Russian M&A expected to rise amid crisis

Financial News


Jason Corcoran in Moscow

19 February 2009

The economic crisis is starting to trigger mergers and acquisitions in Russia and could lead to the formation of new national champions, according to a report by Italian bank UniCredit.

Recent deal activity has seen the takeover of London-listed, Russia-focused Imperial Energy by India's state-run energy giant ONGC.

Other deals in the offing include the bid by Polyus Gold, Russia's largest gold producer, for KazakhGold, and Russian gold producer Peter Hambro's proposed all share acquisition of iron ore producer Aircom.

The report from UniCredit said: "We expect the trend to continue, likely expanding to larger companies, as the correction of commodity prices and lack of financing should stimulate companies to search for synergies in alliances with rivals and repair balance sheets."

Steven Dashevsky, head of equities at UniCredit in Moscow, said: "Clearly we can see a lot of appetite for M&A for mid-cap deals. They are becoming more affordable and more digestible. The next step is the super-mergers. "

The report dismissed the much touted creation of the Russian equivalent of BHP Billiton from six diverse companies – Norilsk Nickel, Metalloinvest, Evraz, Mechel, Uralkali and VSMPO-Avisma – as highly unlikely, given its complexity and the lack of potential synergies.

Instead, UniCredit said it saw super-mergers among two or three Russian companies as more feasible.

The report said the combination of energy giants Surgutneftegaz-Rosneft and miners Rusal-Norilsk Nickel are the most likely candidates to form new national champions. It said it believed Surgutneftegaz's $20bn cash stockpile may prove too attractive for debt-laden Rosneft to pass up this year, while the crisis may prompt the state to tighten its control of the oil sector, which remains the key to securing budget financing and political influence in Russia.

Several Russian metals billionaires, hit hard by the credit crunch, have proposed merging their firms in various schemes that would allow the state to part-own a diversified miner in exchange for absorbing most of the owners' debts.

As for Rusal and Norilsk Nickel, UniCredit believes the threat of nationalisation due to high debt levels and increasing interest from other industrial groups such as Metalloinvest might compel the owners to merge the assets later this year.

The bank said the potential mergers of Sistema's fixed line and mobile subsidiaries MTS and Comstar, along with steel-maker Mechel and coalminer Belon, are the most reaslistic due to their simpler structure and operational synergies.

The financial strain on Sibir Energy's key shareholders raises the chances of an alliance with an oil major. UniCredit regards Gazprom Neft as the primary candidate.