODC

Middle East

– QIA

– Mubadala Petroleum

– Saudi Aramco

* Top-3 companies in terms of money spent on inbound M&A deals in Russia for the stated period.Source: KPMG analysis.

25%2015–2019

0%2010–2014



2019 was marked by a boom in investment in integrated LNG projects (which resulted in a jump in the 2P reserve multiplier).

In 2018–2019 NOVATEK’s sale of shares in the Arctic LNG 2 project was one of the key drivers of the oil and gas (and the entire Russian M&A) market; this was one of the top-

# Target Acquirer Vendor % acquired USDm

1 LUKOIL LUKOIL Minority shareholders 5.1% 3,000

2Gazprom Single undisclosed buyer Gazprom 3.6% 2,941

Gazprom Single undisclosed buyer Gazprom 2.9% 2,202

3 Arctic LNG 2 China National Offshore Oil Corp (subsidiary of CNOOC Ltd.) NOVATEK 10% 2,612

4 Arctic LNG 2 Japan Oil, Gas and Metals National Corporation; Mitsui & Co Ltd NOVATEK 10% 2,612

5 Arctic LNG 2 CNODC Ltd (subsidiary of China National Petroleum Corp.) NOVATEK 10% 2,612

6 Stroygazmontazh Gazstroyprom Arkady Rotenberg – private investor 100% 1,177

7Project to develop sections 4A and 5A of Achimov deposits of Urengoy gas field

OMV Gazprom 25% 1,025

8 Gazprom Drilling Gazstroyprom

Igor Rotenberg – private investor; Managing Company Evocorp; Alexander Zamyatin – private investor

100% 910

9 New Age (African Global Energy) Limited, license for Marine XII LUKOIL Upstream Congo SAUNew Age (African Global Energy) Limited 25% 800

2019: largest M&A deals in oil & gas industry


In addition to Arctic LNG 2 project transactions, the buy-back of stakes in LUKOIL in the public market and a deisgnated sale of Gazprom’s shares, the top-10 transactions included the acquisition of a Gazprom construction and drilling contractor. Gazstroyprom, Gazprom’s new single contractor, in which the gas monopoly holds a 49% stake and the remainder is owned by Gazprombank structures and individuals, acquired Stroygazmontazh in November 2019, and Gazprom Bureniye two months earlier.

As part of its international business expansion strategy, LUKOIL closed a deal in 2019 to acquire a stake in the Marine XII block, located on the Congo continental shelf. The license covers five discovered fields containing 1.3 billion boe of 2P reserves.

2019 also saw two significant deals in retail (in 2018 not a single deal of more than USD2 million was recorded), both of which took place in the St. Petersburg market. Rosneft acquired the largest independent fuel operator in the region, St. Petersburg Fuel Company (which comprises 141 filling stations, 125 gasoline tankers, and two modern oil depots), and two months later the acquisition of the Russian fuel retail business from the Finnish company Neste (75 filling stations and a terminal in St. Petersburg) by Tatneft was announced.

Moreover, Russian majors are continuing to build their resource base by acquiring promising licenses at state auctions: NOVATEK, Rosneft, and LUKOIL were the leaders in terms of the number of licenses acquired in 2019.

2019: the flight of foreign investors to LNG; China is the leader

10 deals on the oil and gas asset market in 2019. Many foreign companies expressed an interest in the project, culminating in deals with Total in 2018 and the Chinese entities CNPC and CNOOC and the Japanese company Mitsui in 2019. Other players, such as Saudi Aramco from the Middle East and the Asian companies PTTEP and KOGAS, could be interested in the company’s future projects.



2020 forecast: Russia to remain attractive

Russian exploration and production assets will continue to be the focus for foreign investors seeking opportunities to rapidly replenish their resource base and production volumes via acquisitions or through a joint venture. Assets in the exploration or early development stages will be of greatest interest.

In particular, we can expect investor interest in Arctic projects, especially the Vostok Oil project, which combines some of Rosneft’s Arctic fields, a joint project with BP Ermak Neftegaz, as well as the Payakhskoye field of Neftegazholding. Having the potential of reserves and resources of 37 billion barrels of oil equivalent and located in the last undeveloped onshore region of Russia, in 2019, Vostok Oil received unprecedented tax benefits. Last year Rosneft already began to look for foreign partners to implement this ambitious project.

Existing sanctions and the threat of new ones will dampen interest in offshore projects, including from European and US investors, while investors from Asia and the Middle East will retain interest in both exploration and production acquisitions

and the petrochemical and gas chemical sector. At the same time, Russian companies will continue to explore international expansion opportunities particularly in the Middle East, North and West Africa, and South America.

Domestically, we expect further asset consolidation along the entire value chain. The largest Russian players are keen to both support production and to develop own sales and distribution channels for petroleum products. Furthermore, there has long been a need for structural changes in the oilfield services and related services market, both for oil companies and their contractors. Time will tell how quickly this will happen.



Innovations & Technology sector deals

In the past two years the innovations & technology sector has been a leader, both in terms of number of deals and aggregate deal value, accounting for 12% of Russian M&A value in 2019. This is to be expected, given the growing level of digitalisation and the trend towards building ecosystems in various sectors of the Russian economy.

Significant recent events in the sector included successful local Russian projects involving foreign investors: a deal to buy shares in the Russian classified ads website Avito, by the South African media group Naspers, and the IPO of hh.ru. Naspers has steadily raised its stakeholding in Avito since 2013 and by 2019 had increased it to 99.6%, having acquired 29.1% for USD1.16 billion (the entire Avito business is valued at USD3.85 billion). hh.ru was floated on the NASDAQ and was the first IPO of a Russian company in two years, and the first IPO of a Russian technology company in five years. The IPO raised USD220 million, and the entire company was valued at USD675 million; two days after the IPO the company’s capitalisation grew by almost a quarter.

2019 also saw a number of major transactions involving the sale and attraction of large investments by companies with Russian roots, but orientated since their establishment towards global markets: Luxoft, Veeam, Nginx, Badoo, and Acronis.

All these companies are distinguished by the fact that they either have a unique business model or have created a unique product that is in demand on the international market. For example, Luxoft, a global provider of innovative technological solutions, with 42 offices in 22 countries around the world and an active player in the M&A market, joined the DXC Technology group of companies; the deal was worth USD2 billion.


Deal Advisory

Russia and the CIS

Director

Marina Manakova

12%deal value

sector remains one of the leaders



M&A as part of an ecosystem building strategy

In 2019 more than 20% of innovation and technology deals were ecosystem transactions, which confirms the current trend towards building ecosystems under the auspices of major Russian business players. The goal of building ecosystems is to satisfy everyday human needs in various industries – from ordering food or taxis to watching a film or looking for a job.

The priority industries for ecosystem purchases in 2019 were digital food and non-food retail, as well as food and restaurant deliveries – these industries are leaders in terms of speed of digitalisation, frequency of service use, and market size.

Ecosystem-related transactions in 2019 featured both direct investments in technology companies and the setting up of joint ventures. As an example, in 2019 Sberbank and Mail.ru Group created a partnership to develop digital technologies for the transport and food market.

In the JV Mail.ru Group contributed its stakes in the food delivery service Delivery Club (100%) and Citimobil

(29.67%), and also invested in other projects: the car-sharing company YouDrive, DC Daily vending machines, and Performance Group, a company that delivers prepared meals. The company also invested RUB8.5 billion in the project. Sberbank contributed its stake in Foodplex (35%), a digital platform for the restaurant market, and around RUB38.5 billion.

The JV also included the SberMarket delivery service, which is part of the Instamart start-up. In total, Sberbank and Mail.ru Group will devote RUB47 billion to the joint project and they plan to invest up to RUB17.6 billion if the venture achieves its target by November 2020.

Sberbank also announced the acquisition of a stake in MF Technologies, a shareholder of Mail.ru Group. Sberbank bought 35% in MF Technologies from Gazprombank, equivalent to 20% of voting rights in Mail.ru Group, and a further 1% from Rostec. The total transaction value was RUB11.3 billion.

With the creation of such a giant entity we can expect greater competition in the digital food retail and transport industries and a corresponding increase in investment activity, aimed at expanding the entity’s operations and strengthening its position on a market where there is stiff competition from similar Yandex services and other market participants.



Following the deal Sberbank obtained a 51% stake in STC, which creates systems to record telephone conversations and voice alerts, biometric access systems (including face recognition), speech-to-text conversion programs, speech synthesisers, and military products. The investment in the Cognitive Pilot project is aimed at developing unmanned transport technologies in industry and agriculture, and developing components for unmanned vehicles.

Other examples of ecosystem-related deals were Sberbank’s investments in the Speech Technology Centre (STC) and the Cognitive Pilot project.

Cognitive PilotThe main advantage of M&A deals, in contrast to the organic growth that comes with building an ecosystem, is the time saved and an ability to meet key customer needs as soon as possible, thereby dramatically increasing the Total Addressable Market and lowering the cost of attracting total addressable market. At the same time, buying a market leader is not always advisable, and raising the shareholder value of acquired assets can be achieved through implementing a synergistic effect: integrating with services within the ecosystem and strategic partnerships with other market players.

Consolidation of expertise

Activity in the innovation and technology sector is also generated through the ongoing trend of increasing and consolidating expertise.

Hence in 2019 IKS Holding continued to consolidate IT assets on the Russian market, and tasked itself with promoting the development of the digital economy in Russia, as well as supporting home-grown IT talent. At the beginning of 2019 IKS Holding acquired Nexign (a St. Petersburg company that creates IT solutions for telecommunications), and later a stake in the developer and manufacturer of Yadro data processing and storage systems. In November 2019 the holding acquired a controlling stake in a Russian developer of cloud platforms, Digital Energy.

Another example of the continuing consolidation of expertise is Zyfra, a subsidiary of Renova Group, which is engaged in developing industrial digitalisation technologies

in industries such as engineering, metallurgy, mining, the oil and gas sector, and the chemical industry. Zyfra actively invests in various products and is developing an industrial Internet of things and artificial intelligence environment. In 2019 the company invested in GeoSteering Technologies, thereby expanding its portfolio of digitalisation solutions for the oil and gas industry.

Also noteworthy is ongoing activity in the online gaming segment. Hence in 2019 Playrix continued with its acquisitions of gaming studios: Eipix Entertainment in Serbia and Vizor Games in Belarus. Such activity was connected with ambitious plans on the part of the founders to be on a par with the giants Activision Blizzard and Electronic Arts by 2025.



Innovation and technology sector transaction specifics

Because of the trend towards digitalisation and building business ecosystems in various sectors of the Russian economy, the type of transactions is changing and, as a result, the priorities when taking a decision on whether to go ahead with a transaction: the focus is shifting from traditional financial indicators (revenue, EBITDA4, debt, working capital, etc.) to the quality and uniqueness of a product, the key people and founders of the company, and whether the product has legal protection.

An IT start-up or young company with a workforce of three to 500 often becomes an investment target in the innovation and technology sector. After closing the respective transaction, the sellers remain minority shareholders and top managers of the company, and are tasked with attaining specific business indicators set out in the respective contract.

An important issue is preserving the shareholder value of the investment object by striking a balance between the interests of the buyer and the top management of the acquired company, which will agree on joint operational functioning and how to realise the various synergies offered by the deal.

Due to the specifics of deals involving purchases of IT start-ups, M&A teams have begun to pay greater attention to studying the operating model of the company they are buying before signing the SPA (sales and purchase agreement) and closing the deal, examining in detail the functioning of the start-up, and seeking to identify potential risk areas (so called “dis-synergies”) .

This involves identifying key risks related to HR, the IT infrastructure, the maturity of the finance function and reporting, corporate culture characteristics, the maturity of the business and intellectual property rights.

Here, the key components of reaching an agreement and the success of the enterprise are the approach used to assess a start-up, a well-structured deal that takes into account the long-term motivation of key personnel and the features of joint operations, and the approach selected for asset integration.



Overall, the innovation and technology sector continued to grow in 2019, which was largely due to the rapidly developing ecosystem aspect and the focus on digitalising the economy. The largest M&A market players in the sector were Sberbank, IKS Holding, Mail.ru Group, Yandex, and VTB. In the next few years we expect increased competition for technology start-ups among major players in the Russian business landscape and, as a result, greater investment activity within the sector.

A marked dis-synergy also arises during the process of integrating a purchased asset when a large corporation attempts to integrate a small start-up into its business and operating model. The solution in this case may be a balanced approach to company integration.

Companies / serial buyers of small IT start-ups have learned from past mistakes, and are increasingly choosing a “preserve and incubate” approach to integration; this allows, on the one hand, the speed of decision-making and the competitive advantages of acquired companies to be maintained, and on the other hand allows the minimum necessary level of asset control to be obtained.

Hence when deciding to buy a company in the innovation and technology sector, qualitative characteristics are paramount: the uniqueness of the product and the presence of a team that can develop the technological know-how and realise the project’s potential; also, the pre-investment focus shifts from an analysis of historical financial results to assessing the product and the corresponding market, as well as the technological and operational features that make up the company’s competitive advantages.



Head of Tax M&A

Tax & Legal

Russia and the CIS

Partner

Dmitry Garaev

Taxation aspects of M&A deals involving innovations & technology companies

Managing the tax risks inherent within a particular business is one of the most important components of an M&A project.

When it comes to tax risks, one can distinguish between universal risks that arise for companies regardless of their industry sector (for example, the

risk of not performing a due diligence when choosing a counterparty), and specific risks that a particular sector of the economy are exposed to.

Which specific tax risks do investors face when investing in IT sector companies?

IT companies can take advantage of a number of tax incentives, including reduced insurance and social contribution rates and Skolkovo Innovation Centre residents qualifying for tax-exempt status. Such incentives can represent a significant asset when calculating future returns on investments, but can constitute a hidden obligation if the conditions for applying the incentives were not properly met. When determining the investment attractiveness of IT companies, it is important to correctly assess historical risks and to assess how likely it is that any tax benefits can be retained.

In the pursuit of greater efficiency, some IT companies create more risks than benefits. Of the instruments used to increase efficiency, the following, on the surface, may seem feasible: dividing a single business into a number of legal entities, and using civil law contracts with staff. However, such optimisation measures can often be the subject of disputes with the tax authorities. Therefore, to assuage the risk of cash outflows as a result of negative tax assessments, a thorough analysis of the economic feasibility of such measures should be performed.

Tax incentives

Efficiency boosting measures

© 2020 KPMG. All rights reserved.


26 • Russian M&A Review 2019

It is not uncommon for personnel, trademarks, software, offices, etc. to be in common use by different legal entities from the same group, without formal contractual relations being entered into and, accordingly, respective payments. For shareholders where all the companies of the group are a single business, the absence of such formalities is not important, however, for the tax authorities it is. From a tax perspective, intra-group relationships without proper clearance and remuneration can carry significant risks.

Intra-group relationships

Given the close attention being paid to intra-group services by the tax authorities, it is important that intra-group operations within M&A transactions be carefully analysed.

In practice, rapidly growing companies do not always correctly formulate the cost of developing software or other intangible assets. Therefore, instead of capitalising costs that form the value of intangible assets, the cost of their creation is deducted for accounting and/or tax accounting purposes. If the company is not planning any M&A activity, this issue may not be so crucial. Everything changes, however, when a company is preparing for a deal, and especially if pre-sale restructuring is covered by the respective terms. If the key developments and technologies of the acquired business are not listed on the balance sheet of the transaction object, the question arises: «How can these be transferred to the new structure?» Solving such problems is often quite complicated in practice, and requires well-coordinated collaboration among M&A specialists, lawyers, and tax consultants.

Intangible assets (IA)

Identifying and assessing tax risks is just the beginning of the process. Subsequently:— a decision needs to be taken on how to manage historical risks— a decision needs to be taken on how to protect the investor from any negative consequences— a decision needs to be taken on the type of transaction, taking into account the identified risks: share deal, asset

deal, or hybrid— a protection mechanism against the identified risks needs to be determined and agreed with the parties — strategies need to be developed to retain any tax benefits— possible mechanisms for staff relations need to be developed so

that new relations do not trigger any labour / tax risks

The tax aspects of IT M&A projects are complex and require proper attention and planning. As practice shows, the saying “we live in times of an unpredictable past” is especially pertinent when it comes to tax and legal relations.

Risks are identified – now what?



Real Estate and Construction Deal Advisory

Russia and the CIS

Director

Alexander Borontov

M&A trends in Real Estate and Construction

2019 saw significant changes to the legislation of the residential real estate development market, and these could lead to a rise in M&A activity, as well as a strengthening of consolidation processes in this market segment. The commercial real estate segment was characterised by changes in market conditions and moderate investment activity.

we expect growth in M&A activity in the near future

The following events and trends in 2019 characterised both the real estate and construction sector in general, and M&A in the sector in particular:

Legislative changes in the area of housing construction changed the procedure for project financing and raised requirements for developers, and also affected project revenue and margins; this could in future lead to a consolidation of market players.

A redistribution of the market and spheres of influence in the housing sector is being observed: government participation is rising, and a number of transactions have been completed involving large development companies.

On the commercial real estate market a number of major transactions took place, involving both state-owned companies and private investors, partially representing non-investment transactions; at the same time, moderate investment activity was observed in all segments of the commercial real estate market.

We are increasingly seeing acquisitions of claims under credit agreements whose collateral is real estate. Banks have created the necessary reserves, which allows them to dispose of assets in the open market.

1 2 3 5

2019 saw a trend towards large banks and funds switching to actively managing portfolios of problem and non-core assets. This was accompanied by the setting up of specialised portfolio management teams, the development of new technical tools, and efforts to boost the efficiency of asset management business processes.

4



Active real estate portfolio management

During the post-crisis years, major Russian banks and funds accumulated a large number of problem and non-core assets made up of real estate, large- and medium-sized development projects, and other real estate and construction sector assets. Recently, banks have created the necessary reserves, which gives them the option of disposing of assets.

As a result, players with large portfolios appeared on the market that switched to or began transitioning to an active management style.

For example, in early 2019 a decision was taken to transfer the assets of VEB.RF to the active management of Dom.RF, including the right to sell assets. For each asset, a separate strategy is developed that corresponds to market conditions.

The activities of Trust Bank confirm this trend and serve as a further example of active portfolio management. At the start of the year, the creation of a bank of non-core assets within Trust Bank was announced, whose goal was to optimise the efficiency and value of assets, with a view to their subsequent sale. In the past year the company has sold a number of non-core assets, and also transferred specialised office assets to its parent company Otkritie Holding. Head of Trust Bank, Alexander Sokolov4, has stated that a number of negotiations are currently underway on including businesses that complement the assets of the bank into their asset pool, and jointly developing them.

In addition to real estate transactions, a number of players are returning to development projects that got delayed as a result of the crisis.

returning to projects that got delayed

For example, in the second quarter of 2019 Sberbank adopted a development strategy for the delayed Rublevo-Arkhangelskoye project, which plans to build over four million square metres of real estate.

Also, PJSC Ingrad (previously PJSC OPIN) resumed a project to refurbish the Torpedo football stadium and develop the surrounding area: under the original plan it was planned to develop over 20 hectares, as well as build over 250 thousand square metres of housing and commercial real estate. The construction of the first residential complex on the project site (River Sky) has already begun, and, according to the Moscow City Town-Planning Policy and Construction Complex, the project to refurbish the stadium should begin in the second quarter of 2020 and be completed at the end of 20225.

Clients are requesting valuation services (as part of complex transactions) or services to transfer assets to management, optimise investment decision-making processes, develop appropriate tools (integrated finance models, platform solutions, etc.), as well as developing strategies and concepts for managing large asset portfolios using Big Data.

4 https://www.trust.ru/press/mass_media/detail182148

5 https://stroi.mos.ru/stadiony-moskvy/plany-po-rekonstrukcii-stadiona-imeni-e-a-strelcova

1

Against the background of this emerging new trend, the KPMG real estate and construction sector practice has observed a rise in the number of client requests to provide services related to adopting strategic and investment decisions regarding real estate sector assets.



Acquisitions of claims under loan agreements

2

The sale of the rights of claim under loan agreements secured by a real estate item removes the need for bankruptcy procedures for “bad” assets from the lender and gives the buyer access to the asset. For default or near-default assets, the purchaser of claims can receive a real estate item at a discount, which potentially creates additional profits, while the bank gets rid of the problem asset and does not have to engage in bankruptcy and subsequent procedures to dispose of the collateral independently. However, until the creation of the appropriate reserve, the possibility of alienating the asset under market conditions in many cases is extremely difficult and “painful” for the bank.

2019 witnessed a large number of both public and private transactions to acquire rights of claim under loan agreements secured by real estate.

An example of a public transaction was the assignment of a claim under a VEB.RF loan agreement for a Neskuchny Home&Spa residential complex construction project. The claim rights were transferred to Promsvyazbank, which plans to restructure the debt and finance the construction of the facility, which is currently owned by Stroy-Complex LLC.

Last year also saw a deal to purchase claims under a Sberbank loan agreement in relation to the Tsvetnoy department store. The Bonum Capital investment group acted as the buyer of the claim rights, and thus gained control over the asset. The deal value was RUB4.2 billion.

The observed deals could be an indicator that banks have created appropriate reserves and this enables them to alienate assets on market conditions, while there are investors in the market interested in acquiring such non-core assets for banks, of course, provided the price is adequate, which allows profits to be earned that are commensurate with the risks.



Changes in housing law

3

In order to resolve an acute issue related to defrauded equity holders and to boost the level of control over the activities of developers, respective amendments were made to Russian legislation in 2019.

For residential projects that had a building permit issued after 1 October 2019, significant amendments were made to Federal Law 214-FZ “On Apartment Block Construction Co-Funding”: now funds received from participants in co-funded constructions (from the sale of apartments under construction), will go to special escrow accounts in authorised banks.

Developers will be able to receive this money only after the building has become operational, and construction will be financed using credit received from the same bank, at a preferential interest rate. In the event of the developer going bankrupt, money from escrow accounts will be repaid to equity holders, and the unfinished building will be transferred to the bank. Also, the updated law imposes stringent requirements for developers and their projects, including an

appropriate level of relevant experience and a certain level of share capital and funds in the company’s current account.

The transition to the new rules will likely have a negative impact on the margins (due to the need to pay interest on funds raised for construction) and return on investment (due to the delay in receiving funds until commissioning) of development projects. This may result in the withdrawal from the market of weaker developers that have small safety margins or who are unable to meet the requirements of the law and financing banks. However, the legislative changes will not have an immediate effect, since many developers managed to obtain building permits before October 2019 and thus are bound by the old rules.

Small developers will find it especially difficult to work in the new conditions, therefore we expect consolidation in the market in the short and medium term. It will be natural for large, “too-big-to-fail” developers to absorb small, promising land mortgage lenders, and combine small developers into alliances, in order to fulfil the requirements of the law and with a view to jointly financing projects.



Redistribution of the housing market

4

In 2019 a number of changes took place that pointed to a redistribution process within the housing construction market. The key change was increased state participation in the industry, which tightens the rules on shared housing construction.

plays an important role in the marketDom.RF

An important role in the market is now played by the state-owned Dom.RF, which is actively involved in cases involving equity holders being defrauded and collecting information on the activities of all Russian developers.

The aim of Dom.RF is to support the housing sector in Russia and increase the affordability of housing for citizens. One of their key tasks is to solve the acute social problem of defrauded equity holders using mechanisms approved by law. Dom.RF consolidates information on the activities of all Russian developers working under the shared construction scheme, through a specially developed platform called UISS, and is developing standards for the integrated development of the territory and the quality of the urban environment. In addition, in its structure, the state-owned company has a bank, which is one of the main players in the segment of mortgages and project financing for development projects.

Greater government participation in the industry also indirectly occurs through state-owned banks.

As an example, in 2019 VTB Group almost tripled the size of its stake in the PIK Group of Companies (the largest residential developer in Russia), to 23.05%. The parties to the transaction hope that this will bolster the strategic partnership and, due to the increase in its stake, VTB Group will have additional control over the developer’s business, while PIK Group will benefit from stable project financing, which is particularly pertinent in view of the legislative changes.

In parallel with increased state participation, a redistribution of property within the sector is taking place among private investors. At the end of the year there was a major transaction involving a merger between Etalon Group, which operates predominantly in the St. Petersburg market, and JSC Leader-Invest, which operates on the Moscow market and was previously owned by Sistema. As a result of the merger, Etalon Group has further strengthened its position as a leader in the construction market. It is expected that the merger of these two developers will boost business efficiency after the integration process is finalised, and also create a synergy effect vis-à-vis the integration of management, the utilisation of production capacities, and streamlining business processes so that they conform to best practice.

In 2019 a deal was announced involving the redemption of a 49% stake in the A101 Development (which previously belonged to Mikhail Shishkhanov) by Mikhail Gutseriev, and which was transferred to Trust Bank as part of the reorganisation of Binbank by the CBR. The share buyback deal will raise Gutseriev’s stake in the development company to 100%.

Changes in housing legislation, the state playing an increasing role in the industry, and changes in market conditions all lead us to expect a further redistribution of the market in the short term.



Major commercial real estate market transactions involving state-owned companies and private investors

5

Transactions announced and closed in 2019 involving office assets could have a consequent impact on the commercial real estate segment.

A number of state-owned companies and corporations are planning to move to large modern office facilities: the CBR is negotiating the purchase of the Oruzheyny Business Centre, Sberbank has plans to create a Sberbank City complex on Kutuzovsky Prospekt, the IQ-Kvartal Tower is completely occupied by government ministries, and Eurasia Tower, which is controlled by VTB, is not currently being actively marketed, which suggests it could be used for VTB’s own needs.

If all the transactions indicated above are concluded, many employees will move from various kinds of buildings dispersed throughout the city, and several large high-quality office properties will immediately exit the market. This may create a deficit of large quality office space in Moscow, which in turn will push up rental rates and revive investor interest in such properties.

Along with the non-investment deals, in 2019 a number of investment-related transactions were closed and announced. The largest of these were:

— The planned purchase of a 49% stake in the Gallery Mall of the Arab Mubadala Investment Company from the Morgan Stanley Fund (the value of the deal has been put at around USD600-650 million).

— The purchase of trade centres Aura in Yaroslavl and Surgut by MallTech from Renaissance Development (the combined value of these assets was put at more than USD100 million).

One of the players in the warehouse real estate market, the Logistics platform Professional Logistics Technologies (PLT, a consortium of RDIF, Arab Mubadala, and other funds) replenished its portfolio with two facilities in St. Petersburg and Solnechnogorsk (the investment has been estimated as being worth more than USD100 million), and ACCENT CAPITAL bought from PNK Group 84,200 sq.m in PNK Valishchevo Park (the transaction value has been put at around USD40 million). The office segment was also rich for investment transactions, one of which is considered to be the largest in this segment in 2019: the sale of the office part of the Neva Towers complex in the Moscow City business centre; the size of the transaction has been put at RUB154.5 – 175 billion. In the hotel segment, there have been two noteworthy deals: the acquisition of the Bridge Resort hotel complex in Sochi and Lux Hotel (formerly Central); the size of these transactions, according to market estimates and open source data, was around USD78 million and USD55 million, respectively.

Emerging market conditions and announced and closed transactions in the market demonstrate moderate investment activity during 2019, and may also reflect positive investment expectations in the industry and the existence of capital among market participants, both local and foreign, for investment in high-quality commercial real estate. Improving attractiveness and market activity leads us to expect further growth in the commercial real estate sector. We expect further growth in the commercial real estate sector, based on improved market attractiveness and existing levels of activity.

What we expectChanging market conditions in the real estate and construction sector point to a rise in M&A activity, in both commercial and residential real estate, as well as an increase in consolidation processes in the residential real estate development sector. In the near future, a large number of assets of potential interest to both local and foreign investors could enter the market.



MethodologyKPMG Russian M&A database

This report is based on the KPMG Russian M&A database which includes transactions where either the target (inbound) or acquirer (outbound) or both (domestic) are Russian. All data are based on transactions completed between 1 January and 31 December 2019, or announced during this period but pending at 31 December 2019. Historical data may differ from earlier versions of this report, as the KPMG Russian M&A database is updated retrospectively for lapsed deals and information subsequently made public.

Data include transactions valued in excess of USD5 million, as well as transactions with undisclosed deal values. Deal values are based on company press releases, as well as market estimates disclosed in the public domain.

The KPMG Russian M&A database has been complied over a number of years and is based on information included in the Mergemarket M&A deals database and EMIS DealWatch database, together with KPMG desktop research of other sources.

The allocation of deals to industry sectors may involve using our judgment and is therefore subjective. We have not extensively verified all data within the KPMG Russian M&A database, and cannot be held responsible for its accuracy or completeness. An analysis of different databases and information sources may yield deviating results from those presented hereto.

Macro trends and medium-term forecasts represent publicly available data collated from the Ministry of Economic

Development, State Statistics Agency, the CBR, Apecon and Bloomberg.

Macro trends and medium-term forecasts


Appendices

Macro trends and medium-term forecasts1

Cross-border M&A highlights2

Sector highlights3


APPENDIX 1. Macro trends and medium-term forecasts

Trend 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E

GDP, USD bln 2,058 1,360 1,347 1,635 1,592 1,648 1,778 1,879 2,066

Growth, real % YoY 0.7 –2.8 –0.2 1.5 2.3 1.3 1.9 2.4 2.8

Inflation - year-end, % YoY 11.4 12.9 5.4 2.5 4.3 3.0 3.6 3.8 3.6

Real disposable income, % YoY –1.0 –6.5 –5.9 –1.7 0.1 0.2 0.8 1.2 1.5

Unemployment, % EOP 5.3 5.6 5.4 5.0 4.8 4.6 4.6 4.6 4.6

Budget, balance % of GDP –0.5 –2.4 –3.4 –1.4 2.6 1.6 1.2 0.9 0.8

Current account, % GDP 3.0 5.3 1.9 2.1 6.8 4.3 3.2 3.1 2.5

RUB/USD, year-end 56.3 72.9 60.7 57.6 69.5 61.8 64.0 64.0 62.0

RUB/EUR, year-end 68.3 79.7 63.8 68.9 79.5 69.6 72.0 72.0 69.0

Brent, USDp/bbl, average 99 52 44 55 71 64 63 60 60

Sources: Ministry of Economic Development, Rosstat, Central Bank of Russia, Bloomberg, Macro-Advisory estimates.


Appendices

Inbound value by region (2019 vs. 2018), USDbn Inbound volume by region (2019 vs. 2018)

Outbound value by region (2019 vs. 2018), USDbn Outbound number by region (2019 vs. 2018)

APPENDIX 2. Cross-border M&A highlights

EuropeNorth

America

CIS

Asia-PacificMEA

Other

Source: KPMG analysis.2018 2019


2018 2019

0.2

3.4

5.9

2.6

4.8

2.7

0.3 0.4

2.4

8.2

0.3

3.6

Europe

North America

CIS

Asia-PacificMEA

Other

463

186

471

45

2,008

27

308

1,020

29

542

786

39

EuropeNorth America

CIS

Asia-PacificMEA

Other

510

8

18

4742

713

4 4

1810

EuropeNorth America

CIS

Asia-PacificMEA

Other

1410

13

1

23

12

6 6

8

13

83

Source: KPMG analysis.2018 2019 Source: KPMG analysis.2018 2019

Note: 17% of deal value (19% of deal volume) representing other regions largely comprises deals in stock exchanges with undisclosed compositions of private and institutional investors.


Appendices

Oil & Gas largest deals in 2019


1 LUKOIL LUKOIL Minority shareholders 5.1% 3,000

2Gazprom Single undisclosed buyer Gazprom 3.6% 2,941

Gazprom Single undisclosed buyer Gazprom 2.9% 2,202

3 Arctic LNG-2 China National Offshore Oil Corp (CNOOC Ltd.) Novatek 10.0% 2,612

4 Arctic LNG-2 Japan Oil, Gas and Metals National Corporation; Mitsui & Co Ltd Novatek 10.0% 2,612

5 Arctic LNG-2 CNODC Ltd. (China National Petroleum Corp) Novatek 10.0% 2,612

Oil & Gas $21.7billion52.7%

59deals

34.5%84.4%

$11.7billion

69.5%

Domestic Total value Volume Market share


Appendices

APPENDIX 3. Sector highlights


$7.5billion

42.1%

11.9%90deals

–20.4%

Innovations & Technology largest deals in 2019


1 Luxoft DXC Technology Existing shareholders 100.0% 2,006

2

Joint venture for food-tech and mobility services (combining Delivery Club, YouDrive, DC Daily, Performance Group, Foodplex)

Sberbank; Mail.ru Group Joint venture 100.0% 1,566

3 Avito Holding OLX Group (Naspers)

Baring Vostok Capital Partners Limited; Vostok New Ventures Ltd; Filip Stig George Engelbert; Jonas Rolf Nordlander

29.1% 1,160

4 Nginx Inc. F5 Networks IncPrivate investors; Runa Capital; Index Ventures; The Goldman Sachs Group Inc; e.Ventures; NEA; MSD Capital; Blue Cloud Ventures; Telstra Ventures

100.0% 670

5 Peter-Service (Nexign)IKS Holding; Anton Chere-pennikov

USM Holdings 100.0% 298

$9.0billion

$1.0billion

23.2%

Inbound Outbound

n/d

$0.3billion

–90.3%

$4.3billion

1,240.2%

Inbound Outbound

$2.9billion

44.9%



Sector highlights

Consumer Markets

$6.0billion

–26.3%

80deals

9.5%17.6%

Consumer Markets largest deals in 2019


1DKBR Mega Retail Group (Joint venture between DIXY, Krasnoe i Beloe, Bristol)

DIXY Group; Krasnoe i Beloe DIXY Group; Krasnoe i Beloe 51%/49% 2,656

2 Lenta SevergroupTPG Capital; European Bank for Reconstruction and Development (EBRD)

41.9% 729

3 Lenta Severgroup Minority Shareholders 36.8% 641

4 Pharmacy Chain 36.6 Altus Capital; Undisclosed buyers - 65.3% 341

5 Pharmacy Chain 36.6 Credit Bank of Moscow - 19.7% 256

Real Estate & Construction largest deals in 2019


1

Leader-Invest Etalon Group AFK Sistema 51.0% 230

Etalon Group AFK Sistema Vyacheslav Zarenkov; The Zarenkov family 25.0% 227

Leader-Invest Etalon Group AFK Sistema 49.0% 224

2 Galeria shopping mall in St. Petersburg Mubadala Investment Co Morgan Stanley & Co 49.0% 637

3 A101 Development Mikhail Gutseriev National Bank Trust 49.0% 627

4 PIK Group VTB Bank Sergey Gordeev 15.5% 610

5 Neva Towers (Moscow-City) Metrika Investments Renaissance Development 100.0% 350

Real Estate & Construction

$5.5billion

3.6%

123deals

8.8%–8.2%

$0.5billion

n/d–83.9% –100.0%

Inbound Outbound

$5.5billion

9.7%


$1.1billion

$0.006billion

51.6% –95.0%

Inbound Outbound

$4.4billion

–1.6%


© 2020 KPMG. All rights reserved.40 • Russian M&A Review 2019

Sector highlights

Metals & Mining largest deals in 2019


1 Norilsk Nickel Institutional and private investors Crispian Investments Ltd; Alexander Abramov; Roman Abramovich 1.7% 551

2 En+ Group Glencore Plc - 10.6% 505

3 En+ Group VTB Bank Oleg Deripaska 14.6% 451

4 NLMK Group Institutional investors Vladimir Lisin 2.6% 400

5 Polyus Institutional and private investors Polyus Gold International 3.8% 390

Metals & Mining $4.7billion

–2.8%

43deals

7.6%–18.9%

Communications & Media

$5.4billion

167.4%

51deals

8.6%10.9%

Communications & Media largest deals in 2019


1 Tele2 Russia Telecom Rostelecom VTB Bank; Rossiya Bank; Invintel BV 55.0% 2,095

2 MegaFon MegaFon Gazprombank; Minority shareholders 20.4% 1,271

3 VEON Holdings Public and private investors Telenor Group 9.0% 362

4 VEON Holdings Institutional investors Telenor Group 5.7% 216

5 Rambler&Co Sberbank A&NN (Alexander Mamut) 46.5% 172

$0.6billion

$0.024billion

1.1%n/d

Inbound Outbound

$4.7billion

137.5%


$3.2billion

$0.005billion

256.8% –98.1%

Inbound Outbound

$1.5billion

–59.5%



Sector highlights

Transport & Infrastructure largest deals in 2019


1 Transcontainer Delo Group United Transport and Logistics Company 50.0% 968

2 Novorossiysk Grain Terminal

VTB Bank Novorossiysk Commercial Sea Port (NCSP) 100.0% 548

3 TransFin-M TFM-Garant Blagosostoyanie 100.0% 512

4 RTC Group VTB Bank n/d 50.0% 454

5 Nitrokhimprom Siberian Coal Energy Co (SUEK) First Heavy Haul Company 100.0% 390

Transport & Infrastructure

$4.5billion

91.2%

43deals

7.2%–18.9%

Chemicals largest deals in 2019


1 EuroChem Group EuroChem Group AG Dmitry Strezhnev 10.0% 785

2 Uralkali Dmitry Lobyak - private investor Sberbank 10.2% 405

3 Sibur Togliatti; Togliattisintez

Tatneft Sibur Holding 100.0% 201

4 Omsk Polypropylene Plant (Poliom)

Sibgazpolimer; Sibur Holding; GazpromNeft Titan Group 50.0% 159

Chemicals $1.5billion

20.4%

13deals

2.5%30.0%

$0.4billion

n/d–55.2% n/d

Inbound Outbound

$1.1billion

198.1%


$0.3billion

n/d788.1%

Inbound Outbound

$4.2billion

115.3%


n/d

© 2020 KPMG. All rights reserved.42 • Russian M&A Review 2019

Sector highlights

Power & Utilities $1.5billion

20.9%

17deals

2.4%–5.6%

Power & Utilities largest deals in 2019


1 REP Holding Gazprom Energoholding GazpromBank; Undisclosed shareholders 100.0% 837

2 Reftinskaya GRES Kuzbassenergo (TGK-12); Siberian Generating Company Enel Russia 100.0% 319

3 Krasnoyarskaya GRES-2

SUEK OGK-2; Gazprom Energoholding 100.0% 160

4 Far East Energy Company

RusHydro Andrey Melnichenko 41.8% 121

5 Electroshield Samara RDIF; Schneider Electric n/d n/d 47

Banking & Insurance

$1.3billion

–59.7%

53deals

2.1%10.4%

Banking & Insurance largest deals in 2019


1 TCS Group Holding Institutional and Private investors n/d 8.4% 300

2 Razvitie (Moscow) Leader-Invest; Etalon Group LSR Group 50.0% 248

3 MTS-Bank Mobile TeleSystems Sistema 39.5% 174

4 National Reserve Bank GTLK Alexander Lebedev 76.3% 110

5 Rosgosstrakh Otkritie Financial Corporation Bank NPF Budushchee 7.1% 108

$0.054billion

$0.014billion

–37.4% n/d

Inbound Outbound

$1.4billion

24.1%


$0.3billion

$0.01billion

68.9% –96.2%

Inbound Outbound

$1.0billion

–64.3%



Sector highlights

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2020 KPMG. KPMG refers JSC “KPMG”, “KPMG Tax and Advisory” LLC, companies incorporated under the Laws of the Russian Federation, and KPMG Limited, a company incorporated under The Companies (Guernsey) Law, as amended in 2008. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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ContactsSean TiernanHead of AdvisoryRussia and the CISPartnerT: + 7 495 937 4477E: [email protected]

Lydia PetrashovaHead of Deal AdvisoryRussia and the CISPartnerT: + 7 495 937 4477E: [email protected]

Robin MatthewsOil & Gas GroupDeal AdvisoryRussia and the CISDirectorT: + 7 495 937 4477 E: [email protected]

Marina ManakovaInnovations & Technology GroupDeal AdvisoryRussia and the CISDirectorT: + 7 495 937 4477E: [email protected]

Alexander BorontovReal Estate and Construction GroupDeal AdvisoryRussia and the CISDirectorT: + 7 495 937 4477E: [email protected]

Dmitry GaraevHead of Tax M&ATax and Legal Russia and the CISPartnerT: + 7 495 937 4477E: [email protected]

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