russian m&a review 2017

Russian M&A review2017March 2018

KPMG in Russia and the CIS

kpmg.ru

http://www.kpmg.com

Contents

— Oil and gas

— Financing – sanctions-related implications

— Debt sales market

— Macro trends and medium-term forecasts

— Appetite and capacity for M&A

— Cross-border M&A highlights

— Sector highlights

OVERVIEW

page 3

2017 IN REVIEW

page 6

OUTLOOK FOR 2018

page 10

METHODOLOGY

page 28

APPENDICES

page 29

KEY M&A DRIVERS IN 2017

page 13

2

© 2018 KPMG. All rights reserved.

Russian M&A review 2017

OverviewAlthough deal activity increased by 13% in 2017, the value of Russian M&A was 12% lower than the previous year, at USD66.9 billion, mainly due to an absence of larger deals. This was in particular reflected in the oil and gas sector, which in 2016 was characterised by three large deals with a combined value exceeding USD28 billion.

The good news is that investors have adjusted to the realities of sanctions and lower oil prices, and sought opportunities brought by both the economic recovery and governmental efforts to create a new industrial strategy.

2017 saw a significant rise in the number and value of deals outside the more traditional extractive industries and utility sectors, which have historically driven Russian M&A. If the oil and gas sector is excluded, then the value of deals rose by 37%, from USD35.5 billion in 2016 to USD48.5 billion in 2017.

USD35.5bln

2016 2017

USD48.5bln

13%Deal activity

37%Deal value Oil and gas sector is excluded


3Russian M&A review 2017

2011 2012 2013 2014 2015 2016 2017

Source: KPMG analysis

Russian M&A (2011–2017)

70.0 79.5

100.979.0

52.0 64.8

56.0 14.4

11.3

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

Mega deals (>USD10 bn), USDbn

302334 333

621

470 482

66.9

546

Progress in terms of economic recovery, although positive, has been slower than that targeted by the government. One of the principal reasons for this is continuing uncertainty over sanctions, which was further

compounded following the publication of the so-called Kremlin report . The economy has largely adapted to the 2014 sanctions, and investors have become used to working within the legal constraints they impose.

1 A report listing officials and billionaires from Russia’s ruling elite that could be targeted through further sanctions. It was compiled by the US Treasury Department, mandated by the US Congress under the Countering America’s Adversaries Through Sanctions Act, and made public on 30 January 2018.

However, two key factors could influence Russian M&A during the year ahead: how the US August 2017 sanctions are further enforced, and the Russian presidential election cycle.

We believe that the outlook for 2018 is for moderate growth, in both the number and aggregate value of deals, compared to 2017.

4



Russian M&A largest deals in 2017

Target Sector Acquirer Vendor % acquired

Value USDm

1 Rosneft Oil Company* Oil & GasCEFC China Energy Company Limited

Glencore, Qatar Investment Authority

14.2% 9,254

2Otkritie Financial Corporation Bank**

Banking & Insurance

Central Bank of Russia Private shareholders 99.9% 7,720

3Joint venture of ride-hailing businesses of Yandex and Uber

Innovations & Technology

Yandex, N.V.; Uber Technologies


59.3%/ 36.6%

3,800

4Holland & Barrett International

Consumer MarketsLetterOne Group (Mikhail Fridman)

The Nature's Bounty Co; The Carlyle Group LP

100.0% 2,250

5 Yuzhno-Russkoye field Oil & Gas OMV AG Uniper SE 25.0% 2,040

6 SIBUR Holding Chemicals Leonid Mikhelson Kirill Shamalov 14.3% 1,910

7Eurasia Drilling Company Limited

Oil & Gas Schlumberger Limited Private shareholders 51.0% 1,900

8 En+ Group Metals & Mining

Qatar Investment Authority; AnAn Group; Russian Direct Investment Fund

Oleg Deripaska 18.8% 1,500

9Retail portfolio of Immofinanz in Moscow

Real Estate & Construction

Fort Group Immofinanz Group 100.0% 1,051

10 MegaFonCommunications & Media

Gazprombank Telia Company AB 19.0% 1,046

*The completion of the deal was postponed due to the CEFC’s cash constraints.

**On 11 December 2017, the Central Bank of Russia acquired 99.9% of the ordinary shares of Otkritie Financial Corporation Bank as part of its bankruptcy protection measures.

10largest deals in period USD32.47bln

48.5%

as a % of total transactions in 2017



2017 in reviewAs previously mentioned, part of the reason for the increased optimism and activity is the economy continuing to show strong resilience to both the sanctions and lower oil revenues.

According to Macro-Advisory estimates, GDP expanded by 1.8% in 2017, thus ending the two-year recession which saw GDP contract by 2.8% and 0.2% in 2015 and 2016, respectively.

The economy continues to benefit from increased competitiveness as a result of the weak rouble and a steady shift in consumption towards domestically produced goods. The agriculture sector has been the big winner from the weaker rouble and Russia’s counter-sanctions, which bans the import of many food types from the EU and US, and was again one of the main drivers of the recovery in 2017. Last year Russia was the world’s largest exporter of wheat and sugar, and the country recorded significant increases in the production and export of other agriculture and food products.

1.8%

GDP Last year also saw the consumer sectors beginning to show signs of recovery after experiencing a slump in the previous two years.

The large drop in inflation (which is estimated to have ended the year close to 2.5% year-on-year, compared to 5.4% in 2016) in combination with a pick-up in wage growth helped boost consumer spending and confidence.

This, together with a steady decrease in debt servicing costs following the CBR cutting its benchmark interest rate and the high street banks following suit, saw a return in demand for higher-priced durable goods, such as vehicles. The total number of passenger and light commercial vehicles sold in 2017 rose 12%, to 1.5 million, the highest number recorded since 2009 and testament to the improving economic environment.

6




Deal value by sector: 2017 vs. 2016

USDbn

Deal volume by sector: 2017 vs. 2016

Oil & Gas

Banking & Insurance

Real Estate & Construction

Metals & Mining

Innovations & Technology

Consumer Markets

Communications & Media

Chemicals

Agriculture

Other

Note: Further detailed analysis of M&A activity by sector is presented in Appendix 4.

Investors also responded to the government’s efforts and commitment to a new industrial strategy aimed at creating a more diversified activity base and a broader mix of exports, which traditionally have been dominated by the extractive industries. The so-called localisation programme, in tandem with the improved competitiveness of the economy, have begun to attract investors to a wider range of sectors.

The innovations and technology sector saw one of the largest deals of 2017, with the USD3.8 billion merger of Yandex and Uber’s ride-hailing businesses in Russia and other CIS countries. The deal effectively sees Uber withdraw from the Russia and CIS market, and follows its 2016 exit from China, where it sold its operations to local rival Didi while retaining a minority stake. Furthermore, recent press reports suggest that Uber potentially could exit other international markets where it has so far struggled to achieve a market-leading position.

Substantial growth was demonstrated by the communications and media sector (from 43 deals, worth USD2.3 billion in 2016, to 57, worth USD4.0 billion, last year), consumer sectors (up from 36, worth USD3.5 billion, to 71, worth USD5.2 billion) and the innovations and technology sector (deal value more than doubled in 2017 compared to 2016).

2017 2016

18.4

9.1

40.6

7.5

1.18.3

6.9

5.5

8.85.2

1.7

4.0

2.33.3 5.0

4.7

3.21.5

2.33.5

2017 2016

43

44100

86

63 41

31

4477

102

5528

3748

71

3657

4312

10



Source: KPMG analysisDomestic Outbound Inbound

2011 2012 2013 2014 2015 2016 2017

Russian M&A deal value by type (2011–2017)

USDbn

2016 2017

Europe

North America

CIS

Asia-PacificMEA

Other regions

0.0

1.9

1.2

6.4

1.4

3.3

0.0

11.8

1.70.1

5.4

10.7

Domestic Outbound Inbound

2011 2012 2013 2014 2015 2016 2017

Russian M&A deal volume by type (2011–2017)

Source: KPMG analysis2016 2017

EuropeNorth

America

CIS

Asia-Pacific

MEA

Other regions

05

5

6.4

3640

24

26

8

22

36

40.6

107.392.2

57.3

36.0 39.3

15.8

12.0

4.6

13.8

5.115.3

16.3

13.6

18.4

7.9

10.9

21.5

39.1

5.2

22.5

Inbound M&A deal value by region (2017 vs. 2016)

Inbound M&A deal volume by region (2017 vs. 2016)

388

178 213 229

476

347 379

47

5348 41

74

5848

111

7371

63

71

65 54

8



The government’s geopolitical diversification policy continues to result in both higher inbound investment activity (the number of such deals doubled in 2017 (the highest level since 2010) compared to 2016), as well as higher inbound investment inflows, particularly from Asian countries, which accounted for over 47% of the USD22.5 billion of inbound M&A announced in 2017.

While the acquisition of a 14.16% stake in Rosneft from Glencore and Qatar Investment Authority by China Energy Company was a clear driver behind this, overall M&A activity with Asian investors in terms of number of deals more than doubled in 2017 compared to 2016.

The overall economic recovery led to resumed interest from European and Northern American investors. After a period of inactivity in 2016, US strategic investors returned to Russia, committing USD1.9 billion of investment, driven primarily by Schlumberger Limited’s acquisition of a 51% stake in Eurasia Drilling Company.

Although the number of Russian outbound deals remained on a par with 2016, the value of M&A fell by two-thirds in 2017, as there were fewer large deals2. The majority, 52%, of Russian outbound investment in 2017 was in European companies, with the largest deal being the investment business with Russian capital LetterOne Group’s USD2.25 billion acquisition of Holland & Barrett International, Europe’s largest health and wellness retail chain.

2 On 15 October 2016 Rosneft acquired a 49% stake in Indian Essar Oil for USD6.3 billion, and United Capital Partners acquired an effective stake of 24% (worth USD3.1 billion) via its interest in a consortium with the international commodity trading firm Triafigura.

USD1.4bln

2016 2017

USD3.3blnMeanwhile, inbound M&A from Europe saw a more than two-fold increase, from USD1.4 billion in 2016 to USD3.3 billion in 2017.



Outlook for 2018It is now clear that the 2014 sanctions had beneficial effects – for example, they led to the government and industry placing a greater focus on boosting efficiency and improving spending discipline.

One example in this regard was in the oil sector, which saw average crude output rise by 740,000 barrels per

day between August 2014, when sanctions were imposed on certain activities relating to the exploration or production of oil or gas, and November 2016, when Russia agreed to participate in a production control deal with OPEC.

Similar examples could be observed across other sectors of the economy. Furthermore,

Russia was the second-largest recipient of foreign direct investment (FDI) in Europe in the 18 months to

However, as mentioned earlier, considerable concern still exists over how the US will enforce the August 2017 sanctions, with the so-called Kremlin report (published 30 January 2018) failing to provide any further clarity on the practical implications of the new legislation.

Until this issue receives clarification some potential investors, and particularly US strategic investors, are likely to further delay deals. One fear on their part is that there will be a significant ratcheting up of legal restrictions on activity in Russia. The issue is expected to be the subject of political debate in Q1 and Q2 this year, which may see transactions delayed until the second half of the year.

June 2017, which was also reflected by the number of inbound M&A deals doubling during 2017.

10



3 A report on the impact of potential sanctions on Russian sovereign debt in legislation passed in August 2017, prepared by the US Department of Treasury, and released by Bloomberg.com.

4 Russia received USD7.5 billion of orders for the USD4 billion of Eurobonds issued in March 2018, at yields almost 0.25 per cent lower than had been anticipated. US and European investors purchased a sizeable portion of the bonds.

However, as Russian corporate debt levels are low and manageable, if the new government signals a business-neutral or friendly stance in its policy agenda, and no draconian measures are imposed by the US vis-à-vis Russian sovereign debt, we believe the conditions will be in place to allow a significant uptick in M&A activity.

The economy is expected to show a broadly similar pace of growth this year to that seen in 2017. The government has stated that it will not spend expected higher oil tax revenues, but will instead use the income to rebuild financial reserves and keep borrowing requirements low. The rouble is expected to remain close to last year’s average, and this should again benefit the import-substitution sectors and maintain the competitiveness of exports.

The good news is that the US Treasury Department concluded in a report that expanding sanctions to cover new Russian sovereign debt and derivatives could destabilise markets and spread beyond Russia to have “negative spillover effects into global financial markets and businesses”3, which indicates that the US is likely to take debt market penalties off the table. Thereafter the credit rating agency Moody’s assigned Russia a positive outlook, putting it on course for a possible rise out of junk status in the next 12-to-18 months. This is expected to lead to a release of pent-up demand, which has been building since the imposition of sanctions. In fact demand was so strong for the Russian Eurobonds issued in mid-March, that they were almost twice oversubscribed, enabling the Russian Finance Ministry to lower the yield4.

While there were no surprises during the Russian presidential election, the bigger question is whether there will be any changes among government personnel (as have been seen in regional governments in the past two years) and which policy and tax changes will be made. These questions may not receive clarification until nearer to the inauguration date in May, or perhaps closer to the FIFA World Cup, which kicks off in mid-June.

The oil and gas sector will again attract a great deal of investor interest, especially in the areas of services and value-added processing. The industry’s response to lower energy prices against the backdrop of sanctions will mean greater opportunities in the services areas, as companies look for improved operational efficiencies and security from domestic providers. The push into LNG, which took a big step forward in late 2017 with the commissioning of Phase 1 of the Yamal project, is also expected to attract a greater volume of investment.

Under the government’s new industrial policy, agriculture and food processing have been identified as strategically important sectors for growth. More opportunities for both domestic and foreign investors are expected to be available in the coming years, and both the number and value of deals should continue to rise.

Infrastructure, in its broadest sense, is also expected to attract increasing investment. The ability to export a much greater volume of agricultural products, for example, is constrained due to capacity restraints in ports. There will have to be both a significant rise in handling capacity and much better port access for road and rail traffic if government targets are to be met in the years ahead.



San

ctions

Debt sales market

Localisation remains at the core of the state’s industrial strategy and is expected to continue to attract investment into relevant areas of manufacturing and services.

As cited in the World Bank’s Ease of Doing Business survey, the government’s commitment to maintaining a competitive environment for manufacturing and exporters creates a favourable backdrop, together with the steady progress already made. The target of reaching 20th place by early in the coming decade, from 35th

currently and 124th in 2010, remains achievable.

The communications, media, innovations, and technology sectors, which recorded a large rise in the value of deals in 2017, are expected to continue to attract strong investment flows in 2018 and the years ahead. This is partially on the back of legislative changes, which stipulate greater investment into local data storage and processing inside the country, and also because of the Russian consumer’s rapid embrace of new technologies in such areas as financial transactions, shopping, and entertainment.

The same problems are evident in warehousing, logistics, and distribution where additional and more modern capacity will have to be installed in order to handle growth in e-commerce and the higher levels of internal trade that has resulted from the success of the government’s localisation strategy.

The government’s focus on improving housing (especially affordable housing) and healthcare services will see better opportunities for investors in these sectors in the coming years, as the ambitious targets set by the government will require a much higher level of investment.

12



Key M&A drivers in 2017

San

ctions

Debt sales market

Oil

& G

as

M a r i n a M i z g i r e v a Head of Oil and Gas Deal Advisory Partner

Russia retains a leading global position in oil production, and despite the OPEC restrictions continues to attract inbound investments, primarily from Asia and the Middle East, and it is expected to be of interest to a wide range of investors due to its relatively low technological risks, production-related expenses, and entry costs.

OIL AND GAS

Although the value of Russian M&A in the oil and gas sector fell in 2017 due to fewer larger transactions, the number of deals has remained broadly stable over the past three years, which in part reflects the resilience of the industry in the wake of the sanctions and lower oil prices.

Russia retains a leading global position in oil production, despite restrictions under the OPEC – Non-OPEC agreement, which stipulates that Russia limit production to around 11 million barrels a day. The minimum daily average level of oil production in Russia in 2017 stood at 10.907 million barrels, and in 2017 the daily production average (including condensate) was 11.2 million barrels5.

Gas production rose by 8% to 690.5 billion cubic meters (bcm) in 2017 following growth in international and domestic demand, particularly because of the cold summer and autumn.

5 Data from the Central Dispatching Office of the Fuel and Energy Complex in Russia.

Oil production in 2017

mbpd*

Gas production in 201711.2

bcm**690.5

*million barrels per day **billion cubic metres





Oil and gas deal value and volumes, 2010–2017

2932

36

51

43 44

Deal value, excl. mega and privatisation deals, USDbn

Number of deals

Privatisation deals,USDbn

Acquisition of TNK-BP by Rosneft Oil Company

2011 2012 2013 2014 2015 2016 2017

13.9 13.3 25.5 27.5

13.2 23.4

17.2

1.7

56.0

0.218.4

43

The standout deal in 2017 was the acquisition by CEFC China Energy Co. Ltd. (CEFC) of a 14.16% stake in Rosneft Oil Co. from a consortium controlled by Glencore and Qatar Investment Authority, in a cash deal worth USD9.254 billion, which made it the largest Russian M&A transaction in 2017.

CEFC made the initial payment for the stake, however, in the beginning of March 2018 the completion of the deal was delayed due to CEFC’s failure to raise capital to finance 60-70% of the deal (as was planned initially), following media reports of an investigation into the CEFC chairman. The CEFC also signed two strategic cooperation agreements with Rosneft in oil refining and petrochemicals, crude oil and product trading, retail, and financial services, and to develop joint exploration and production projects in western and eastern Siberia.

Another Russian major, Novatek, signed three agreements with Chinese and Japanese companies to cooperate in implementing the Arctic LNG 2 project, and to collaborate in different segments of the LNG and natural gas markets, including LNG trading and gas infrastructure development.

However, interest came not only from Asian players outside the influence of the sanctions against Russia. Some European international oil companies (IOCs), such as OMV, BP, Shell, and Eni continued to expand their upstream interests in Russia during 2017. OMV acquired a 24.99% stake in the Yuzhno-Russkoye natural gas field (located in western Siberia) from Uniper SE for USD1.85 billion, while BP strengthened its cooperation with Rosneft by acquiring 49% in the Kharampurskoe and Festivalnoye license areas of the Yamalo-Nenets Autonomous Okrug in western Russia. Shell and Gazprom Neft

concluded an agreement which formalised their intention to promote further collaboration. Eni S.A. entered into a cooperation extension agreement with Rosneft covering upstream, refining, marketing, and trading, which reinforced previous agreements between the two players, specifically in drilling exploration wells offshore as part of joint projects in the Black and Barents Seas and a further expansion of international cooperation.

Overall, in 2017 Russian majors continued to expand on the domestic market via the acquisition of private companies and through participation in state tenders. Rosneft remained the leading domestic player in terms of number of deals and cooperation agreements signed, followed by Novatek and Gazprom Neft. Mid-sized, privately owned companies are expanding their domestic upstream portfolios as well, largely through acquisitions of other players.

Asian and Middle East investors have been very active in Russian oil and gas projects in recent years and continued to show interest in acquiring equity stakes in Russian majors and signing cooperation agreements, both to develop upstream and downstream assets and for technological cooperation.

14



OIL AND GAS

These international regions incur even lower Capex and Opex costs than Russian companies do domestically, and have material reserves and high production levels, an acceptable geopolitical situation, and relatively manageable security risks. Russian companies are focusing on such regions in order to gain access to a new reserves base, diversify portfolio risk, and establish mid- to long-term growth opportunities.

Russian oil field services players, similar to those globally, continued to suffer from lower volumes and pricing, which could potentially lead to joint ventures with foreign strategic players or see them sell minority equity stakes to improve debt positions and finance future development or the acquisition of more competitive specialised service providers. Rosneft, Gazprom Neft, and LUKOIL

have all shown interest in these areas, sometimes in partnership with other international players. As an example, Rosneft has entered into an agreement with Kurdistan Regional Government to participate in five production units, and announced the start of the joint implementation of an infrastructure project to operate the oil pipeline in the Kurdish Autonomous Region. Rosneft is also looking for deals around the eastern Mediterranean and Africa, which are areas of tactical importance beyond the energy picture. In Iran, Rosneft and the National Iranian Oil Company have agreed an outline deal to work on a number of strategic projects, which together could be worth up to USD30 billion. Gazprom Neft and Austria’s OMV will work in Iran’s oil sector under a memorandum of understanding. LUKOIL, together with Indonesia’s state firm Pertamina, are seeking to develop the Mansouri field in south-western Iran.

Russian companies continued to look for acquisition and expansion opportunities internationally, especially across North Africa and the Middle East (including Iran).

In July 2017 Schlumberger agreed to purchase a majority 51% stake in Eurasia Drilling Company Limited (EDC), the leading Russian onshore and offshore drilling and well services contractor, for an estimated USD1.9 billion.

In December 2017, in order to gain approval for the deal from Russia’s Federal Antimonopoly Service (FAS), Schlumberger agreed to sell a controlling stake in EDC to the state should certain new sanctions be imposed on Russia, something Schlumberger refused

to do when it attempted to buy a 45.65% stake in Eurasia Drilling for USD1.7 billion in 2015. The change in attitude from Schlumberger indicates the willingness of foreign companies to do business in Russia and to find ways to resolve sanctions-related issues. In November 2017 a consortium made up of Russian Direct Investment Fund, China Investment Corporation, and funds from the Middle East agreed to buy a 16.1% stake in EDC.




O u t l o o kOur outlook for 2018 is that Russia, as in 2017, will be interesting for a wide range of investors due to its relatively low technological risks, Capex and Opex costs, and acquisition prices for assets. Following substantial cuts in exploration spending, caused by the sharp fall in oil prices in mid-2014, 2017 was the worst year for exploration discoveries experienced by the industry in 70 years, and followed an almost equally poor performance in 2016. We would expect only modest improvement in the situation concerning exploration spending in 2018. The continuous interest in Russian upstream assets stems from opportunities to quickly replace reserves and production through acquisitions or partnerships. Asian and Middle East investors will continue to show interest in acquiring stakes in Russian companies, mainly majors, while interest from European and US companies will depend greatly on how the situation develops vis-à-vis the sanctions. The Russian upstream sector will continue to attract most interest, followed by oil field services companies.

In Russia, on the one hand, we are expecting the further consolidation of domestic assets by the majors, and on the other, we believe that Russian companies will continue to look towards international expansion, especially across North Africa and the Middle East.

The Russian market environment continues to be challenging, and sound advice is more important than ever. At KPMG we have been working closely with the most prominent oil and gas companies in Russia and the CIS for more than 25 years, thus accumulating valuable insights into the current state of play and investor interests. Our oil and gas M&A team is unique in the market, as it comprises advisors with oil and gas industry and investment banking backgrounds and dedicated oil and gas deal support professionals. And, through our global network of 12 oil and gas centres of excellence, we have access to the top decision makers from a wide range of players, which helps our clients execute their strategies by providing valuable and relevant insights and foresight.

P o i n t s t o n o t e

16



FINANCING – SANCTIONS-RELATED IMPLICATIONS

S t e p a n S v e t a n k o vHead of Financing Partner

Russian companies have adapted to the EU and US sanctions in many respects, with each new extension of restrictions having less effect on their financing terms. However, the outlook for the Russian financing market in 2018 remains unclear, even after the publication of the Kremlin report, and depends highly on the kind of new sanctions that will be imposed by the US.

The sanctions against Russia in 2014 had an immediate negative effect on the ability of domestic companies to raise capital on debt markets. However, after a considerable decrease in the volume of debt financing in 2014-2015, Russian companies were able to secure alternative ways to raise funds on international debt markets. Recent market statistics demonstrate that EU and US investors actively participated in purchasing Russian corporate Eurobonds and, while the environment for bank lending has also been improving, the issue of geopolitical risk is still of great relevance to both domestic and foreign banks.

Since 2014 the EU, the US, and other countries have progressively imposed a regime of sanctions against Russia. These include a number of measures to restrict the financing of Russian state and private companies. Some of the main measures in this respect relate to the maximum maturity period for borrowed funds:

— EU: 30 days for major state-owned Russian banks, energy, and defence companies. These sanctions have been extended until 31 July 2018; and

— US financial markets: 14 days for banking sector companies, 30 for defence sector companies, and 60 for energy sector companies, valid from 28 November 2017 (the earlier maximum maturity periods were 30 and 90 days, respectively).

In January 2018, US officials published new information about the possibility of future sanctions, which included the so-called Kremlin report and an assessment of the consequences of the possible introduction of restrictions on transactions with Russian sovereign debt and derivatives. The Kremlin report listed the names of 210 officials and billionaires from Russia’s ruling elite, exposing them to scrutiny and potential future sanctions. However, those named have not yet been subjected to the new restrictions. And regarding the assessment of the possible future impact of sanctions on Russian sovereign debt and derivatives, the US Treasury Department warned that imposing sanctions on Russia’s important sovereign debt market carries the risk of triggering global financial turmoil.

How sanctions have impacted the financing of Russian companies




The impact of the sanctions adopted in March 2014 on Russian corporate Eurobond issuers was stark, with over a 70% decline in both the number of placements (from 357 in 2013 to 107 in 2014) and the value of funds raised (from USD44.7 billion in 2013 to USD11.9 billion in 2014). At the same time as placement volumes were falling, the cost of debt financing under bond issues rose (see charts 1 and 2). The number of deals involving the placement of corporate Eurobonds dropped further in 2015, from 107 in 2014 to 55, against a backdrop of recently imposed restrictions and increased geopolitical risks. In value terms, funds raised fell to USD4.8 billion, of which more than half was attracted in the second half of 2015.

Source: Cbonds

2012 2013 2014 2015 2016 Nov 2017

Chart 1. Issues of bonds and Eurobonds by Russian residents*

C o r p o r a t e b o n d m a r k e t

Bonds, RUBbn Eurobonds, USDbn

4245

12

5

12

221,220

1,6921,781

2,2402,368

2,077

Note: (*) Excluding government bonds

Chart 2. Effective yield to maturity of corporate bonds and Eurobonds

5.3% 5.3%

7.6% 4.5%

9.1%

6.7%7.4%

8.0%

10.0%

16.1%

9.6%

H1 2012 H1 2014 H1 2015 H1 2017

Bond Russian (maturity 3-5Y) Eurobond Russia NIG Eurobond Russia IG

Source: Cbonds

Note: IG-investment grade, NIG-non-investment grade of bond issuer Bond Russian (maturity 3-5Y) or Cbonds-CBI RU 3-5Y index reflects effective YTM in RUB Eurobond Russia IG or Euro-Cbonds IG Russia Index reflects effective YTM in USDEurobond Russia NIG or Euro-Cbonds NIG Russia Index reflects effective YTM in USD

Beginning in autumn 2015, the market demonstrated an upward trend in the volume of Eurobond placements by Russian issuers, both in quantitative and value terms, after a sharp decline in 2014 (see Chart 1).

This rebound was due to a number of factors, including a relative decrease in geopolitical tensions, oil prices stabilising, international investors reassessing the risks presented by Russian issuers, and

high yields compared to other emerging markets and European countries. In many ways, growth in borrowing through the issue of corporate Eurobonds was connected to the refinancing of companies’

current borrowings, both bank and bond related. Eurobond yields in recent years have been lower than the interest rates of bank loans, as well as the cost of other types of financing.

18




According to data from Cbonds, Russian issuers placed approximately USD21.9 billion in Eurobonds of various currencies in the 11 months to November 2017 – almost 80% (USD9.6 billion) more than for the whole of 2016. The largest placements were bonds on the Irish Stock Exchange by Gazprom (GBP0.85 billion) and MMC Norilsk Nickel (USD1 billion), with the latter at the lowest coupon rate ever in the history of the company’s placements on international capital markets. Some 61% of Gazprom’s Eurobonds were bought by UK investment funds, with the remainder purchased by investors from Asia, continental Europe, and Russia. The Norilsk

Nickel Eurobonds were purchased by investment funds from Russia (37% by value), the UK (31%), continental Europe (17%), Switzerland (9%), and the US (5%).In February 2017 Severstal placed USD500 million in Eurobonds on the Irish Stock Exchange, at an annual coupon rate of 3.85% – this was also a record-low rate for the company. In March and September 2017 RUSAL raised a total of CNY1.5 billion (approximately USD220 million) via panda bonds on the Shanghai exchange. This Eurobond placement was the first for Russian companies on the Chinese market.

1Renewed interest on the part of Western investors in the secondary Eurobond market. An example in this regard was investment companies such as Fidelity, BlackRock, and JP Morgan Asset Management increasing the share of VEB bonds in their portfolios; and

2 New, non-standard types of bond issues. For example, in July 2016 VEB placed Eurobonds with settlements in roubles, and in October 2016 VTB began issuing one-day bonds to raise overnight funds on the Moscow Stock Exchange. The limit on the bond issue programme was RUB5 trillion.

At the same time, the following trends were observed in the banking sector (the sector most strongly affected by the sanctions):




B a n k l e n d i n g m a r k e t

Similar to the bond market, the bank lending market saw a significant fall in the foreign currency financing of Russian companies after the adoption of the sanctions in 2014. Between 2014 and 2016 there was a sharp fall in the level of Russian residents’ external net debt to foreign banks; at the same time, there was a marked increase in loan interest rates, which peaked in the first half of 2015 (14.8% in RUB, 8.6% in USD, and 8.2% in EUR).

Due to the financial restrictions imposed by the US and the Eurozone, Russian companies began working actively with Asian banks. In particular, Gazprom and Bashneft, both affected by the sanctions, raised capital from a consortium of Chinese banks for the first time: USD1.5 billion in 2015 and USD0.5 billion in 2016. VEB and MMC Norilsk Nickel also received debt financing from Chinese banks.

It should be noted that Russian banks and the subsidiaries of foreign banks in practice interpret differently the restrictions imposed by the sanctions. The wording of the sanctions stipulates no direct restrictions on financing the transactions of companies under sanctions from non-EU entities. However, in practice the compliance departments of banks in Russia interpret these restrictions differently, and refuse to provide foreign currency financing to these companies.

According to the Bank for International Settlements (BIS), in the first half of 2017 there was a rise (for the first time since 2013) in Russian residents’ external net debt – by USD8 billion. According to Central Bank of Russia (CBR) data, the volume of rouble-denominated loans issued by Russian banks to legal entities and

individual entrepreneurs fell by 10% in 2015 compared to the prior year, and stood at RUB183 trillion. Between 2016 and 2017 there was a gradual rise in the value of rouble lending to Russian enterprises, and, based on 2017 results, the total value of such loans exceeded the respective amounts in 2013 and 2014 by 13% and 2%, respectively.

According to the CBR, the value of foreign currency lending fell by 16% in 2015, to RUB24 trillion, with the downward trend continuing

The sanctions are having an indirect impact on the financing of Russian companies through the risk-aversion strategies of many commercial banks which do not wish to appear on the new sanctions lists. To a large extent, this factor explains why oil and gas and metals and mining companies are seeking financing on Asian markets, where the interpretation of sanction restrictions is less strict.

Chart 3. Loans issued to Russian legal entities and individual entrepreneurs by Russian banks*

2012 2013 2014 2015 2016 2017

163185

204183 189

209

16 25 29 24 20 22

13% 17%

10% (10%)

3%11%

50%

(18%)

(16%)

11%

Loans in RUBLoans in RUB, % change

Loans in a foreign currencyLoans in a foreign currency, % change

Source: CBRNote: (*) Foreign currency loans also include loans in precious metals

in 2016, as lending declined by a further 18%, to RUB20 trillion. The downward trend was finally reversed in 2017 as the value of foreign currency lending went up by 11%, to RUB22 trillion; however, it should be noted that the value of foreign currency lending since 2014 has been negatively affected by the weakening of the rouble over this period. Chart 3 illustrates the value of lending in roubles and foreign currencies to legal entities and individual entrepreneurs from 2012 to 2017.

20




Looking at the interest rate dynamics of bank loans for Russian companies it can be observed that, immediately after the sanctions were imposed in the third quarter of 2014 and up to the second quarter of 2015, there was a gradual rise in weighted average interest rates on foreign currency loans. The cost of bank financing for this period in US dollars and euros rose by an average of 1.2-2.0%; for rouble-denominated loans there was average growth of 3.9%.

The growth in rouble interest rates was mainly affected by a sharp increase in the CBR key rate in Q4 2014, following the depreciation of the rouble against the US dollar, while the cost of financing in a foreign currency was chiefly influenced by the effect of sanctions.

In addition, growth in the cost of borrowing has been influenced by a number of factors, including reduced financial market liquidity, the option to refinance debts on the external market, local investors changing how they assess risk, and top ratings agencies downgrading Russia’s sovereign credit score.

From Q3 2015 there was a gradual decline in interest rates, both in roubles and in a foreign currency. By the end of 2017 interest rates on loans had overall returned to the level seen in early 2014 (i.e. before the sanctions were introduced). Hence, the effect of sanctions-related restrictions on loan interest rates only lasted for about a year. However, depending on their nature, fresh US sanctions could significantly change the Russian lending market in 2018.

Chart 4. Changes in debt of Russian residents

Source: BIS, CBR

Note: (1) Foreign banks. The aggregate debt of Russian residents on all possible instruments (loans, debt securities, deposits) to banks in 30 countries(2) Russian banks. Change in net debt on loans issued by Russian banks to legal entities and individual entrepreneurs in roubles, a foreign currency, and in precious metals

2012 2013 2014 2015 2016 H1 2017

Foreign banks, USDbn Russian banks, RUBbn

8 10

(40)

2,519

(18)

(19)

8

2,662

5,543

2,099

(1,681)

892

Chart 5. Loan interest rates to non-financial Russian companies

Loan Interest rate, RUB

Loan Interest rate, USD

Loan Interest rate, EUR

H1 2012 H1 2014 H1 2015 H1 2017

8.3%6.6%

8.2%6.5%

8.6%

7.0%7.7%

11.2% 10.9%

14.8%

11.5%

4.6%

Source: CBR




Main state support measures taken (or planned) after the introduction of sanctions

1 Vnesheconombank (VEB) new long-term financing mechanism: Project Finance Facility (the "PFF")

This mechanism was developed by the Russian Ministry of Economic Development and is aimed at raising investment for large-scale projects in priority sectors of the economy. The areas covered by the PFF will include infrastructure projects from 26 industries that are strategically important for VEB, in particular supporting exports of hi-tech products from Russia, and projects from the transport, energy, and telecommunications sectors.

It is planned that during the first four years of the programme’s implementation, the total volume of financing received through the PFF will exceed RUB1 trillion, with the PFF planned to be provided for a period of 10-15 years. The interest rate for the borrower will be calculated as the yield on inflation-linked government bonds, plus a premium (not more than 3.5%). Russian Minister of Economic Development Maxim Oreshkin has stated that the first VEB PFF projects will be seen in the first quarter of 2018.

2 The Industrial Development Fund (IDF)

The IDF was set up in August 2014 to improve the global competitiveness of Russian industry and to implement import substitution policies. The IDF provides loans to industrial enterprises at an annual rate of 5%. Loans can only be issued for projects which introduce advanced technologies, create new products, or for export-orientated and import-substituting industries. By the end of 2017 the IDF had financed 224 projects across 54 Russian regions. The amount of respective concessional loans issued stood at more than RUB55 billion, and the total cost of implementing the projects was around RUB216 billion.

3 The Special Investment Contract (SPIC)

The IDF was set up in August 2014 to improve the global competitiveness of Russian industry and to implement import substitution policies. The IDF provides loans to industrial enterprises at an annual rate of 5%. Loans can only be issued for projects which introduce advanced technologies, create new products, or for export-orientated and import-substituting industries. By the end of 2017 the IDF had financed 224 projects across 54 Russian regions. The amount of respective concessional loans issued stood at more than RUB55 billion, and the total cost of implementing the projects was around RUB216 billion.

4Investment projects support programme funded by a project financing scheme (the «Programme»)

The Programme was adopted in October 2014. Its goal is to create a mechanism to support investment projects implemented in Russia using project financing which, it is hoped, will facilitate an increase in lending under long-term and preferential terms to companies in the real production sector of the economy. The Programme stipulates the criteria and procedure for selecting investment projects. The interest rate on loans for investment projects selected under the Programme should not exceed the refinancing rate level of +2.5%. State guarantees on loans issued to implement investment projects account for up to 25% of the loan amount.

22




5 Support for non-resource exports

In April 2015 JSC Russian Export Centre, a government institution set up to support non-resource-based exports, was founded to provide Russian exporters with a wide range of financial and non-financial support measures. In particular, the centre provides Russian exporters with credit and guarantee support services (financing export contract expenses, current export delivery costs, financing exporters’ commercial loans, etc.).

6Planned introduction of «infrastructure mortgage» scheme and setting up an Infrastructure Development Fund in mid-2018

Under this scheme it is intended that an infrastructure facility that is the subject of a concession agreement is bought using credit received from private investors, and the users of the facility (public partner) then gradually repay the loan. The Russian Ministry of Economic Development sees the function of the Infrastructure Development Fund as raising borrowed capital through an «infrastructure mortgage», by placing bonds secured by state guarantees, through financing in the form of grants to private partners (concessionaires), and by issuing guarantees to secure the obligations of a public partner.

7 Tax-free provisions on bond coupons

In March 2017 a new law was passed that provides for the cancellation of income tax for individuals on coupon income received from corporate bonds. This benefit only applies to new securities issued between 1 January 2017 and 31 December 2020, and the size of the coupon should not exceed the key rate by more than 5 percentage points.

We are seeing more and more Russian companies trying to secure state support in various forms, however, this can be a lengthy process. State and commercial banks are more active on the lending market than two years previously, and there is a special focus on financing projects that include an anticipated export component, as well as agriculture and healthcare projects.

When working with our clients on capital-raising projects, including corporate and project financing, IPO preparations, state support programmes, and PPP projects, we have observed that the Russian market continues to adapt to the financial sanctions. This observation is supported by the following trends:

— a decrease in interest rates, resulting in a gradual recovery of the project finance market

— the development of state support measures for investments projects

— increasing interest on the part of private investors in concession and PPP projects

— growing investor appetite for OFZ

P o i n t s t o n o t eIt is difficult to predict how the situation will evolve in circumstances of new potential sanctions, however, at present we can say that the overall trend is positive, despite the sanctions having a slightly negative effect on the financing market.



DEBT SALES MARKET

M a x i m F i l i p p o vM&A Lead Advisory/Portfolio Solutions Group Director

The further development of the Russian corporate NPL market depends largely on opening the market to international investors. Certain doubts in this regard do exist, however, given the recent transition of the Russian economy from recession to recovery, as well as the stabilisation of Forex rates and inflation, we believe the attractiveness of the market has improved considerably.

International outlook

The European non-performing loans (“NPL”) market comprises around 100 transactions annually between banks from all over the continent and numerous international investors. The market took off after the global financial crisis and has been active ever since. In 2017 it was worth more than EUR 87 billion (in GBV terms).

The market’s development has been driven by a large number of active investors, who are prepared to take on the risks presented by NPL and who seek to achieve paybacks via accelerated debt recoveries. These investors include debt

KPMG are a leading financial advisor on the European debt market, with a dedicated Portfolio Solutions Group consisting of over 50 professionals, offering proprietary technology solutions for managing all aspects of NPL transactions, including tender processes. While we are active throughout Europe, including in major markets, such as Spain, and Ireland, our contribution has been especially significant in the opening of new European markets, particularly in the east of the continent.

collection agencies (e.g. Lindorff, Intrum Justicia, Hoist), distressed asset funds (Cerberus, Oaktree capital, CarVal Investors), and PE funds (Blackstone, TPG, Bain Capital). In addition, certain well-positioned banks (including Deutsche Bank and Goldman Sachs) and international development institutions (mainly EBRD and IFC) take part in NPL purchases.

A special feature of the NPL market is that once investors establish operations in a country, they consider a wide range of portfolios offered for sale – hence there is a high level of liquidity and competition among potential buyers. In certain debt sale

processes, dozens of investors may be competing for well-packaged NPL portfolios, thus creating upwards pressure on prices, which in turn leads to attractive deal terms for sellers.

At the same time, banks are incentivised to dispose of NPL portfolios through a combination of regulatory pressure and a need to boost profits. Forecasts from the European Central Bank indicate that a successful reduction in the NPL level could improve the aggregate return on equity of banks in the Eurozone area by at least one per cent, with some sectors even gaining three to five per cents.

24



Eastward expansion

During the early days of the European NPL market, investor interest and debt sales activity were largely centred in Western Europe, while Eastern Europe lagged behind. This created a disparity in the reduction of NPLs: as of 2013, Eastern Europe suffered from painfully high NPL ratios (e.g. 21.9% for Romania, 16.9% for Bulgaria, and 16.8% for Hungary, compared to an EU average of 6.4%). The uneven reduction in the NPL level meant that opportunities in Eastern Europe were becoming increasingly attractive for well-funded NPL investors interested in new investment opportunities. However, for international investors to switch to Eastern European markets certain barriers had to be overcome, including poor knowledge of the local regulatory environment and an underdeveloped debt-servicing infrastructure in the region.

This step forward required a major roadshow, organised by KPMG, to promote the Romanian market. The key questions addressed covered not only the portfolios offered for sale, but also aspects of the market: the regulatory and debt enforcement environment, the pipeline for future deals, and the availability of NPL servicing companies. Following this initial success Romania quickly became one of the most active NPL markets in Europe, with seven deals (worth over EUR2 billion) closed in 2016-2017.

Following the success achieved in Romania, the KPMG Portfolio Solutions Group drove further market openings throughout Eastern and South-Eastern Europe, including in such countries as Greece, Cyprus, Hungary, Croatia, and the Baltic States. We are also working to develop investor interest

in non-EU countries, and are currently handling a number of NPL transactions in Serbia, helping the Ukrainian Deposit Guarantee Fund prepare for multiple portfolio sale processes, and seeking to create interest among global investors in Ukrainian NPLs.


BANK2013 saw a breakthrough: Romania had its first two successful secured loan portfolio transactions, both of which were executed by KPMG.



DEBT SALES MARKET

However, given the recent transition of the Russian economy from recession to recovery, as well as a stabilisation of Forex rates and inflation, we believe that the attractiveness of the market has improved significantly. The availability of experienced debt servicers (which KPMG observed during our previous deals in Russia) further supports reasons for optimism over the arrival of international investors.

Russia

The Russian banking system has been hit twice over the past 10 years: first by the global financial crisis and then by the recent sanctions and slowdown of the Russian economy. As a result, it now holds one of the largest NPL pools in Europe: corporate NPLs of Russian banks amount to RUB1.9 trillion (6.4% of the total portfolio), and retail NPLs RUB0.85 trillion (7.0% of the total portfolio).

However, the development of the Russian debt sales market is quite uneven: the retail (especially unsecured) debt market has a long history and is already well-established, reaching a peak in 2016 (close to RUB0.5 trillion in GBV terms). Meanwhile, the corporate NPL market is underdeveloped, chiefly due to a combination of political and regulatory factors. In addition, prevalent local business practices have an impact: Russian banks are used to selling single exposures, not entire debt portfolios, and these deals are insufficiently large to attract the attention of international investors – therefore the market remains dominated by local investors.

In our view, the further development of the Russian corporate NPL market will greatly depend on the ability to attract international investors. Certain doubts in this regard exist, especially given that the two portfolio deals closed by KPMG in 2016 (total volume in GBV terms EUR340 million) attracted a predominantly local investment audience. This was for various reasons, including:

an unfavourable macroeconomic situation, resulting in a negative outlook for the majority of distressed businesses

perceived inefficiencies within the judicial system and heightened uncertainty over debt enforcement

relatively low liquidity of certain real estate asset classes, resulting in insufficient visibility on the timing and proceeds of eventual sales of collateral items

a wide geographical spread, making the administration of debt recovery more difficult and costly

geopolitical instability and uncertainty

26



While the creation of the Banking Sector Consolidation Fund is without doubt a major new chapter for the Russian banking system, it is still not clear which particular actions the CBR plans to take in respect of the toxic assets of the banks Otkrytie, BINBank, and Promsvyazbank. Obviously, a diversified approach will be required, and we expect that a third-party service provider/ investor could be the most appropriate option for certain asset types.

A key condition remaining to be fulfilled is the creation of a pipeline of portfolios available for sale; however, recent developments in the Russian banking sector may have created the foundation for this.

In addition to retail NPLs (currently the most liquid type of debt in Russia), assets designated for sale / servicing could include real estate backed corporate loans. The value of these loans will largely be driven by the ability of the owner (or servicer) to undertake accelerated collateral repossession and to then optimise the property’s management and disposal – traits that are more likely to be attributable to external servicers than to banks.


The goal of KPMG is to facilitate the opening of the Russian market, and we are already well placed to make this happen. Our Portfolio Solutions Group has accumulated substantial experience in advising on both sell- and buy-side transactions (more than EUR80 billion across Europe in 2014-2016). We have proprietary tools designed to make the data collation and transaction process simple, efficient, and transparent. We have access to virtually all potential investors in European NPLs, and over 2,000 potential buyers are registered in our proprietary transaction system and can easily be invited to consider an NPL portfolio. We have direct and relevant experience of CIS loan sales gained from two successful deals in Russia, where we assisted the owners of non-performing corporate and loan portfolios with a total GBV of EUR340 million.

P o i n t s t o n o t e



Methodology1st January — 31st December 2017

K P M G R u s s i a n M & A d a t a b a s eThis 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 2017, or announced during this period but pending as at 31 December 2017. Historical data may differ from previous 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 where the target’s turnover exceeds USD10 million. 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 compiled over a number of years based on information contained in 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 it 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.

M a c r o t r e n d s a n d m e d i u m - t e r m f o r e c a s t sMacro trends and medium-term forecasts are based on publicly available data collated from the State Statistics Agency, the CBR, Apecon, Bloomberg, and Macro-Advisory.

A p p e t i t e a n d c a p a c i t y f o r M & AOur analysis of forward-looking appetite and capacity for Russian M&A is based on the principles of the KPMG M&A Predictor, a tool which tracks important indicators 12 months forward. The rise or fall of forward P/E (price/earnings) ratios offers a good guide to overall market confidence, while net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratios helps gauge the capacity of companies to fund future deals.

Our analysis is based on 39 Russian companies for 2017, and all the raw data within the Russian M&A review were sourced from S&P Capital IQ as at January 2018. The financial services and property sectors are excluded from our analysis, as net debt/EBITDA ratios are not relevant in these industries. Where possible, earnings and EBITDA data are calculated on a pre-exceptional basis.

28



AppendicesMacro trends and medium-term forecasts1

Appetite and capacity for M&A2

Cross-border M&A highlights3

Sector highlights4



APPENDIX 1. Macro trends and medium-term forecasts

Trend 2012 2013 2014 2015 2016 2017 2018 E 2019E 2020E

GDP, RUB bln, nominal 68,054 72,995 79,019 83,085 85,841 91,175 99,439 105,471 112,083

GDP, USD bln 2,207 2,293 2,059 1,363 1,280 1,563 1,650 1,771 1,857

Growth, real % YoY 3.7% 1.8% 0.8% (2.8%) (0.2%) 1.8% 1.7% 1.8% 1.6%

CPI - year-end, % YoY 6.5% 6.4% 11.4% 12.9% 5.4% 2.4% 4.2% 4.6% 4.5%

CPI - average, % YoY 5.1% 6.8% 7.8% 15.5% 7.0% 3.7% 3.9% 4.5% 4.7%

Gross fixed investment, real %YoY 6.1% 1.8% (1.6%) (9.3%) (2.5%) 3.9% 3.2% 1.5% 1.8%

Industrial production, real % YoY 3.8% 0.6% 0.2% (2.4%) (0.1%) 3.0% 1.1% 1.3% 1.5%

Agricultural output, % change YoY 3.7% 3.8% 4.1% 4.6% 4.7% 4.7% 4.7% 4.7% 4.7%

Central Bank key rate, % 17.0% 11.0% 10.0% 7.75% 7.0% 6.0% n/d

Bank average lending rate, % 9.1% 9.5% 11.1% 15.7% 12.6% 10.6% 9.7% 10.0% 10.2%

Retail sales, % YoY 7.1% 4.6% 0.9% (6.1%) (0.0%) 2.5% 3.3% 3.1% 2.9%

Real disposable income, % YoY 7.4% 4.6% 2.9% (8.1%) 0.4% 7.6% 5.7% 2.9% 1.3%

Unemployment, % EOP 5.5% 5.5% 5.2% 5.6% 5.5% 5.2% 5.1% 4.9% 5.2%

Budget, balance % of GDP (0.1%) (0.4%) (0.4%) (2.4%) (3.4%) (1.5%) (1.1%) (0.9%) (0.7%)

Current account, % GDP 3.2% 1.5% 2.8% 5.0% 2.0% 2.1% 3.1% 2.7% 1.7%

RUB/USD, year-end 30.4 32.7 56.3 72.9 60.7 57.6 62.2 58.4 61.6

RUB/USD, average 39.9 42.4 51.0 68.0 74.0 66.0 70.0 77.0 70.4

Brent, USDp/bbl, average 112.0 108.9 98.9 52.4 44.0 54.5 59.0 57.5 54.5

Source: State Statistics Agency, CBR, Apecon, Bloomberg, Macro-Advisory estimates

30



Dec 2016

Dec 2017

Market cap (Largest companies)

Appetite (Forward P/E ratio)

Capacity (Net debt/EBITDA)

—4.2%

52.7%

36.0%

8.5%14.5%

Market capitalisations decreased significantly after recording a 53% increase in 2016, primarily due to a decline in the oil and gas sector.

Forward P/E ratios, a measure of appetite, did not continue the positive trend of the previous year and were down –7.1% in 2017.

Net debt to EBITDA, a measure of capacity, is forecast to improve by an average of 14.5% by the end of 2017, with only Banking and insurance demonstrating a negative outlook.

2017 saw a modest fall in the market capitalisation of Russia’s largest companies, after they recorded sharp growth in the previous year. Although capacity for M&A continued the increasing trend of last year, appetite for deals waned after two years of consecutive growth, perhaps implying a more cautious outlook for deal making.

—7.1%

–4.2%

–7.1%

14.5%

APPENDIX 2. Appetite and capacity for M&A



Inbound M&A deal value by region (2017 vs. 2016)

USDbn



Inbound M&A deal volume by region (2017 vs. 2016)

Outbound deal value by target’s region (2017 vs. 2016)

Note: 29% of deal value (32% of deal volume) representing other regions largely comprises deals in stock exchanges with undisclosed compositions of private and institutional investors.

Outbound deal number by target’s region (2017 vs. 2016)

Europe

North America

CIS

Asia-Pacific

MEA

Other regions

2017 2016

15%6%

8%

9%

25%

47%

55%

29% 6%

2017 2016

65%

5%

36%

5%20%

2%

32%9%

7%

15%

4%

Europe

North America

CIS

Asia-Pacific

CEE

Other regions

2017 2016

67%

16%

52%

2%

7%

24%

14%

12%

3%

3%

2017 201640%

15%

34%

14%19%

11%

8%10%

13%

15%

17%

4%

Source: KPMG analysis Source: KPMG analysis

APPENDIX 3. Cross-border M&A highlights

32



APPENDIX 4. Sector highlights



O i l a n d g a s

Largest oil and gas sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 Rosneft Oil Company

CEFC China Energy Company Limited

Glencore Plc; Qatar Investment Author-ity

14.2% 9,254

2 Yuzhno-Russkoye field OMV AG Uniper SE 25.0% 2,040

3 Eurasia Drilling Company Limited Schlumberger Limited Private

shareholders 51.0% 1,900

4 Bashneft Rosneft Minority shareholders 9.0% 861

5 NK KondaNeft Rosneft Oil Company

The Independent Petroleum Company

100.0% 698

Domestic

Inbound

Outbound

Total value

USD4.0bn

USD13.8bn

USD0.5bn

USD18.4bn

Volume

43 deals

–67.9%

–18.6%

–95.3%

–54.8%

–2.3%

B a n k i n g a n d i n s u r a n c e

Largest banking and insurance sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 Otkritie Financial Corporation Bank Central Bank of Russia Private

shareholders 99.9% 7,720

2 Yandex.Market Sberbank Yandex 50.0% 508

3Renaissance Insurance Group; Blagosostoyanie

Baring Vostok Capital Partners Limited; The Sputnik Group; Trans-fingroup

Not disclosed 100.0% 451

4 Tinkoff Bank Institutional investors Oleg Tinkov 7.7% 245

5 JSCB Yapi Kredi Bank Moscow Expobank Yapi ve Kredi Bankasi

Anonim Sirketi 100.0% 57

Domestic

Inbound

Outbound

Total value

Volume

USD8.8bn

USD0.3bn

USD0.0bn

USD9.1bn

31 deals

1,333.9%

120.3%

–90.4%

738.6%

–29.5%

SECTOR HIGHLIGHTS

Market share 27.5%

Market share 13.6%

34



R e a l e s t a t e a n d c o n s t r u c t i o n

Largest real estate and construction sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1Retail portfolio of Immofinanz in Moscow

Fort Group IMMOFINANZ Group 100.0% 1,051

2 PIK Group Sergey GordeevAlexander Mamut; Mikail Shishkhanov

24.6% 826

3 PIK Group Sergey GordeevAlexander Mamut; Mikail Shishkhanov

20.1% 627

4 Gorbushkin Dvor Viktor Kharitonin Sergey Podlisetsky 100.0% 500

5

Office space and parking area in Moscow’s IQ- Quarter complex

Agency for Housing Mortgage Lend-ing

Hals- Development 100.0% 427

Domestic

Inbound

Outbound

Total value

Volume

USD6.6bn

USD0.8bn

USD0.1bn

USD7.5bn

77 deals

–0.7%

1,242.6%

–96.4%

–10.2%

–24.5%

M e t a l s a n d m i n i n g

Largest metals and mining sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 En+ Group

Qatar Investment Author-ity; AnAn Group (Sin-gapore); Russian Direct Investment Fund

Oleg Deripaska 18.8% 1,500

2 RUSAL Zonoville Investments Limited

Dimosenco Hold-ings Co. Limited 7.0% 504

3 Zoloto Kamchatki Vysochaishy Renova Group of Companies 100.0% 500

4 Norilsk Nickel Undisclosed Metalloinvest 1.8% 400

5 Taishet Alumini-um Smelter RusHydro RUSAL 50.0% 388

Domestic

Inbound

Outbound

Total value

Volume

USD3.7bn

USD3.1bn

USD0.1bn

USD6.9bn

55 deals

–51.6%

341.4%

–80.6%

–21.4%

96.4%

SECTOR HIGHLIGHTS

Market share

Market share

11.2%

10.3%



SECTOR HIGHLIGHTS

I n n o v a t i o n s a n d t e c h n o l o g y

Largest innovations and technology sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1

Joint venture of the ride-hailing busi-nesses of Yandex and Uber

Yandex, N.V./Uber Technologies


59.3%/ 36.6% 3,800

2Beijing Bikelock Technology Co. (Ofo)

Alibaba Group Holding Ltd; DST Global; CITIC Private Equity Funds Management Co Ltd; Beijing Xiaoju Technology Co Ltd


3Beijing Bikelock Technology Co. (Ofo)

Consortium of investors led by DST Global

Not disclosed n/d 450

4 Via Transportation Inc

Daimler; Roman Abramovich


5 Fasten Russia UFG Private Equity Private shareholders n/d 100

Domestic

Inbound

Outbound

Total value

Volume

USD4.0bn

USD0.0bn

USD1.5bn

USD5.5bn

37 deals

190.8%

120.8%

359.4%

221.7%

–22.9%

C o n s u m e r m a r k e t s

Largest consumer markets sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 Holland & Barrett International

LetterOne Group (Mikhail Fridman)

The Nature's Bounty Co; The Carlyle Group LP

100.0% 2,250

2 Magnit Private and institutional investors Sergey Galitsky 7.5% 734

3 Detsky Mir GroupPrivate and institutional investors

Sistema; Russia- China Investment Fund; Private share-holders

30.5% 325

4 M.video SAFMAR Financial Group Public investors 24.7% 310

5 M.video Undisclosed investors

SAFMAR Financial Group 24.7% 300

Domestic

Inbound

Outbound

Total value

Volume

USD1.2bn

USD1.7bn

USD2.3bn

USD5.2bn

71 deals

–55.1%

226.8%

720.1%

47.2%

97.2%

Market share

Market share

8.2%

7.8%

36



C o m m u n i c a t i o n s a n d m e d i a

Largest communications and media sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 MegaFon Gazprombank Telia Company AB 19.0% 1,046

2 MegaFon Institutional investors Telia Company AB 6.2% 389

3 VEON Institutional and private investors Telenor Group 5.1% 374

4 TruphoneMinden (Roman Abramov-ich); Vollin Holdings (Alexander Abramov)

Not disclosed n/d 339

5 Rambler&Co ANN Group (Alexander Mamut) Interros 50.0% 295

Domestic

Inbound

Outbound

Total value

Volume

USD2.5bn

USD1.2bn

USD0.4bn

USD4.0bn

57 deals

177.7%

105.1%

–57.4%

72.3%

32.6%

C h e m i c a l s

Largest chemicals sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 SIBUR Holding Leonid Mikhelson Kirill Shamalov 14.3% 1,910

2 Uralorgsintez Ektos Group SIBUR Holding 100.0% 391

3 Sibur Holding Gennady Timchenko Kirill Shamalov 2.7% 361

4 PhosAgro Vladimir Litvinenko Igor Antoshin 4.8% 262

5 PhosAgro The Guryev family Igor Antoshin 2.7% 150

Domestic

Inbound

Outbound

Total value

Volume

USD3.2bn

USD0.1bn

USD0.0bn

USD3.3bn

12 deals

123.9%

–96.2%

–91.2%

–3.3%

20.0%

SECTOR HIGHLIGHTS

Market share

Market share

6.0%

4.9%



SECTOR HIGHLIGHTS

A g r i c u l t u r e

Largest agriculture sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 Yug Rusi Group Solnechnye Produkty Sergei Kislov 62.0% 724

2 Parus Agro Agrokompleks Imeni Tkacheva

A. Muraviev and N.Dolgikh working structure

100.0% 328

3 Agro-Invest; Agro Invest Regions

Volgo- DonSelkhozInvest

Black Earth Farming 100.0% 200

4 DMP-RM Russian Fishery Company Dalmoreproduct 73.7% 150

5 Greenhouse Growth Technology Sergei Rukin Marsfield;

Sergey Adonyev 80.0% 114

Domestic

Inbound

Outbound

Total value

Volume

USD2.2bn

USD0.1bn

USD0.1bn

USD2.3bn

63 deals

82.7%

–70.4%

—

55.6%

53.7%

P o w e r a n d u t i l i t i e s

Largest power and utilities sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 RusHydro VTB Bank Rosimuschestvo 12.5% 919

2 En+ Group Polina Deripaska Oleg Deripaska 6.9% 500

3 En+ Group Basic Element; Oleg Deripaska VTB Bank 2.4% 189

4 TNS energy Group VTB Capital Dmitry Arzhanov 19.9% 107

5

Pleshanovskaya solar power station; Grachevskaya solar power station; Bugulchan-skaya solar power station

Fortum Oyj Hevel Group 100.0% 107

Domestic

Inbound

Outbound

Total value

Volume

USD1.8bn

USD0.1bn

USD0.0bn

USD2.0bn

14 deals

0.9%

663.1%

—

7.9%

7.7%

Market share

Market share

3.5%

2.9%

38



T r a n s p o r t a n d i n f r a s t r u c t u r e

Largest transport and infrastructure sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 Nakhodka Trade Sea Port Lanebrook Limited EVRAZ 100.0% 354

2 Airport Pulkovo

Russian Direct Investment Fund; Baring Vostok Capital Partners; Russia- China Investment Fund (RCIF); Mubadala Development Co

VTB Capital 25.0% 257

3 Transcontainer Alexander Abramov; Alexander Frolov; Millhouse

NPF Blagosos-toyanie 24.5% 250

4 Global Ports Investments Delo Group

Transportation Investments Holding Limited

30.8% 238

5Aeroflot – Russian Airlines

Private and institutional investors

Aeroflot – Russian Airlines

4.8% 168

Domestic

Inbound

Outbound

Total value

Volume

USD0.5bn

USD1.0bn

USD0.2bn

USD1.8bn

38 deals

–64.9%

118.9%

3,607.2%

–5.8%

–2.6%

H e a l t h c a r e a n d p h a r m a c e u t i c a l s

Largest healthcare and pharmaceuticals sector deals in 2017Target Acquirer Vendor % acquired Value USDm

1 R-Pharm Mitsui & Co. Alex Repik 10.0% 200

2 FortAlexander Vinokurov; Sergei Zakharov

Anton Katlinsky 50.1% 71

3 OTCPharm Viktor Kharitonin Minority Shareholders 12.3% 54

4 Grotex Baring Vostok Capital Partners Oleg Zherebtsov 33.3% 43

5 Argos Therapeutics Pharmstandard Not disclosed 4.5% 39

Domestic

Inbound

Outbound

Total value

Volume

USD0.2bn

USD0.3bn

USD0.1bn

USD0.6bn

27 deals

–30.6%

153.2%

4.3%

20.2%

58.8%

SECTOR HIGHLIGHTS

Market share

Market share

2.6%

0.8%



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

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

Robert VartervanianHead of M&ARussia and the CISPartnerT: + 7 495 937 4477 E: [email protected]

Peter LatosDeal AdvisoryRussia and the CISPartnerT: + 7 495 937 4477 E: [email protected]

Marina MizgirevaHead of Oil and GasDeal AdvisoryRussia and the CISPartnerT: + 7 495 937 4477 E: [email protected]

Stepan SvetankovHead of FinancingDeal AdvisoryRussian and the CISPartnerT: + 7 495 937 4477 E: [email protected]

Maxim FilippovM&A Lead Advisory/ Portfolio Solutions GroupDeal AdvisoryRussia and the CISDirectorT: + 7 495 937 4477 E: [email protected]

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