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M&A activity set to rise
March, 08th 2010

Optimism is returning to the mergers and acquisitions (M&A) industry in Russia according to a survey.

Deal makers in Russia are overwhelmingly optimistic about the future of Russian M&A with 81% of those surveyed feeling positive about the prospects of the Russian economy in 2010 compared with 2009. An additional 6% claim to be very positive about Russias M&A prospects.

Mergermarket interviewed 100 Russian M&A and corporate finance decision makers on the current Russian M&A environment. Mergermarket supplemented the research with deal type and sector analysis from mergermarkets M&A data.

Tight credit conditions and the lack of liquidity in the market are viewed as the biggest threats to the growth prospects of Russian companies over the next 12 months. Almost a third (32%) of respondents view it as the greatest threat while 30% see it as a major issue.

A majority (58%) of those surveyed said they expect the overall level of M&A activity in Russia to increase over the next 12 months with a further 3% thinking it will increase significantly.

Almost half (48%) of respondents expect the Russian telecommunications, media and technology (TMT) sector to see the most M&A activity over the next 12 months while only 8% think the construction sector will be the hottest sector.

Over half (69%) of respondents consider that the bulk of Russian M&A transactions will be worth less than 250 million over 2010.

Russian M&A activity in 2010 is most likely to be driven by large corporates disposing of non-core assets according to nearly half of respondents (47%). Over three-quarters (77%). of respondents expect an increasing number of cross-border acquirers will be targeting Russian assets. A vast majority (88%) said the Asia- Pacific region will be most heavily targeted by Russian buyers.

Overseas TMT targets will attract the most attention from Russian outbound acquirers over 2010 according just over half (51%) of respondents while over a third (38%) think foreign energy, mining and utilities assets also remain attractive for Russian buyers

Securing deal finance is highlighted by over 50% of respondents as at least a very serious obstacle facing private equity companies with one-third highlighting this as the most serious issue facing the asset class.

Respondents are split on whether foreign or local private equity companies will dominate the M&A landscape in 2010, polling nearly 50% each. Private divestments and public takeovers are likely to be the most frequent sources of private equity acquisitions in Russia in 2010.

We are cautiously confident about a slight increase in M&A activity in 2010. Prices are becoming more reasonable while business opportunities are still here," noted David Cranfield, head of corporate practice of CMS Russia.

John Hammond, senior partner at CMS Russia, said he expects the market to be driven by the privatisation programme and asset disposals by the state banks in the second half of 2010. This should provide opportunities for domestic and international investors.

In 2009 a total of 164 deals were announced in Russia worth a total of 17.6 billion. Compared to the previous 12 months, this represented a fall of 40% in terms of deal volume while valuations declined by 52%.

The total domestic deal count amounted to 117 transactions collectively valued at 14.1 billion, a fall of around 40% from 2008 in both volume and value terms. The energy, mining and utilities deal market was the most active for domestic M&A in 2009, accounting for nearly 20% of total activity and over 50% of deal value.

There were 47 inbound M&A transactions in 2009 with a total value of 3.4 billion compared with 89 deals worth 12.7 billion in 2008. Consumer companies were the top destination for inbound deals in 2009 accounting for around one-third of total transactions valued at a combined 279 million. Energy, mining and utilities companies ranked as the second most active investment area in terms of deal volume with six transactions worth 1.6 billion.

Private equity transaction volumes and deal values shrank to a fraction of 2008 with just eight deals worth 276 million transacted in the Russian market in 2009, compared with 27 deals valued at 1.7 billion in 2008.

The average deal size fell to 107 million in 2009 from 134 million in 2008. Average deal sizes varied widely over 2009, peaking at 158 million in the second quarter on the back of six large-cap (250 million plus) transactions coming to market. Excluding second quarter deals, the average deal size was just 86 million.

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