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Khachaturyan: ‘Certain sectors expected to warm up faster’
In this Kyiv Post interview, Armen Khachaturyan, senior partner at Kyiv-based law group Asters, said that energy, especially in oil and gas upstream and downstream and subsoil areas, remain the most attractive investment and M&A opportunities. He said agriculture and food processing are on the rise as well. Other sectors of interest include infrastructure, chemistry, pharmaceuticals and fast-moving consumer goods.
Kyiv Post: Do you see the Ukrainian M&A market recovering to pre-crisis levels? If so, when and what sectors will be most attractive?
AK: It is no secret that the investment climate in Ukraine, in general, has worsened over last few years. There are a number of political and economic reasons for that both domestic and international.
Lack of economic and regulatory reform together with legal challenges and corrupt regulators and judiciary remain to be among investors' key concerns. Global economic and financial crisis with extremely difficult situation in Europe has undoubtedly added to these concerns.
However, Ukrainian government does make an effort to improve Ukraine's investment image. The announced shale gas tenders, the program of national projects and activity of the State Agency on Investment and national projects and it's structural unit InvestUkraine, as well as infrastructure projects related to 2012 UEFA Euro Cup are among just a few indications of the Ukrainian government persistency to improve Ukraine's investment image.
These efforts need to be obviously further enhanced to produce the positive result. It could be too optimistic to envision the economy's quick picking up this year (not speaking about reaching the pre-crisis indicators). However, certain economic sectors could be expected to warm up faster than others. For example, investment into Ukraine's hydrocarbons industry could be vast in coming years.
Shell is not the only one interested. The interested parties include Shell, Chevron, ExxonMobil, Eni, OMV, TNK-BP, Lukoil, ConocoPhilips, Halliburton, Total and a number of other companies. All of them have now with announcement of two significant shale gas PSA tenders a good chance to win an extremely lucrative project.
Vanco International needs to be also mentioned as the company which won the first ever PSA tender in Ukraine for exploration and production on the Black Sea shelf, was subsequently deprived of its rights and finally settled on its entitlement to this project through the international arbitration. The Black Sea shelf, especially given the recent discoveries within adjacent Romanian areas, remains an appealing investment attraction.
Another lucrative investment/M&A destination is reusable (wind and solar) energy. One of the world's most attractive green tariffs has been adopted in Ukraine together with very favorable natural conditions. These are the reasons for reasonably good investment expectations in this area.
Thus, energy, especially in oil and gas upstream and downstream and subsoil areas, remain to be among the most attractive investment/M&A opportunities. Agriculture and food processing is on the rise as well. Other sectors of interest include infrastructure, chemistry, pharmaceuticals and FMCG.
KP: If European banks were big buyers of Ukrainian assets before the crisis, who are the main buyers on the market today, who will be buying in coming years and what countries are they from?
AK: Foreign banks were actively buying Ukrainian banking assets in the pre-crisis years. Indeed it is difficult to recall another single economic sector as hot for a buy-sell activity as the Ukrainian banking sector in 2005-2007.
Owners of many Ukrainian banks would love to sell them for a decent price tag today, but there are no that many buyers. However, M&A activity in banking industry is something that is expected, because discounts on banks' investment and credit portfolios may be huge and the National Bank of Ukraine seems to direct industry towards consolidation by challenging small banks by raised capital requirements.
There may be forthcoming acquisitions of foreign bank subsidiaries' retail businesses as well as mergers of banks within the same business groups. Also, banks will be more actively acquiring assets through foreclosures on mortgages and pledges.
As noted, it is expected that foreign investment funds and industrial buyers will be interested in a number of other target zones. It is likely that Russian and Chinese companies will be most visible as potential buyers/investors in Ukraine.
KP: For the selling side, is now an optimal time for a Ukrainian business owner to sell? Or would it be best to wait a year or two?
AK: It is apparent based on the business theory that the time of economic stagnation is not the best time for selling one's business unless owners badly need money, e.g., to restructure debt or to optimize business engagements, etc., or when economic forecasts promise inevitable downgrading of the whole economy, a particular industry or type of business.
KP: For the buying side, is now an optimal time to for a foreign investors to buy an asset in Ukraine, or would it be best to wait a year or two?
AK: Clearly, this time is good for buying. Distress assets may be acquired for pennies and potential buyers will likely have a stronger negotiation position.
Even for performing business targets political, financial and global risks will lead to a lower purchase price.
KP: Could you identify the top five strategies and hands on changes domestic business owners should start adopting today to ensure they can maximize the sale price of their assets to an investor in the future?
AK: 1. Any serious M&A transaction starts with financial and legal due diligence review of the target. The cleaner are the results of such a review the higher is the price. The due diligence check list is not that long, however not always it is well known to business owners. It could be good for many to start looking at their businesses by the eyes of potential buyer. That essentially means that potential seekers should hire professionals to complete so called vendor's due diligence to reveal corporate and business shortcomings to be cleaned up to the maximum extent so that the future buyer's due diligence produce a more attractive image of the target.
2. Ukrainian law is often difficult for efficient corporate planning, including title transfers, corporate governance and shareholders' arrangements. Besides, operational and tax optimization is often possible through foreign jurisdictions. Therefore, corporate restructuring of the seller's business through off-shore holdings is one of the tools attracting investors as it guarantees a smoother off-shore acquisition structuring. As corporate shaping-up requires time, an early start will raise chances to find an interested investor.
3. Efficient and professional management is often a key to success. Although the buyer will always have an option of appointing its own managers, the efficiency of the managing team and convincing business plan often enhance acquisition plans and may add to the price. The reinforcement of management is the right thing to do as a selling strategy.
4. Transparency of ownership and business organization is also extremely important as a selling tool. Proper restructuring of legal and organizational scheme of business is the right thing to do during a pre-sale strategy.
5. Implementing international standards and policies in business organization even if they are not yet required under Ukrainian business regulation would clearly add scores and raise the price tag.
KP: What are the top five risks investors face when buying assets in Ukraine and what strategies and measures can they adopt to main ensure that they get a fair price for assets bought in Ukraine while minimizing risks of potential problems related to the assets?
AK: 1. Unclear, inconsistent and cumbersome laws and regulations applicable to business. - Find a good legal advisor. Try to structure investment off-shore. Lobby good laws through business associations or international initiatives.
2. Political instability. These risks may be well surpassed by the potential economic benefits.
3. Judicial and regulatory corruption. See item 1 above plus contractually take your disputes to foreign arbitrations rather than Ukrainian courts.
4. Unreliable local partner. Collect as much information on your partner as possible. Do not blindly trust, investigate and check. See also item 1 above.
5. Cultural challenges. Get acquainted with local business mentality And cultural specifics and turn them in your favor. Hire local managers with foreign training who could soften the cultural clashes.