M&A In Ukraine: Market Overview, Legislative Changes and Outlook for 2019

M&A activity continued its growth in 2018 in Ukraine as the country’s economy continued to recover. The market saw a substantial rise in both deal count and value. However, the majority of M&A transactions can be qualified as domestic ones. The most significant announced transactions occurred in agriculture, mining, energy, technology and real estate. The Ukrainian government updated corporate laws and relevant regulations to attract more inbound investments. It is expected that 2019 will retain the trends set by 2018 taking into account some uncertainties associated with political elections.

Market overview for 2018

During 2018, the Ukrainian economy steadily recovered and showed a third consecutive year of moderate growth. The country’s gross domestic product has grown by  3.3%  in  2018  (against  2.5% in 2017 and 2.4% in 2016). The government’s policies remained fiscally responsible. The IMF and the EU essentially contributed to the current stability and pushed further reforms by providing loans and financial assistance upon the government’s meeting reform targets. Nevertheless, many international organizations seem to note a slow pace of reforms and a lack of substantial progress in reducing the level of corruption.

Given the existing country risks, fragile economy and ongoing conflict in Eastern Ukraine, foreign investors remain cautious in making significant long-term investments into Ukraine, and domestic deals still constitute a majority of all transactions. According to reports on major markets, domestic transactions account for slightly more than 60% of both the number of deals and their values in 2018.

The largest reported deals took place in industries that are traditional for Ukraine like metals and mining, techno­logy, agriculture, energy and utilities, and real estate.

The largest deal by its value involved major domestic industrial groups in metals and mining business. Ukraine’s largest steel and mining group Metinvest, which had earlier successfully restructured its finances, acting with other buyers, acquired the biggest coal mine in the territory controlled by Ukrainian authorities from Energo Group, apparently, to ensure stable supplies of coking coal. The reported value of the transaction is over USD 700m, which is significantly more than any other announced transaction in 2018.

Another landmark transaction took place in agricultural. The Saudi Agricultural and Livestock Investment Company, an invest­ment vehicle of the sovereign wealth fund of Saudi Arabia, took part in the successful restructu­ring of a major agricultural company, Mriya Agro Holding, which grows crops including wheat, barley, corn and potatoes in Western Ukraine. In so doing Salic acquired substantial farming assets, inclu­ding infrastructure facilities, machinery, and leasehold rights to 165,000 ha of farmland.  Other deals in the sector include cross-border expansion of some large Ukrainian agricultural companies.

Last year, Partners Group, a global private markets investment manager, announced its acquisition of a 48% ownership stake in GlobalLogic Inc. from private equity firm Apax Partners.  The transaction values this software development company at more than USD 2 billion. With 12,000 employees globally, GlobalLogic creates digital products, including mobile and web applications for customers, and is one of the global leaders in digital product engineering services. GlobalLogic engages around 3,500 of its developers in Ukraine.

Domestic players contributed to a significant impact caused by investments in real estate and construction. Besides, there is continued sale of real estate belonging to insolvent banks. However, the situation in real estate is somewhat complicated. There was reasonable commercial expectation that 2018 was a favourable time to invest in real estate as assets were considered to be undervalued, including facilities like warehouses, shopping malls, and office centres. Nevertheless, there is an oversupply of residential buildings on the real estate market, which may lead to financial issues for construction companies.

In the energy and utilities sector, a number of deals took place in the field of renewable energy sources. Foreign investors still rushed in to take advantage of the lucrative green tariff, which will be replaced by a less favorable auction mechanism from begin 2020. In addition, some improvements occurred in this area, such as the introduction of positive changes to Power Purchasing Agreements. Foreign investors could also benefit from various tax incentives in this area. Although the number of deals in renewables was remar­kable, the value of most transactions was less than USD 5 million. The only remarkable deal in this sector was the acquisition by Norwegian renewable energy company NBT AS of a project to build a wind plant with power capacity of 250-330 MW.

Legal Updates

Even though most of the largest transactions seem to have been executed under foreign laws, Ukraine has improved its corporate laws, tax regulations and currency cont­rols to facilitate M&A transactions. Some of the most relevant and important amendments have taken their effects in 2018, and some changes have been approved in 2018 and shall take their effect in 2019. The positive mechanisms of the new laws are still to be tried in practice and in courts to become reliable tools for cross-border transactions.

Improvements for Joint-Stock Companies

In 2018, businesses and investors tested the new Law On Amending Certain Legislative Acts of Ukraine on Increasing the Level of Corporate Governance in Joint-Stock Companies, which was developed and adopted in 2017 to upgrade the Ukrainian corporate regulations in line with the common standards of the Western corporate world. The  law  altered  the  mandatory but inflexible buyout  procedure  and  introduced squeeze ­out rights for majo­rity sharehol­ders of joint­stock companies, which many companies  actively  app­lied  during  2018. The M&A parties can now use escrow accounts as a contractual arrangement previously unknown to Ukrainian law.

Improvements for Limited Liability Companies

The highly-anticipated Law On Limited ­Li­ability and Additional Liability Companies was adopted and took effect in 2018. It introduced important changes in corporate governance and in the rules for business combinations of limited liability companies. In particular, the law established the possibility to form a supervisory board and restrict activities of a company’s officers for the benefit of participants (including under the concepts of material and interested party transactions). The law envisaged and facilitated a debt-to-equity conversion, enforcement of a pledge over shares, share transfers and agreements among  participants.

Tax Updates

The tax office clarified the rules on the transfer of an accrued value-added tax credit in the event of a business combination. The transfer of VAT credit to a taxpayer’s successor or successors shall take place in a reporting period immediately following the execution of a handover report (for a merger, accession or transformation) or a division’s balance sheet (for a division), provided that the indicated sum of the tax credit is confirmed by a tax audit.

Currency Control Changes

The new Law On Currency and Currency Transactions came into effect on 7 February, 2019. Its main purpose is to lift or soften numerous currency control procedures and restrictions, such as individual licenses and permits, upper thresholds and payment deadlines for certain cross-border transactions. However, the National Bank of Ukraine can re-introduce some restrictions in the event of an emergency that threatens the stability of the national currency market.

Among the obstacles to the healthy development of the M&A market, there are remnants of the old restrictions dating back to 2014 when the financial situation of Ukraine was under serious threat. Some of those restrictions were lifted in 2016-2018 due to the overall improvement of financial stability. However, there is still a limitation of the monthly amount of repatriated investments, which is USD 5 million, and dividends, which is USD 7million.

Outlook for 2019

Despite uncertainties associated with the presidential and parliamentary elections this year, there is a positive outlook for the country’s stable economic growth in 2019, as the government should remain fiscally responsible under pressure from the IMF, the EU and other donors.

There is an expectation that foreign investors will continue to drive agricultural M&A in 2019. The foreign investors on the ground may increase their operations and acquire farming areas. M&A activities  may  be  substantially  increased if  Parliament  further  develops  laws  on the agricultural land market and lifts the moratorium on its sale, a move much advocated by international financial institutions.

Investors will also likely continue to invest in renewables during 2019 to secure the existing green tariff, which will be substituted with green auctions starting from next year. Investment activities will certainly continue and even increase in solar energy, which currently accounts for 71% of all renewable capacities in Ukraine.

Noticeable increases in salaries and consumer spending should cause major retailers to expand in Ukraine. As some newcomer retailers such as H&M opened their first stores in 2018, the trend is expected to develop with IKEA and other retailers announcing plans to enter the market and expand on it. Technology, real estate and construction should traditionally attract investments from both foreign and local actors.

Therefore, having seen impressive growth in 2017 and 2018, there is cautious optimism for another strong year for M&A activities in 2019.