Russia M&A

M&A in Russia 2012

February 2013

KPMG in Russia and the CIS

2 | M&A in Russia — 20122 | Европейские стадионы — 2011

ContentsM&A in Russia in 2012 4

Sector analysis

Communications and media 10

Consumer markets, retail and agriculture 14

Financial services 18

Metals and mining 22

Oil and gas 26

Power and utilities 30

Real estate and construction 34

Transport, logistics and infrastructure 38

Other markets 42

Methodology 46

KPMG in Russia and the CIS 47

© 2013 ZAO KPMG. All rights reserved.

M&A in Russia — 2012 | 3

Sean TiernanHead of Transactions

and Restructuring

ACQUISITION OF TNK-BP BY ROSNEFT

In late 2012, Rosneft announced that it had agreed to acquire TNK-BP from its joint venture (JV) partners, BP and the AAR consortium in a deal valued at USD56 billion.

Under the terms of the deal, BP will receive USD17.1 billion in cash and 12.84% of Rosneft’s treasury stock for its 50% interest in TNK-BP. Simultaneously, BP will buy 5.66% of Rosneft’s shares for USD4.8 billion, and as a result will hold a 19.75% stake in the company. The owners of the AAR consortium, Alfa Group, Access Industries and Renova Group, will receive USD28 billion in cash for their 50% interest in TNK-BP.

The acquisition of TNK-BP is the largest deal ever in the history of Russian M&A, and the second largest deal globally in 2012. To give some perspective, this transaction was greater than the combined value of all M&A in the Russian oil and gas sector over the previous three years

Once the transaction has completed, which is expected in the fi rst half of 2013, Rosneft will overcome ExxonMobil to become the largest listed oil company in the world, with annual crude oil production of over 200 million tons, and 5% of global oil production.

2012 proved to be a strong year for M&A in Russia, and one that rewrote history:

■ M&A in Russia more than dooubblled tto UUSDD13339.11 bbillion

■ Roosneft’s acquisition of TNK-BBP was the larrggesst ddeaal eevveer announcced in Russiia, and second largest globally

■ Unndeerlying M&&A, excluding TNK-BP, increased by 21% to USSD883.1 billioon driven by the proportion of larger transactions

■ The secondary public offering (SPO) of Sbberbbbannk was Russia’s larrgesst-eever privatizzation, and second largest offering in the EMEA region in 2012

■ Deeal vvoluumes increaased byy 122% against the backdrop of a 10% decline globally and a 19% decline across the rest of Europe

Total deal

value, USDbln

2011 2012

140

100

60

40

0

20

160

120

80USD68.2 bln(total 381 deals)

USD139.1 bln(total 427 deals)

USD83.1 bln(total 425 deals)

USD56.06 bln(Rosneft/TNK-BP)

20.3

Rosneft/TNK-BP Oil and gas

60

50

40

30

20

0

Tota

l dea

l val

ue, U

SD

bln

56.0 23.010

11.6

200920102011


4 | M&A in Russia — 2012

While Rosneft’s acquisition of TNK-BP was without doubt one of the defi ning moments in the history of Russian M&A, the sheer scale of the transaction has a distortive impact on comparative analysis. We have therefore excluded this deal from the subsequent analysis in this survey1 to provide a more meaningful comparison with M&A in Russia in prior years.

2012 was a strong year for M&A in Russia, as illustrated by the growth in underlying activity – the total value of deals increased by 21% to USD83.1 billion, excluding TNK-BP, while the number of deals increased by 12%, demonstrating the resilience of the market in light of the continued global economic uncertainty.

By contrast, the value of deals announced globally increased by just 2% in 2012 to USD2.6 trillion2, notwithstanding three of the largest deals for a number of years – the spin-off of Abbott Laboratories’ research-based pharmaceutical business to create AbbVie (USD66.4 billion), Rosneft’s acquisition of TNK-BP and the pending merger of Glencore and Xstrata (USD45.8 billion). Although deal value increased, the volume of deals globally fell by 10% to the lowest level since 2005; activity in the USA and UK declined by 5% and 4% respectively, while the rest of Europe saw deal volumes fall by 19% as confi dence was knocked by the eurozone debt crisis that rumbled on throughout the year.

Global overview

Source: Thomson Deals database, Mergermarket database, analyst estimates, KPMG analysisNote: Figures from our previous surveys have been adjusted

1 Unless specifi cally stated otherwise2 Thomson Reuters Global Mergers & Acquisitions Review, full year 2012

Global M&A deal value and volume, 2005–2012

2008 2009 2010 2011

5,0004,500

3,500

2,500

1,5001,000

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals (volume)

2,623

35,457

3,469

40,822

2,622

44,100

Deal value, USDbln Number of deals

500

4,000

3,000

2,000

50,00040,500

30,500

20,500

10,50010,000

05,000

40,000

30,000

20,000

2005 2006 2007

4,070

46,662

39,969

1,894

42,664

2,401

42,074

2,545

37,923

2,259

2012

Global and Russian M&A deal volume index, 2005–2011

Global Russia

2008 2009 2010 2011

200140

140

100

6040

0

Dea

l ind

ex-

2005

= 1

00

115132

42

124

162172

113

20

160

120

80

2005 2006 2007

136120 119

74

75 85

107

2012



Russian overview

M&A in Russia remained heavily weighted towards domestic activity during 2012, although the value of cross-border3 deals increased by 30% to USD33.7 billion, representing 41% of the market (2011: 38%). The number of inbound transactions remained broadly fl at yet the value increased by 29% to USD17.1 billion compared to an aggregate decline of 14% across the BRIC nations4. The secondary public offering (SPO) of Sberbank, initial public offering (IPO) of MegaFon, and acquisition of SABMiller’s Russian and Ukrainian beer business by Turkey’s Anadolu Efes accounted for 51% of all inbound investment in 2012. The USA, UK, China and Japan were the most active inbound investors, participating in 22 deals worth USD2.6 billion5.

During 2012, there was a healthy diversifi cation of deal value away from the historically dominant energy and natural resources sectors6 towards communications and media, and fi nancial services. Deal value in the energy and natural resources declined to 31% of the total market (2011: 43%) refl ecting the sustained absence of deals amongst the large Russian miners and integrated steel producers given volatile commodity prices, and to a lesser extent, unattractive returns for private investors in the power and utilities sector. A power reshuffl e in the telecoms sector involving Altimo, MegaFon and VimpelCom led to four transactions which accounted for three quarters of the USD16.1 billion of deals in the communications and media sector. Meanwhile, the SPO of Sberbank, its expansion into Turkey via the acquisition of Denizbank, and conversion of Gazprombank’s subordinated debt to equity accounted for a similar proportion of deal value in the fi nancial services sector. With the exception of the energy and natural resources sectors, real estate and construction was the only other sector in Russia to record a decline in deal value during 2012.

DomesticInboundOutbound

Number of deals by type, 2011–2012

Russian M&A deal value and volume, 2005–2012

Deal value, USDbln

Number of dealsDeals individually valued >USD20 bln

2011 2012

180

140

100

6040

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals (volume)

122.4

688

20

160

120

80

900800

600

400

2001000

700

500

300

2008 2009 2010

48.8

214

20.7(2)

375

77.5

381

68.7

56.0(3)

427

83.1

Deal value by type, 2011–2012

268

4050

301

7374

3 Inbound and outbound transactions4 Thomson Reuters5 Excluding the SPO of Sberbank of Russia and IPO of MegaFon as geography of investors were not disclosed 6 Metals and mining, oil and gas, and power and utilities sectors

2011

2012

62%

18%

20%

60%

20%20%

2011

2012

Notes: (1) 2007: Liquidation of YUKOS assets (USD36.8 billion) and RAO UES reorganisation (USD25.0 billion) (2) 2010: VimpelCom acquisition of Weather Investments (USD20.7 billion) (3) 2012: Rosneft acquisition of TNK-BP (USD56.0 billion)

867

61.8(1)

93.163.6

817

40.5

505

2005 2006 2007



M&A in Russia in 2012

Despite strong growth, Russian M&A remained volatile during 2012. Volume growth, which had been 40% at the end of Q1 2012, slowed to 7% by November as the number of deals valued at less than USD100 million fell by 50% during the second half of the year. Notwithstanding this, transactions of this size remained at the core of the market, comprising more than two thirds of all activity in the year. Conversely, the value of M&A was down by 42% at 31 March 2012. However, 19 deals valued in excess of USD1 billion were announced following the presidential elections, driving a sharp increase in the value of M&A through to November. The year ended with a fl ourish of deals, with volumes up by 90% in December, yet the value of transactions was down by a third on 2011.

Refl ective of the 11 largest deals, two thirds of deals valued in excess of USD1 billion were concentrated in the communications and media, fi nancial services and oil and gas sectors in 2012. The average transaction value increased by 8% in 2012 to USD194 million.

7 Excluding the acquisition of TNK-BP8 Excluding the SPO of 7.58% of Sberbank of Russia on the London and Moscow Stock Exchange

Number of deals by sector in 2011–2012

Deal value by sector in 2011–2012

Cummulative growth, 2012 versus 2011

12%21%

(50%)

(40%)

(30%)

(20%)

(10%)

10%

20%

30%

40%

50%

Deal volume Deal value, USDbn

0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

State owned enterprises were the most active participants in Russian M&A during 2012. For example, Sberbank, VTB, Rosneft7 and Inter RAO UES participated in 41 transactions with a combined value of USD17.1 billion, equal to 21% of the total market. During the year, Sberbank participated in the greatest value of deals at USD5.9 billion8, while VTB was involved in 14 deals, the most by any one party. Rosneft and Inter RAO UES participated in a total of 9 and 10 deals respectively, which in common with the majority of serial participants in Russian M&A, were focused on their core markets. A large number of deals involving Sberbank and VTB were outside of their core market, refl ecting the investment activities of these banks and the continued divestment of stakes acquired during the fi nancial crisis. There were also a large number of tender offers during 2012 as shareholders seized the opportunity to squeeze out minority holdings.

44

40

35

62 18 13

65

49

55

51

79

29

33 46

23

65

34

65 13%

9%

15%

17%

17%

9%

10%

9% 1% 19%

8%

19%

8%

17%

5%

8%

12%4%Communication and media

Consumer markets, retail and agricultureFinancial servicesMetals and miningOil and gasPower and utilitiesReal estate and constructionTransport, logistics and infrastructureOther markets

2011

2012

2011

2012



Russian M&A largest transactions in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 MegaFon Communication and media Investor Group Altimo/ TeliaSonera AB 26.1% 5,200

2 Sberbank Financial services Investor group (SPO) Bank of Russia 7.6% 5,200

3 VimpelCom Ltd Communication and media Altimo Weather Investments II S.a r.l. 14.8% 3,600

4 Denizbank AS Financial services Sberbank Dexia SA 99.9% 3,596

5 Gazprombank Financial servicesVnesheconombank and current shareholders (Gazprom; NPF Gazfond; Gaztek; Novfi ntekh)

n/a 22.7% 3,125

6 SABMiller Plc (beer business in Ukraine and Russia)

Consumer markets, retail and agriculture

Anadolu Efes Biracilik ve Malt Sanayii A.S. SABMiller Plc 100.0% 1,900

7 MegaFon Communication and media Investor Group (IPO) TeliaSonera AB/ MegaFon

Investments 15.1% 1,830

8 JSC Freight One Transport, logistics and infrastructure Vladimir Lisin (Private Investor) Russian Railways OJSC 25.0% 1,616

9 Imilorskoe, West-Imilorskoe and Istochnoe oilfi elds

Oil and gas OOO LUKOIL-West Siberia State auction n/a 1,650

10 OOO Scartel Communication and media

Garsdale Services Investment Limited

Sergey Adoniev (75%) and Russian Technologies (25%) 100.0% 1,500

WINGAS, WIEH, WIEE, Astora and Wintershall Noordzee B.V.

Oil and gas Gazprom OAO BASF SE 50.0% 1,500

Eleven largest transactions(1) 30,716As a % of total Russian deal value(1) 37.0%

Note: (1) Excluding Rosneft/ TNK-BP

As anticipated, the pace of privatizations gathered momentum in 2012. In addition to Sberbank’s SPO, privatizations raised a further USD5.5 billion, principally from two sectors. The USD1.6 billion privatization of the remaining 25% stake in Freight One was the largest deal in the transport, logistics and infrastructure sector, which also included the privatization of the gas transportation services company SG-Trans, and the Murmansk and Vanino commercial sea ports, which altogether raised USD1.3 billion. Meanwhile in the metals and mining sector, USD1.3 billion was raised through the privatization of stakes in the titanium producer VSMPO-AVISMA and fertilizer producer Apatit.



Outlook

We remain optimistic regarding the outlook for M&A in Russia during 2013, and expect continued growth across all key sectors of the economy albeit at more modest rates than those seen in 2012.

The energy and natural resources sectors will continue to play an important role, although activity within each sector will result from different drivers. We expect activity in the metals and mining sector to remain subdued as the large and integrated players focus on cost effi ciencies and capital deployment given forecast commodity prices. Oil and gas major’s are likely to make further divestments of non-core assets to optimize portfolio returns, while foreign players will seek opportunities to tap into Russia’s vast reserves, either through acquisitions or JVs. We anticipate further consolidation of generation and distribution assets in the power and utilities sector, driven by the State owned enterprises.

With high levels of penetration, growth in fi xed line broadband is slowing by comparison to mobile access, such that although further consolidation of regional broadband operators is expected during 2013, but at a much lower scale compared to recent years. Importantly, VimpelCom recently announced its intention to carve-out it’s broadband assets to focus on mobile subscribers, and it remains to be seen whether other mobile network operators (MNOs) will follow suit.

Public offerings of VTB, diamond producer Alrosa, shipping company Sovcomfl ot, and nanotechnology focused RUSNANO have all been rumored for 2013, as the government pushes ahead with its privatization agenda. We also expect to see further privatizations in the transport, logistics and infrastructure sector during 2013, driven in part by the need to attract investors to modernize ageing assets. Companies that put IPO plans on hold in recent years but still require external funding will be watching the market closely as questions regarding price valuations and the capacity of Russian equity markets to absorb such a large number of offerings remain.

The level of activity in the real estate and construction sector is likely to remain fairly stable in 2013 despite there being a number of large deals which are expected to close during the year, including the acquisition of the Metropolis shopping center by Morgan Stanley Real Estate Investing which closed in February 2013.

Russia continues to attract international investors. Sentiment appears to be improving across the global economy following the last minute deal to avoid the US fi scal cliff, renewed optimism that the worst of the eurozone crisis may fi nally be over, and with equity markets rising. The government is taking steps to tackle corruption, increase transparency and reduce bureaucracy to create a more investor friendly environment in Russia but time will tell whether such measures address investors concerns regarding the perceived risks of doing business, and lead to a sustained increase in inbound investment over the medium term.



Although the headline value of M&A in the Russian communications and media sector increased by 79%, three quarters of deal vale related to Altimo and AF Telecom’s reshuffl ing of their interests in the telecoms market. Over 70% of deal volume in the year was driven by transactions valued as less than USD100 million.

Several of our predictions from last year’s survey proved to be true during 2012; there was further consolidation of assets in the media segment, and in particular television, radio, and print, while the substitution of traditional media by the internet drove the acquisition of broadband assets and internet service providers (ISPs). The software segment was another key area of focus for Russian M&A participants in 2012, accounting for nearly one fi fth of total deal volumes.

While internet investors Digital Sky Technologies and Mail.ru Group reportedly raised USD2.5 billion from a partial exit of their stakes in the social media company’s IPO, 2012 turned out to be much quieter for both in terms of Russian M&A9 activity.

TelecomsA power reshuffl e amongst telecoms players led to four transactions with a combined value of USD12.1 billion, equal to 75% of M&A in the communications and media sector during 2012.

In April, Mr. Alisher Usmanov gained control of MegaFon via AF Telecom in a USD5.2 billion transaction aimed at aligning shareholder objectives and simplifying the capital structure of the company. The deal resulted in Altimo exiting its holding in MegaFon, and TeliaSonera reducing its stake. In a USD1.5 billion deal, AF Telecom subsequently merged its holding in MegaFon10 with the LTE operator, Scartel, into a new holding company (USM Holding) majority owned by Mr. Alisher Usmanov and his partners. The restructuring of MegaFon’s capital structure was completed in late November, when 15.1% of the company was listed on the London and Moscow stock exchanges, raising USD1.8 billion and reducing TeliaSonera’s holding to 25%.

Following its exit from MegaFon, Altimo increased its stake in VimpelCom in August to 41.85% through the acquisition of 14.8% of voting rights from Weather Investments for USD3.6 billion – the largest outbound deal in the sector. In September, Telenor, the Norwegian telecoms group, increased its holding in VimpelCom to 42.95% by honoring its obligation to acquire shares from Weather Investments following its exercise of a put option in respect 14.8% of the voting rights11. However, Altimo seemingly took the advantage in the power struggle for control of VimpelCom in late October when it purchased a 6% stake from Ukrainian businessman Viktor Pinchuk for USD218 million, to take its interest to 47.85%.

Total deal value: USD16.1 billion (+79%)Total deal volume: 51 (+16%)Market share by value: 19% (2011: 13%)

16.1

51

20.7

2009 2010 2011 2012

40

35

30

25

20

15

10

5

0

100

75

50

25

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

10.4 12.8 9.0

26

52 44

M&A in communications and media, 2009–2012

Deal value, USDbln Number of dealsVimpelCom/Weather Investments

9 Where either the target or acquirer is Russian10 50% plus one share11 Not Russian M&A, and not included in our database



In July, VTB Capital and Corporate Commercial Bank (CCB) of Bulgaria, acquired a 93.99% stake in the Bulgarian Telecommunications Company for USD926 million. This was the second largest outbound transaction in the communications and media sector during 2012. Intriguingly, although this is the second acquisition by VTB in the Bulgarian market, we suspect that they were either acting as a fi nancial investor or consummated the transaction on behalf of a strategic player.

On the infrastructure side, Russian Towers, the independent owner and operator of transmission towers in north-western Russia, announced the completion of a USD100 million investment by a group of investors comprising UFG Private Equity, Macquarie Renaissance Infrastructure Fund, EBRD and ADM Capital.

MediaIn last year’s survey we predicted that as delivery channels mature, the key Russian media groups would need to start looking for local and international content producers in order to secure quality content. One such example, was the acquisition of a 75% interest in Comedy Club Production by the TNT network, a subsidiary of Gazprom-media, for USD338 million. This is a clear sign of the free-to-air channel taking steps to secure revenue through the acquisition of a major content producer for TNT.

Number of deals by type,2011–2012

Ten largest transactions in communications and media in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 MegaFon Telecom Investor Group Altimo/ TeliaSonera AB 26.1% 5,200

2 VimpelCom Ltd Telecom Altimo Weather Investments II S.a r.l. 14.8% 3,600

3 MegaFon Telecom Investor Group (IPO) TeliaSonera AB/ MegaFon Investments 15.1% 1,830

4 OOO Scartel Telecom Garsdale Services Investment Limited Telconet (75%) and Russian Technologies (25%) 100.0% 1,500

5 Bulgarian Telecommunications Company AD

Telecom Investors Group (VTB Capital and CCB - Corporate Commercial Bank, Bulgarian bank)

PineBridge Investments Asia Limited 94.0% 926

6 Mail.ua Technology Mail.ru Group Ltd Internet Invest Group 100.0% 500

7 Comedy Club Production Media Gazprom-Media HoldingArtur Dzhanibekyan (Private Investor); Garik Martirosyan (Private investor)

75.0% 338

8 Kaspersky Lab Technology Kaspersky Lab General Atlantic 20.0% 300

9 VimpelCom Ltd Telecoms Altimo Bertofan Investments (Viktor Pinchuk) 6.0% 218

10 NVision Group Technology RTI Individual shareholders 50.0% 200

Ten largest transactions total 14,611As a % of total communications and media deal value 91.0%


278

9

30

6

15

2011

2012



In addition to the acquisition of an 80% interest in O2TV, the Moscow-based owner and operator of TV stations, by a group of Russian investors for USD99 million, there were a further six acquisitions of stakes in television and radio companies during 2012.

Away from television and radio, the second most active area within segment was print media, although each of the four deals was valued at less than USD10 million.

TechnologyThere was a notable increase in the level of activity in the technology segment during 2012, with 19 deals totaling USD1.5 billion in the year. The largest of these deals was the USD500 million acquisition of the Ukrainian webmail service provider, Mail.ua, by Mail.ru Group from Internet Invest Group.

In February, Kaspersky Lab, one of the world’s largest makers of anti-virus software announced a recapitalization plan following a strategic review of the business. Under this plan, Kaspersky parted company with the US investor, General Atlantic, which had purchased a 20% stake in the company for USD200 million in 2010, together with a number of minority investors at a total cost of USD300 million.

Another notable transaction was the acquisition of a 50% stake in NVision Group by RTI, the high-tech subsidiary of AFK Sistema, for USD200 million. Under the deal, RTI intends to acquire the remaining 50% of NVision in a swap transaction. The aim of the deal was to integrate the assets of NVision and RTI, which comprises RTI Systems and Sitronics, with a view to creating opportunities to realize synergies across the combined entities projects and customer base which includes Rostelecom, MTS and MGTS.

A further 16 deals with a combined value of USD0.5 billion were announced in the technology segment in 2012, including four transactions related to ISPs and seven related to software companies.

Communications and media



Outlook

We do not anticipate any signifi cant growth in M&A activity in the communications and media sector during 2013, and expect the following trends to have an impact on M&A in the sector during 2013:

Internet access is becoming routine in many aspects of daily life and given already comparatively high levels of broadband penetration in Russia, fi xed line internet is demonstrating slower growth characteristics compared to mobile access. Further regional consolidation of broadband assets, as observed over the last few years, is likely to continue albeit at a signifi cantly diminished scale. Moreover, VimpelCom has recently announced its intention to carve-out its broadband assets into a separate entity, in order to focus on its mobile subscriber services and higher growth segments. The timing of such a transaction has yet to be announced and it remains to be seen whether other MNOs will follow suit.

We believe investments such as Baring Vostok Capital Partners USD75 million injection into Avito.ru, will continue in 2013 as the Russian internet space attracts greater attention from investors. The spread of handheld devices, mobile internet access and increase in online activity will drive reallocation of advertising revenues from print media to the internet. Traditional businesses will need to realign their strategies with customer preferences for ease of use and speed of transaction. Both factors will impact M&A in the media space during 2013.

In 2013 we may see transactions driven by the need to comply with requirements of 4G license tenders conducted last year. It is possible that operators will seek ways to develop networks through sharing of infrastructure, creating JVs and acquiring regional players. Infrastructure investments are plausible but require a joint effort by MNOs and fi nancial investors (e.g. Russian Direct Investment Fund), and although interest is high specifi c investments remain quite remote at present.

The high level of competition amongst MNOs is likely to see a shift in focus toward the quality of their subscriber base, and opportunities to reduce operating and capital expenditure. Foreign MNOs have successfully outsourced service functions as part of their strategy to focus on core operations, and we expect to see Russian players increasingly do the same. In turn, investors will be attracted to outsourcing companies with tested business models and growth potential.



Against a backdrop of a consumer market struggling to generate single digit-growth, Russia continued to outperform and separate itself from the rest of the world. Most established consumer businesses in Russia delivered solid results in 2012, with many reporting double-digit revenue growth. Despite its resilience, the Russian consumer market showed signs of slowing in 2012, notwithstanding a 30% rise in consumer credit; infl ation increased to just below 7% by December from a historic low of 3.6% in April, and real wages growth fell to around 5% by the year end.

These factors affected M&A activity in the Russian consumer markets, retail and agriculture sector, which saw the total value of deals remain broadly fl at at USD6.6 billion in 2012. However, the number of transactions almost doubled, with 79 deals announced in the year (2011: 40), driven solely by deals valued at less than USD100 million – illustrative of the conservative sentiment of acquirers who were generally more focused on incremental bolt-on acquisitions as opposed to transformational transactions.

Key driversDrivers of M&A activity within the consumer sector were varied and specifi c to particular industry verticals:

Agriculture As predicted in the last survey, agriculture shaped up to be a very active segment, with deal activity underpinned by fi nancial investors seeking opportunities to invest in a growing market at reasonable price valuations.

The largest deal in the segment was the acquisition of a 50% stake in the United Grain Company by Summa Group from the Russian government for USD186 million. Closely behind, the Arco Capital Corporation acquired Stoylenskaya Niva for USD180 million giving it access to the company’s bakery business and milling plants and in support of its interest in developing agricultural businesses in emerging markets. In addition, EBRD took a minority stake in the growing organic vegetable producer Belaya Dacha. As for strategic investors, Cherkizovo acquired Voronezhmyasoprom for a consideration of USD138 million, and Japanese conglomerate Mitsui acquired a 10% minority stake in Sodruzhestvo, a leading global producer of soybeans and vegetable oils. Both deals focus on core operations of their primary relevant businesses.

Consumer goodsIn 2012, 13 deals in the consumer goods segment were valued at less than USD10 million, of which eight deals, related to tender offers to squeeze out minority shareholders.



6.6

79

2009 2010 2011 2012

12

10

8

6

4

2

0

100

75

50

25

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

2.3 8.7 6.5

29

60

40

M&A in consumer markets, retail and agriculture, 2009–2012



The largest deal in the segment was Swedspan Holding’s (IKEA) acquisition of Pfl eiderer, a Russia-based manufacturer of wooden chipboards from the listed Polish company Pfl eiderer Grajewo SA, for USD208 million. This strategic acquisition will enable IKEA to generate considerable effi ciencies through localized production and reduced logistics costs. The other notable transaction in this segment was the privatization of the Moscow-based Svoboda Cosmetics plant in which Buket Group supported by Moscow Industrial bank acquired 50% of the company for USD54 million. While some have surmised that the price was driven up due to the company’s attractive real-estate portfolio, the business sees a signifi cant growth opportunity producing national cosmetic products and detergents that it sells directly or produces on behalf of large Western consumer products businesses.

Food and beverageWhile the volume of deals remained broadly fl at, the value of M&A in the food and beverage segment increased signifi cantly to USD3.3 billion, driven by consolidation of positions in companies already acquired or by longer-term strategic considerations.

Ten largest transactions in consumer markets, retail and agriculture in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 SABMiller Plc (beer business in Ukraine and Russia)

Food and beverage

Anadolu Efes Biracilik ve Malt Sanayii A.S. SABMiller Plc 100.0% 1,900

2 Euroset Group Retail (non-food) MegaFon ANN Investment Company 50.0% 1,070

3 JSC Baltika Breweries Food and beverage

Baltic Beverages Holding AB (a subsidiary of Carlsberg Group) Minority shareholders 12.1% 951

4 Pfl eiderer OOO Consumer goodsSwedspan Holdings BV; Ingka Pro Holding Subholding I B.V. (a subsidiary of IKEA Group)

Pfl eiderer Grajewo SA 100.0% 208

5 United Grain Company OJSC Agriculture JSC VTB Government of Russian Federation 50.0% 186

6 Stoylenskaya Niva AIC Agriculture Arco Capital Corporation Ltd Unicor Management Company 100.0% 180

7 Retail assets of ENKA TC LLC (Citystore) Retail (food) Billa AG (Rewe Handelsgruppe) ENKA TC LLC 100.0% 163

8 M.Video Retail (non-food) CJSC Depository Clearing Company (ZAO DCC) Svece Ltd 10.0% 147

9 VMP Group - Agricultural Assets Agriculture Cherkizovo Group National Agribusiness 100.0% 138

10 Sodrugestvo Group of Companies Agriculture Mitsui & Co., Ltd Undisclosed 10.0% 126

Ten largest transactions total 5,069As a % of total consumer markets, retail and agriculture deal value 77.2%



25

11

4

50

17

10

2011

2012



The largest deal in the consumer markets, retail and agriculture sector during 2012 was the strategic tie-up of SABMiller and Anadolu Efes, in which SABMiller ceded ownership of its Russian and Ukrainian businesses in return for 24% of Efes. The aim of the deal is to strengthen Efes position across the region and, through this, better develop SABMiller’s international brands. As a highly consolidated market struggling with margin pressures and declining volumes, the deal is expected to generate cost synergies of at least USD120 million per annum and provide additional revenue synergies.

Other notable deals in the segment included the strategic investment into Russian dairy farm operator Rusmoloko by Singaporean Olam International (USD75 million); Santa Bremor (Belarus) led consortium‘s acquisition of Russian Sea Group, a value added producer of seafood products (USD52 million); Nestle’s bolt-on acquisition of Korolevskaya Voda (USD50 million); fi nancial investor Russkie Fondy’s acquisition of a 46% stake in processed-cheese producer Karat (USD47 million) and Ladoga’s acquisition of Spanish winemaker Vinedos Del Camino Real and French alcohol distiller Earl Les Vignobles Reunis (USD 26 million).

RetailThough the number of transactions in the retail segment more than doubled in 2012, the total value of M&A fell by more than 40% as the number of deals valued at less than USD100 million more than tripled, driven to a large extent by acquisitions of online retailers. Ozon.ru expanded its product offering through the acquisition of the fashion retailer, Sapato.ru, for USD100 million. Meanwhile, Digital Sky Technologies invested USD177 million in two separate transactions to build a 9% stake in Zalando, to support the German online shoe retailer’s European growth plans. Another notable deal in this space was the 51% acquisition of Sotmarket for USD50 million by the Russian venture capital fi rm, IQ One.

The largest retail deal of 2012 saw Russia’s biggest mobile phone retailer, Euroset, become co-owned by VimpelCom and MegaFon after the latter acquired a 50% stake in the company from Mr. Alexander Mamut for USD1.1 billion. The deal should lead to synergies for both companies and help MegaFon to increase its penetration of the mobile market. Elsewhere, the Russian investment holding Haden paid USD60 million to acquire Ekrafarm, which it plans to integrate into its existing pharmacy retail network, while August Meyer and Dmitry Kostigyin bought a 40% stake in Obuv.com, the Moscow-based shoe retailer for USD25 million.

Although the number of food retail deals doubled, the total value of M&A fell by more than 80% in 2012, with Billa’s bolt-on acquisition of Enka’s Moscow-based Citystore for USD163 million, and Lenta’s strategic expansion into the key markets of Yaroslavl, Voronezh and Orenburg through the acquisition of four hypermarkets for USD77 million, the largest transactions. Whilst not included in our database, it is worth noting that Auchan signifi cantly expanded its existing retail network in Russia as part of the acquisition of 96 hypermarkets in Central Eastern Europe from Real for USD1.43 billion12.

2

9

15

4

8

2 17

16

16

9

9

12

Consumer markets, retail and agriculture



AgricultureConsumer goodsFood and beverage

Retail (food)Retail (non-food)Retail (online)

12 The deal was excluded from our database as no public information was available to separately value the Russian assets

6%

20%

13%

40%

12%

9%11%

5%

49%

6%

22%

7%

2011

2012

2011

2012



Outlook

Russia is looking like a twin-track economy with growth in consumer spending, retail sales and wages anticipated at a time when industrial production and investments are slowing.

Looking ahead, we expect further consolidation in the food retail segment particularly driven by bolt-on acquisitions of smaller, regional retail chains or attractive real-estate properties by a core group of leading Russian retailers (both multinational and domestic). With compelling valuations, an increasing number of projects in the market and rising interest in localized food production, agriculture will continue to attract interest from both strategic and fi nancial investors alike.

Other consumer businesses will attract interest from local funds investing development capital or strategic players pursuing new markets or entry points into Russia; however, selective buying will be focused on core activities driven by underlying fundamentals. While consolidation will be led by domestic companies, we see renewed interest from multinationals that have become more active in their pursuit of growth in Russia, and we expect transaction volume within the Russian consumer space to increase signifi cantly in the next two to three years, albeit with moderate growth expected in 2013.



Despite an overall decline in the number of deals during 2012, the value of M&A in the Russian fi nancial services sector increased to USD15.6 billion, driven principally by three major transactions, including two cross-border deals.

Domestic activity accounted for almost 80% of M&A in the fi nancial services sector during 2012, up from two-thirds in the previous year. However, by value cross-border transactions increased from 13% to 58% of total largely as a result of the SPO of Sberbank and its acquisition of Denizbank, the only outbound deal in the year. Sberbank’s acquisition of a 99.85% interest in the Turkish bank from Franco-Belgian banking group Dexia, continued its international expansion strategy following last year’s purchase of Volksbank International (Austria) and SLB Commercial Bank (Switzerland).

The SPO of 7.58% of the government’s stake in Sberbank, on the London and Moscow stock exchanges in September 2012 was the largest transaction in the fi nancial services sector, raising USD5.2 billion. This was Russia’s largest-ever privatization deal, the largest SPO in the EMEA region during the last two years, and one of the largest public offerings in the world in 2012. The offering, which was more than two times oversubscribed and rumored13 to have attracted interest from institutional investors including US private equity group TPG, George Soros, and China Investment Corp, reduced the government’s stake to 50% plus one share.

Five inbound deals were completed in 2012 (2011: 7), although only one transaction was valued at over USD100 million. In July an investor group comprising of the US state-owned IFC and the UK state-owned EBRD acquired a 15% stake in Moscow Credit Bank for USD191 million (in equal shares).

Whilst domestic activity remained broadly fl at in 2012, with 23 deals announced (2011: 25), the value of these transactions declined by 27% compared to the prior year, and totaled USD6.5 billion. The largest of these deals resulted in Vnesheconombank, together with Gazprom, NPF Gazfond, Gaztek and Novfi ntekh, acquiring a further 22.7% stake in Gazprombank through the conversion of its subordinated debt to equity.

Sberbank also made progress with its strategy to penetrate new domestic business segments by acquiring a 70% stake in Moscow-based BNP Paribas Vostok, to develop retail lending at points of sale, and the acquisition of the Moscow-based insurance company Alliance Life.

VTB, another state-owned bank, increased its interest in TransCreditBank to 99.6% through two separate transactions; the acquisition of a 21.8% stake from Russian Railways for USD641 million and a share issue by TransCreditBank equal to 3.25% of equity for USD250 million. VTB’s purchase of TransCreditBank, in which it eventually plans to consolidate 100%, expands its market share in line with the bank’s strategic development plan.

Total deal value: USD15.6 billion (+54%)Total deal volume: 29 (-17%)Market share by value: 19% (2011: 15%)

M&A in f nancial services, 2009–2012


2009 2010 2011 2012

18

15

12

9

6

3

0

100

75

50

25

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

1.7 2.7 10.1

15

2735

15.6

29

13 Details of investors were not disclosed



Ferrosplav Invest, which is controlled by East Group (a major shareholder of Nomos-Bank), acquired a 44.2% stake in Khanty-Mansiyskiy Bank for USD412 million, via an auction from the Khanty-Mansiysk autonomous region in a privatization process which lasted more than a year. As a result of this deal, Nomos-Bank increased its shareholding in Khanty-Mansiyskiy Bank to 95.5%, following its plan to consolidate 100%. At the same time, Otkritie Financial Corporation, the Russian banking group, acquired a 19.9% stake in Nomos-Bank from PPF Group in a stock swap transaction, valued at USD510 million. This deal is a strategic investment for Otkritie, which plans to consolidate 100% of Nomos-Bank within the next two years as part of its drive to create the second-largest private bank in Russia.

Having been on the market for some time, KBC Group of Belgium fi nally sold its Russian operation, Absolut Bank for USD398 million to a group of companies that manage the assets of Russia’s second-largest non-state pension fund, Blagosostoyanie. KBC paid almost three times this amount when it entered the Russian market by acquiring Absolut Bank in 2007. The transaction, which is subject to regulatory approval, continues the trend over the last two years of foreign banks leaving Russia due to capital pressure in their key markets. In 2012, Swedish-based Svenska Handelsbanken, Germany’s Commerzbank Auslandsbanken, and Portigon (formerly WestLB) exited the Russian market.

Ten largest transactions in f nancial services in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 Sberbank Banking Investor group (SPO) Bank of Russia 7.6% 5,200

2 Denizbank AS Banking Sberbank Dexia SA 99.9% 3,596

3 Gazprombank BankingVnesheconombank and current shareholders (Gazprom; NPF Gazfond; Gaztek; Novfi ntekh)

n/a 22.7% 3,125

4 JSC TransCreditBank Banking VTB Russian Railways 25.1% 891

5 OJSC NOMOS-BANK Banking Otkritie Financial Corporation JSC PPF Group 19.9% 510

6 Khanty-Mansi Bank Banking Ferrosplav Invest (ICT Group) Government of Khanty-Mansyiskiy region 44.2% 412

7 Absolut Bank BankingCompanies managing reserves of NPF Blagosostoyanie (owned by Russian Railways)

KBC Group 99.0% 398

8 Bank Rossiyskiy kredit Banking Investor Group (6 private individuals)

Unicor Management Company (Boris Ivanishvili) 99.6% 352

9 TransCreditBank Banking VTB Rights issue 3.2% 250

10 OJSC Credit Bank Of Moscow Banking EBRD and IFC Concern Rossium (Roman Avdeev) 15.0% 191

Ten largest transactions total 14,924As a % of total fi nancial services deal value 95.9%



25

7

3

23

5

1

2011

2012



Financial services

Outlook

We predict M&A activity to increase in 2013, driven by IPOs, including privatization, and capital requirements to support continued growth. However, companies will be watching markets closely given questions regarding price valuations, and ability of Russian equity markets to absorb the large number of offerings rumored.

The government will continue with its long-term strategy to privatize state-owned banks, with VTB, Russia’s second largest bank, rumored to be considering a USD2 billion IPO in the spring. A number of large and medium-sized private banks and insurance companies are also actively considering IPOs. However, Promsvyazbank, one of Russia’s largest private banks, has delayed its planned IPO on the London and Moscow stock exchanges until further notice due to concerns regarding price valuations.

Mid-sized banks, especially those focusing on retail business, need to raise capital to further expand their operations. Investors, including private equity funds, are showing interest in this high margin business model and we expect to see increased activity following Horizon Capital and Baring Vostok’s USD40 million investment in Tinkoff Credit Systems Bank during 2012.

State-owned institutional investors like EBRD are likely to continue investing into the Russian banking sector. In addition, last year, Vnesheconombank and the IFC established the Russian Bank Opportunity Fund with USD550 million of capital to invest in regional Russian banks.

The trend of foreign banks leaving the Russian market is likely to continue, as many European banks are still preoccupied with restructuring measures and are looking for divestment opportunities in emerging markets in order to shore up business at home, and address with the upcoming challenges of Basel III.

The Russian insurance sector has low penetration but high growth potential, and the government is committed to opening the market up to foreign capital and expertise. This coupled with the fact that European and US insurance markets are rather mature, and therefore unlikely to experience comparable growth, makes the market attractive to foreign investors. As such, we believe that M&A activity in the Russian insurance sector will pick up over the next 2-3 years, albeit that transaction values are likely to remain fairly low.



In general M&A activity amongst the large integrated producers and mining companies, which have historically played a key role, remained subdued throughout 2012, as many of them lacked suffi cient cash reserves or debt capacity to fund acquisitions given signifi cant capital expenditure programs that still required funding.

Similar to 2011, there were not many large transactions – only one exceeded USD1 billion in value. Deals were spread across several segments, although gold and fertilizer assets were the most actively targeted, accounting for more than 50% of all deals. Buyers also took the opportunity to consolidate existing shareholdings during 2012 through the acquisition of minority interests, which accounted for nearly a quarter of all transactions.

While domestic activity continued to play a dominant role in the sector, there was a notable increase in inbound M&A during the year. A total of 9 deals with a combined value of USD949 million were announced, representing a 24% increase on the prior year, and accounting for 15% of the deal value in the metals and mining sector (2011: 6%). China accounted for 52% of all inbound investment during 2012.

Key driversCompanies controlled by or otherwise linked to Mr. Roman Abramovich (Millhouse Capital, Evraz and Highland Gold Mining Ltd) accounted for approximately 40% of total deal value in the metals and mining sector.

The largest deal of 2012 saw Millhouse Capital acquire a 4.9% stake in Norilsk Nickel from Interros and UC RUSAL for USD1.5 billion. Based on publicly available information, Millhouse Capital may opt to increase its stake up to 10%

Commodity prices are a key driver of profi tability and, in turn, M&A activity in the metals and mining sector. The volatility and general decline in most commodity prices during 2012 led many global metals and mining companies to reassess their M&A and capital allocation strategies, and focus once again on cost optimization. The impact of these factors was also evident in Russia, where both the volume and value of M&A in the metals and mining sector declined by 47%.

Total deal value: USD6.4 billion (-47%)Total deal volume: 33 (-47%)Market share by value: 8% (2011: 17%)

M&A in metals and mining, 2009–2012

Deal value, USDbln Number of dealsFertilizer deals

2009 2010 2011 2012

25

20

15

10

5

0

100

75

50

25

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

4.2 9.8 9.8

24

40

627.8

2.3

5.3

33

1.2

Historical trend in commodity prices, 31 December 2012 vs 31 December 2011

(40,4%)

(18,6%)

7,1%

4,6%

4,8%

(6,5%)

3,5% AluminiumNickelCopperIron oreGoldSteam coalCoking Coal



through open market purchases. The acquisition was viewed positively by the market as Norilsk Nickel’s share price increased by 6% on the day following the announcement fuelled by hopes that this deal will help to resolve the protracted confl ict between its largest shareholders Oleg Deripaska (UC RUSAL) and Vladimir Potanin (Interros).

In April, the vertically integrated steel producer, Evraz, indirectly acquired an additional 41% stake in the Russian coal miner Raspadskaya for USD865 million, concluding a deal that was postponed in 2011. The deal, which increases Evraz’s stake in Raspadskaya to 82%, is intended to make the steel producer self-suffi cient in terms of its coking coal requirements.

At the other end of the scale, Highland Gold Mining company acquired LLC Klen, which owns a gold and silver deposit in Russia’s Far Eastern Chukotka region, for USD69 million.

The Russian government privatized stakes in two mining assets during 2012; Russian Technologies sold a 45.4% stake in the titanium producer VSMPO-Avisma to its management team and Gazprombank for USD970 million, while Phosagro increased its stake in Apatit to 77.6% by acquiring a 26.7% stake from FAUGI, the agency responsible for management of State property, for USD356 million.

Rising fertilizer prices were a key driver of M&A activity. Acron sold a 38% stake in its subsidiary Verkhnekamsk Potash Company to a group of banks comprising state-owned Vnesheconombank, Eurasian Development Bank and Raiffeisen Bank for USD406 million, in order to raise funding to commence development of Verkhnekamsk potash deposit in the Perm territory. Acron also completed the acquisition of a 12% stake in the listed Polish fertilizer and chemicals company, Zaklady Azotowe w Tarnowie-Moscicach, for USD102 million.

Ten largest transactions in metals and mining in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 OJSC MMC Norilsk Nickel Production - Nickel Millhouse Capital UK Ltd Interros/ UC RUSAL 4.9% 1,487

2 JSC VSMPO-AVISMA Corporation Production - Titanium Gazprombank Russian Technologies 45.4% 970

3 Raspadskaya OJSC Mining - Coal Evraz Group S.A.Adroliv Investments Limited (by aquiring remaining 50% of Corber Enterprises Ltd.)

41.0% 865

4 Polyus Gold International Ltd. Mining - Gold Chengdong Investment Corporation

Jenington International Inc. 5.0% 425

5 Verkhnekamsk Potash Company FertilizerVnesheconombank (VEB), the Eurasian Development Bank (EDB) and ZAO Raiffeisenbank

AKRON Group n/a 406

6 OJSC Apatit Fertilizer PhosAgro OJSC FAUGI - Federal Agency for State Property Management 26.7% 356

7 JSC Kazakhaltyn MMC; Norox Mining Company Limited Mining - Gold

Altyngroup Holdings Korlátolt Felelősségű Társaság (INTER RAO UES OJSC)

Polyus Gold International Ltd and Romanshorn LC AG 100.0% 310

8 Vyksa Steel Works Production - Steel ZAO United Metallurgical Company Several minority shareholders

(likely public traded) 12.3% 278

9 Polyus Gold International Ltd Mining - Gold VTB Jenington International Inc. 2.5% 211

10 K+S Nitrogen GmbH Fertilizer MCC EuroChem CJSC K+S Aktiengesellschaft 100.0% 182

Ten largest transactions total 5,490As a % of total metals and mining deal value 85.1%



3815

9

1810

5

2011

2012



Elsewhere, Eurochem also headed west by acquiring K+S Nitrogen, a German-based manufacturer of fertilizers from K+S Aktiengesellschaft for USD182 million.

The price of gold increased by around 6% in 2012, as investors continued to view the commodity as a safe heaven, which in-turn supported M&A. Jenington International sold a 7.5% stake in Polyus Gold, Russia’s largest gold producer, in two separate transactions in order to reduce debt and fi nance existing development projects. Chengdong Investment Corporation, a Chinese investment company with interests in gold, acquired a 5% stake in Polyus Gold for USD425 million, while VTB acquired a 2.5% stake for USD211 million.

In December 2012, following the cancellation of a deal with AltynGroup, Polyus Gold announced it had agreed to sell its Kazakhstan assets, comprising Kazakhaltyn MMC and Norox Mining Company, to a consortium of offshore investors for USD310 million. The ultimate shareholders of the consortium have not been announced and the deal is subject to approval of the Kazakhstan government.

During 2012, Nord Gold announced its intention to consolidate 100% of Canadian High River Gold Mines after increasing its interest in the company to 97.9% by acquiring a 22.9% stake for USD176 million. Meanwhile GeoProMining, the diversifi ed metals holding company, sold its Georgian copper-gold mining companies Madneuli and Quartzite to Capital Group for USD120 million, following its decision to focus its regional growth strategy on its assets in Armenia and Russia.

United Metallurgical Company (OMK) completed the largest transaction of a minority interest by acquiring the remaining 12.3% of Vyksa steel works, one of the major Russian pipe producers, which it didn’t already own for USD278 million.

Metals and mining



Outlook

Overall, we expect limited growth in M&A activity in the Russian metals and mining sector during 2013.

Commodity price forecasts would suggest that activity is likely to focus on nickel, aluminum and coal producers, while iron ore, steel and copper producers will probably be more focused on realizing further operational effi ciencies and potentially the disposal of non-core assets.

We expect to see continuing interest from Chinese companies looking to enter the Russian market, which given the improving global outlook may potentially translate into an increased number of deals within the mining sector. However, restrictions imposed on the ownership of strategic assets (including resource deposits) by the Russian government are likely to continue to be an obstacle for foreign investors.

The Russian government and State owned enterprises will continue to play an important role in M&A activity in the sector during 2013, especially as the privatization agenda is expected to gather pace; a number of large deals, including the privatization of Alrosa, are expected.

We also anticipate that metals and mining players will continue to develop their infrastructure assets, including ports, warehousing facilities, and trading businesses in order to optimize supply chains and capture a greater share of downstream value. This trend is supported by the recently announced potential acquisition of Murmansk port by Eurochem. We also believe that there is likely to be an increase in the level of outbound activity in 2013 in relation to infrastructure assets.

Consensus price forecast (3 year)

12,7%

9,7%

(7,7%)

(3,8%)

(4,5%)

24,6%

15,5% AluminiumNickelCopperIron oreGoldSteam coalCoking Coal



The total value of transactions announced in 2012 increased by 22% to USD14.2 billion, while the number of deals more than doubled. The increase in deal value was driven by transactions valued in excess of USD100 million, while the volume of activity was, to a large extent, driven by deals below this value, continuing the trend observed in the Russian oil and gas sector over the last three years.

M&A activity in the sector during 2012 was characterized by consolidation of the local market by major Russian oil and gas companies, which accounted for more than two thirds of deal value and volume. A small number of outbound transactions involving Gazprom, LUKOIL, Rosneft and Gunvor, made up one third of deal value. Inbound M&A, which accounted for almost half of deal value and deal volume in 2011, was virtually non-existent in 2012, with fi ve deals totaling USD37 million.

Domestic activityThe largest deal in the sector was LUKOIL’s acquisition of three oil fi elds in the Khanty-Mansiysk Autonomous District, including the relatively large Imilorskoye fi elds, via a State auction for USD1.7 billion. The acquisition is expected to increase LUKOIL’s production capacity by 8-9 million tons per annum by 2020, although it is likely that LUKOIL may consider creating a strategic alliance to develop these fi elds.

Rosneft’s USD56 billion acquisition of TNK-BP was the largest deal in Russia in 2012, and the largest in the country’s history of M&A. The sheer scale of this transaction has a distortive impact when analyzing trends in M&A, and we have therefore excluded it from the analysis of the oil and gas sector to provide a more meaningful comparison with prior years.


M&A in oil and gas, 2009–2012

Dol

lars

per

bar

rel

Brent spot price FOB, 2009–2012

2009 2010 2011 2012

60

50

40

30

20

0

100

75

50

25

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

23.0 20.3 11.6

30

2418

80

70

10

14.2

46

56.0


Rosneft/TNK-BP

0

20

40

60

80

100

120

140

Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013



In November, Novatek announced the acquisition of a 49% stake in Northgas from R.E.D.I. Holdings, owned by businessman Mr. Farkhad Achmedov, for USD1.4 billion. Management expect synergies from the acquisition as Northgas’s production areas are located close to Novatek’s production, transportation and refi nery assets in the Yamalo-Nenets region.

Rosneft and ITERA Group combined their gas assets as part of a strategic cooperation agreement to create a JV to produce and sell gas. Rosneft obtained a 51% in the JV in exchange for 100% of Kynsko-Chaselskoye Neftegaz which owns the Kynsko-Chaselsk license block, and USD173.4 million in cash. The new JV‘s consolidated 2P14 reserves will total 372.4 billion cubic meters of gas and 15.7 million tons of liquid hydrocarbons. The total deal value was estimated at USD1.3 billion.

Alrosa Group consolidated its ownership in Geotransgaz and Urengoy Gas Company to 100% by repurchasing 90% stakes in both companies from VTB. Alrosa sold stakes in both entities which are involved in exploration and development of gas reserves in Yamalo-Nenets Autonomous District, to VTB in 2009 to reduce its debt burden.

In August 2012, TNK-BP sold 71.09% of Novosibirskneftegaz and 100% of Severnoeneftegaz, two upstream production companies in Eastern Siberia, to an undisclosed group of specialist Russian and foreign investors for USD450 million. The divestment was in line with TNK-BP’s strategy to optimize its asset portfolio and improve per-barrel effi ciency. It is rumored that Russneft became the ultimate benefi ciary of Novosibirskneftegaz and Severnoeneftegaz.

Ten largest transactions in oil and gas in 2012

Target Sector Acquirer Vendor % share acquired Value USDm

1 Imilorskoe, West-Imilorskoe and Istochnoe oilfi elds Upstream OOO LUKOIL-West Siberia State auction n/a 1,650

2 WINGAS, WIEH, WIEE, Astora and Wintershall Noordzee B.V. Marketing Gazprom OAO BASF SE 50.0% 1,500

3 ZAO Northgas Upstream Novatek OAO R.E.D.I. Holdings (Mr. Farkhad Akhmedov) 49.0% 1,375

4 NGK Itera Upstream Rosneft Itera Holdings Ltd 51.0% 1,316

5 Corporacion Venezolana del Petroleo Upstream Rosneft Petróleos de Venezuela, S.A. 40.0% 1,100

6 Geotransgaz, Urengoy Gas Company Upstream Alrosa VTB Capital 90.0% 1,037

7 Petroplus Ingolstadt refi nery Refi ning Gunvor International B.V. Petroplus Holdings AG 100.0% 800

8 ISAB S.R.L. Refi ning NK LUKOIL OAO ERG SpA 20.0% 524

9 Petroplus Antwerp refi nery Refi ning Gunvor International B.V. Petroplus Refi ning Antwerp NV 100.0% 500

10 OAO Novosibirskneftegaz/OAO Severoyeneftegaz Upstream Undisclosed investor group TNK-BP 71.1% & 100.0% 450

Ten largest transactions total(1) 10,252As a % of total oil and gas deal value(1) 72.3%


Note: (1) Excluding Rosneft/ TNK-BP

14 Proven and probable reserves


6

9

3

34

5

9

2011

2012



Cross-border activityIn November, Gazprom announced an asset swap that will see it take control of its WINGAS, WIEH and WIEE 50:50 gas trading JV’s with BASF, and WINGAS’s storage subsidiary, Astora, which comprise the largest gas depot in Europe. In addition, Gazprom will also receive a 50% stake in the North Sea gas exploration and development company Wintershall Noordzee BV. In return, BASF’s Wintershall will receive 25% plus one share in Gazprom’s two high profi le blocks of the Achimov formation of the Urengoi natural gas and condensate fi eld, with an option to increase its stake to 50%. Gazprom and BASF have an existing 50:50 JV, Achimgaz, which is involved in development and production of gas on the earlier discovered blocks of the Achimov formation. The deal, which is subject to regulatory approval, is estimated to be valued at USD1.5 billion.

In December, Rosneft announced it had entered into an agreement with La Corporación Venezolana del Petróleo S.A (CVP), a subsidiary of Petróleos de Venezuela S.A. (PdVSA) to create a JV for the development of the Carabobo-2 block in Venezuela’s Orinoco River basin. Rosneft will acquire a 40% interest in the JV for USD1.1 billion.

Gunvor Group, the energy trader, in which Mr. Gennady Timchenko is one of the key benefi cial owners, announced three acquisitions in Europe during 2012 which analysts estimated totaled USD1.6 billion. In March and May, Gunvor acquired the Antwerp and Ingolstadt refi neries and petroleum retail chain of Petroplus Holding which went bankrupt in 2011. These acquisitions, together with the acquisition of a 10% stake in the TransAlpine Pipeline in October refl ect Gunvor’s strategy to form a vertically integrated oil and gas company with strong presence in Europe.

LUKOIL announced in September that it had increased its interest in its IASB Refi nery JV with Italy’s ERG SpA to 80%, through the acquisition of further 20% stake from the Italian energy group for USD524 million. Since the acquisition it has been rumored that LUKOIL plans to consolidate 100% ownership of the refi nery in 2013-2014 by acquiring ERG SpA’s remaining 20% interest in the JV.

Oil and gas



Outlook

Russia’s hydrocarbon reserves are some of the largest in the world, and many international oil majors are under pressure to fi nd opportunities to invest given that it is one of the most politically stable oil and gas basins. However, developed reserves are signifi cantly depleted and existing greenfi eld opportunities are often in remote locations, which require signifi cant upfront infrastructure investment. This combined with the perceived risks of doing business in Russia, and sometimes prohibitive valuations mean that deals take time to negotiate. Despite this and the low level of inbound M&A in 2012, international oil companies remain interested in partnering with Russian majors on large scale exploration and development opportunities, and we anticipate an increase in inbound activity during 2013.

As the Russian majors have developed, the sector as a whole has evolved, costs have increased and taxation has become more burdensome, and as a result domestic players continue to look closely at optimizing their portfolios. We expect to see some continued divestment of non-core assets which are suboptimal to the overall portfolio and strategy of Russian majors.

LUKOIL, Rosneft and Gazprom will continue to look for opportunistic foreign assets to acquire in order to capture value chain links beyond Russia’s borders, potentially in upstream assets in Africa and Latin American, as well as certain European downstream assets.

We also anticipate further consolidation of the Russian oil and gas market due to the number of relatively small assets, including those which have been divested by the Russian oil majors. Given the perceived abundance of such opportunities, we believe that the sector is ripe for a few consolidators to roll up these assets to create larger oil and gas companies.



During 2012, M&A activity in the Russian power and utilities sector continued the trend of consolidation of electricity generating and distribution assets by State-owned companies, and in particular INTER RAO UES. Interest of domestic and foreign private investors in the sector remains limited due to the pace of market reform and inconsistent tariff regulation which deters potential strategic investors. Liberalization of the power market was the primary objective of the structural reform program, adopted by the government in July 2001. RAB methodology15, which was intended to secure returns on investment through price tariffs, was not universally introduced across the sector.

In January 2012, the government announced that producers had agreed to hold energy prices at the December 2011 level by deferring tariff increases for six months, until after the presidential elections. Furthermore, the government also revised RAB methodology during 2012, resulting in a reduction to the return to investors. Such unexpected changes in tariff regulation, and revision of RAB, have decreased the overall attractiveness of the industry to investors, and as a result M&A activity.

Similar to last year, M&A in the sector was predominately restricted to domestic activity, with limited cross-border deals. In 2012, the total value of M&A decreased by 27% to USD4.3 billion, despite a 77% increase in the number of transactions – this refl ects the overall increase in the number of deals valued at less than USD100 million.

Key driversINTER RAO UES was the most active participant in M&A in the power and utilities sector during 2012, announcing nine transactions with a combined value of USD3.7 billion, equal to 77% of total deal value. During 2012, INTER RAO UES successfully completed the reorganization of power generating assets by acquiring the remaining stakes which it did not already own in Bashkirenergo, OGK-1, OGK-3 and Bashenergoactiv, and forming a separate subsidiary company to hold its generating assets.

The largest deal announced in the sector will result in INTER RAO UES disposing of its 40% stake in the electricity generator, Irkutskenergo which is majority owned by EuroSibEnergo, for USD1 billion. In July, it was announced that Rosneftgaz had received government approval for the acquisition of INTER RAO UES’s stake in Irkutskenergo, although the deal is not expected to be completed until sometime in 2013.

In March, Rusenergo Fund led a consortium of investors including Russia Direct Investment Fund (RDIF), Macquarie-Renaissance Infrastructure Fund (MRIF) and AGC Equity Partners, in the acquisition of a 26.4% stake in the power generation company Enel OGK-5 from INTER RAO UES for USD750 million. Rusenergo and

Total deal value: USD4.3 billion (-27%)Total deal volume: 23 (+77%)Market share by value: 5% (2011: 9%)

4.3

23

2009 2010 2011 2012

10

8

6

4

2

0

40

30

20

10

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

0.1 5.6 5.9

5

39

13


M&A in power and utilities, 2009–2012

15 RAB or Regulatory Asset Base methodology is a formula for tariff setting that includes a return on investment as an invest-ment premium into the tariff



RDIF reportedly contributed half of the funds for the deal, which was one of the largest private equity transactions in the Russian power and utilities sector.

The largest of the three outbound deals in the year were INTER RAO UES’s acquisition of a 90% stake in Trakya Elektrik Uretim Ve Ticaret A.S., which owns a Turkish gas fi red power plant, for USD68 million and the acquisition of a 40 mega-watt wind farm in northern Bulgaria by LUKERG Renew, a JV owned by LUKOIL and Italy’s ERG SpA, for USD65 million.

State-owned Rosatom, and its subsidiary Atomenergoprom, continue to play an active role in M&A in the sector and reportedly acquired several assets during 2012. However, details of these deals were not made public and, as such, are not included in our database. We also observed an increase in M&A in support industries dedicated to the power and utilities sector, such as engineering and construction, and research and development although the value of such deals were quite small.

The planned merger of Gazprom Energoholding and IES Holding, which was one of the most widely rumored deals of 2012, was eventually cancelled as the parties could not agree terms. Gazprom Energoholding, controlled by Gazprom, owns TGK-1, Mosenergo and OGK-2, while IES Holding, owned by Mr. Viktor Vekselberg’s Renova Group, controls TGK-5, TGK-6, TGK-7 and TGK-9. Had the proposed merger gone ahead, it would have created one of the largest generating companies in Russia, by installed capacity.

Ten largest transactions in power and utilities in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 JSC Irkutskenergo Power Generation OJSC Rosneftegaz INTER RAO UES 40.0% 1,000

2 OJSC Bashkirenergo Power Generation INTER RAO UES OAO Sistema-Invest, subsidiary of AFK Sistema 74.8% 871

3 OJSC Enel OGK-5 Power Generation Investor Group INTER RAO UES 26.4% 750

4 JSC OGK-1 Power Generation INTER RAO UES LUKOIL OAO 25.0% 399

5 JSC OGK-3 Power Generation INTER RAO UES

Anatoliy Motylev (Private Investor); Boris Khait (Private Investor); Vladimir Faevorich (Private Investor); Boris Pastukhov (Private Investor); Georgy Gens (Private Investor); Viktor Lukoyanov (Private Investor)

18.0% 347

6 Bashenergoaktiv Power Generation INTER RAO UES AFK Sistema 25.0% 167

7 Holding MRSK Power Distibution Neft Aktiv Holding MRSK 3.2% 165

8 OJSC Kubanenergo Power Distibution JSC Tyumenenergo Neft Aktiv 28.0% 164

9 GorUpravDom (and boiler houses in Odintsovo and Balashikha)

Heat Production Gorodskie Teplosistemy ZAO SU-155 100.0% 101

10 Trakya Elektrik Uretim Ve Ticaret A.S. Power Generation INTER RAO UES AEI (Turkey) 100.0% 68

Ten largest transactions total 4,032As a % of total power and utilities deal value 93.3%



10

3

20

3

2011

2012



Outlook

Overall we do not anticipate any signifi cant change in the value of M&A in the Russian power and utilities sector during 2013, which has amounted to USD5-6 billion per annum over the last three years.

No signifi cant market reforms or easing of tariff restrictions are anticipated during the coming year. As such, we expect involvement of the private sector to remain subdued, with some private investors looking to exit the market due to diminishing returns.

Consolidation of assets by State-controlled companies will continue. We expect Gazprom Energoholding to resume discussions with IES regarding the acquisition of certain power generating assets, rather than a merger of the two. Market intelligence also suggests that Rosneftegaz, the parent of Rosneft, could become one of the largest energy holdings by acquiring stakes in RusHydro and Inter RAO UES.

The planned merger of MRSK Holding (the interregional distribution grid company) and the Federal Grid Company (FSK UES, which operates electricity transmission grids) to create Russian Grids, is expected to be completed by the end of June 2013. We anticipate that the merger is likely to drive further consolidation of transmission, distribution and retail networks during 2013. In addition, certain assets of MRSK are also rumored to be included on the government’s 2013 privatization agenda.

The need for modernization within the sector and international expertise required for such programs, may lead the government to ease regulation in order to attract investors. It is anticipated that the government will broaden the current list of DPM16 projects, in order to increase the attractiveness of the generating industry for investment. Steam powered heat plants are likely to be upgraded to combined cycle gas turbines to increase effi ciency, reduce costs and increase returns which may subsequently attract investors.

INTER RAO UES, RusHydro and Rosatom temporarily put their international expansion plans on hold during 2012, given the challenges in the domestic market and global economic uncertainty. We believe that with generally improving sentiment in global markets Russian companies will continue to monitor overseas opportunities and invest where the fundamentals and investment return (e.g. IRR) stack-up.

Power and utilities

16 DPM or Capacity Supply Agreement – a measure that was introduced by the government to guarantee payments for newly installed capacity as part of the privatization process



M&A activity in the Russian real estate and construction sector was relatively static in 2012, albeit at a high level; deal volumes remained fl at while the value of transactions fell marginally to USD6.5 billion. Domestic M&A increased by 26% to USD5.5 billion, with volumes up by 6% (56 deals), whereas inbound transactions declined by 25% with deal value falling 60% to USD968 million. The slowdown in the Russian economy, and continued uncertainty globally, led investors to take a more cautious approach in 2012. There was an increased focus on the developed markets of Moscow and St. Petersburg during the year, with international players continuing to prefer high-quality properties. Similar to 2011, there was no outbound M&A in the sector.

In general, investors prefer operating properties to development projects, given the cash fl ows generated by the lease. Investors are adverse to the high risks associated with real estate projects at the development stage, and banks are still not inclined to fi nance projects in the early stages. Experience of the 2008 crisis showed that commercial properties with a good location and high-quality tenants typically enjoy stable cash fl ows, even during in an economic downturn, and are therefore desirable investment opportunities.

Debt for refi nancing or acquiring buildings is currently almost only available from the Russian State-controlled banks, such as Sberbank, VTB, Vnesheconombank and Gazprombank. Financing for new construction remains limited and is only available for large-scale projects of State importance. This refl ects the perceived risk profi le of the sector, uncertainty regarding tenancy demand and broader risk perception of doing business in Russia.

O1 Properties was the largest investor in the sector, with four deals worth USD1.8 billion in the offi ce segment, and all in line with the company’s strategy of investing into prime class17 properties. BIN Group, which acquired Unicor’s real estate, offi ce, hotel and warehouse portfolio for a total of USD983 million, was the second largest investor in 2012. The real estate and construction sector has historically been a focus business area for BIN Bank and other companies of the group. Mr. Bidzina Ivanishvili, the benefi cial owner of Unicor sold his Russian assets to BIN in order to participate in the 2012 Georgian parliamentary elections.

Like the overall level of investment in the sector, yields also remained relatively stable by comparison to 2011. The offi ce segment demonstrated minimum yields of 8.5%-9%, the retail segment slightly higher at 9-10% and the warehouse segment the highest at 11-12%.

Total deal value: USD6.5 billion (-4%)Total deal volume: 65 (0%)Market share by value: 8% (2011: 10%)

M&A in real estate and construction, 2009–2012


Tota

l dea

l val

ue, U

SD

bln

2009 2010 2011 2012

12

10

8

6

4

2

0

Num

ber of deals

2.0 4.4 6.8

32

47

65

6.5

75

50

25

0

100

65

17 A and B rated properties



Offi ce The offi ce segment attracted the largest share of investment with 17 deals totaling USD3.4 billion; all of which were in Moscow and involved prime class properties.

O1 Properties announced four deals in the offi ce space during 2012. The acquisition of the White Square offi ce complex will provide its vendors with a profi table exit, based on its estimated value of USD0.7 billion when VTB Capital acquired its stake in May 2011. Ducat Place III was sold by its developer, Hines Global REIT, to raise funds to fi nance future development projects, while Evans Randall reportedly made a 44% return on the disposal of Silver City Business Centre for USD333 million. O1 also acquired the disused Bolshevik factory from Kraft Foods for USD73 million.

Only 6% of properties were purchased for the acquirer’s own needs, including the Paskal offi ce by Alfa-Bank and Menger offi ce by Raiffeisen Bank, both in the Nagatino i-Land complex. International investors made four acquisitions which totaled almost USD0.5 billion – the largest being the acquisition of the Four Winds Offi ce Complex for USD208 million by Capricornus Investments, which is reputedly owned by Mr. Roman Abramovich.

Ten largest transactions in real estate and construction in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 White Square Business Centre Offi ce O1 Properties AIG, Lincoln, VTB Capital 100.0% 1,000

2 Garden Quarters, Summit, InterContinental Moscow Tverskaya, Lux Hotel and RTI Kauchuk

Residential, Offi ce, Hotel, Hotel and Warehouse

Gruppa BIN Unikor (benefi ciary B. Ivanishvili) 100.0% 983

3 Ducat Place III Offi ce O1 Properties Hines Global REIT 100.0% 360

4 Silver City Business Center Offi ce O1 Properties Evans Randall 100.0% 333

5 Metropol Moscow Hotel Hotel Okhotnyi ryad Deluxe Moscow government 100.0% 273

6 Golden Babylon Rostokino Retail Immofi nanz Group Patero 50.0% 250

7 AB Krasnaya Polyana Hotel Sberbank Capital Mahomed Bilalov 28.3% 238

8 Arbat Square Business Center Offi ce Confi dential Zhilrekonstruktsiya n/a 230

9 Ozerkovskaya Complex Offi ce AFI Development Super Passion Ltd 100.0% 230

10 Pushkino logistic park Warehouse Padastro Holdings Ltd PLP Holding GmbH 100.0% 215

Ten largest transactions total 4,111As a % of total real estate and construction deal value 63.2%



52

13

56

9

2011

2012



26

9 7

11

11 1

9

13

17

3

15

8

Hotels Hotels attracted the second largest share of investment, with 13 deals valued at USD1.1 billion, of which around 70% relates to high quality facilities in Moscow such as the Hotel Metropol and Radisson Slavyanskaya Hotel, which were sold by the Moscow Government as part of its non-core asset disposal program. Meanwhile, Sberbank Capital increased its stake in the AB Krasnaya Polyana project in Sochi to an undisclosed majority following the acquisition of a further 28.3% stake for USD238 million.

Five hotels of lesser status were acquired in the cities of Saint Petersburg, Rostov-on-Don, Nizhniy Novgorod and Irkutsk at a total cost of USD79 million. The relatively low level of regional activity is explained by the lack of good facilities and relatively high number of deals closed with major hotels in previous years.

Hotels were the only segment within the real estate and construction sector not to attract inbound investment during 2012; however, international players continue to evaluate opportunities to enter or expand in the Russian hospitality market.

RetailWhile the level of activity in the retail segment increased by over a third, to 15 deals, the value of investment declined by almost two thirds to USD848 million. The segment was boosted in 2011 by three deals – the acquisitions of the Galeria, Gorbushkin Dvor and Filion shopping malls – with a combined value of USD1.5 billion. Investors continue to prefer good quality operating properties in Moscow, Saint Petersburg and cities with populations of over one million. Deals in Moscow and St. Petersburg accounted for over three quarters of investment during 2012, including the only major inbound transaction; the acquisition of a 50% stake in the Golden Babylon Rostokino shopping center by Immofi nanz Group from Patero-Development for USD250 million, in line with the company’s retail focused strategy.

WarehousesThere were eight transactions in the warehouse segment during 2012 with a combined value of USD387 million, more than half of which related to the acquisition of the Pushkino Logistic Park by Padastro Holdings Ltd (USD215 million). The main reason for the low level of investment is the lack of investment grade property. As in the offi ce segment, all the recorded deals were made in Moscow and the Moscow region. PNK Group completed the sale of terminals at its Vnukovo Warehouse Park to Magnolia, Tsentr Obuv and PRV Group for a total consideration of USD127 million. The buyers entered these transactions to expand their own warehouse facilities, while PNK Group continued its strategy of exiting its construction projects.

Real estate and constructionInvestments into real estate and construction companies totaled USD769 million, including BIN Groups acquisition of the Garden Quarters complex for USD445 million. Of the remaining 11 deals in this segment, the largest was the sale of a 97% stake in the construction company, GVSU Centre, by Sberbank to ZAO UK Razvitiye for USD172 million. Razvitiye intends to use the acquisition as a platform to expand its construction business.

Real estate and construction



2%18%

27%

17%

36%

4%

16%

53%

8%

13%

6%

ConstructionHotel

Real estateRetailWarehouse

Office

2011

2012

2011

2012



Outlook

Overall we expect M&A activity in the real estate and construction sector to remain relatively stable in 2013 despite some large deals which are due to close in the year. Morgan Stanley Real Estate Fund Investing (MSREI) fi nalized the USD1.2 billion acquisition of the Metropolis shopping mall for an estimated USD1.2 billion18 in February 2013 and Kaspersky Lab is expected to complete the acquisition of the Olympia Park business center for an estimated USD350milllion during the year.

We anticipate that yields will hover around current levels in 2013. Domestic investors are again expected to take a dominant position in the market, although the share of total transaction volume may decrease as international investors consider acquisitions in Russia to be a good alternative to Europe.

High-quality properties in excellent locations generating steady income will continue to enjoy the greatest demand. A number of developers have announced plans for new warehouse projects in 2013-2014, which, given the current lack of supply, should promote M&A activity in the segment. A lack of high quality stock in the Russian regional centers will mean that Moscow and St. Petersburg property continues to hold the most interest for investors.

Investment activity in the hotel segment will mostly be determined by developers’ plans for the construction of new properties. In coming years we expect an increase in investment activity in the host-cities of the FIFA 2018 World Cup, and especially hotels, sports and transport infrastructure. However, given the one-off nature of the event, project economics and inherent risks, we believe that the majority of investors will be domestic players.

Retail developers’ regional expansion plans and an economic upturn may boost regional investment interest in the medium to long term. However, we expect investment activity in the regions to remain low in the short term due to the continued shortage of investment quality assets.

18 Actual deal value was not disclosed



The volume of transactions in the Russian transport, logistics and infrastructure sector fell by 31% in 2012, to 34 deals, driven solely by a reduction in domestic activity. The number of cross-border activity remained stable, with seven inbound and one outbound deal during the year. Nonetheless, the total value of deals increased by 65% to USD10.1 billion, driven by the ongoing privatization of railway and seaport assets.

While the range of the deal sizes remains extremely broad, there was a notable increase in the average deal size during 2012. In 2011, the average deal was valued at USD45 million19, with 88% of all deals being valued at less than USD100 million. This compared to an average deal size of just over USD230 million20 in 2012 as deals valued at more than USD250 million but less than USD1 billion accounted for 38% of total volume, and contributed USD6.4 billion in deal value – more than the whole sector generated in 2011.

Key driversThe largest transaction in 2012 was the privatization of the remaining 25% stake in Freight One which was acquired by Independent Transport Company, a subsidiary of NLMK for USD1.6 billion. The State also auctioned off stakes in a number of infrastructure assets as part of the 2012 privatization program. In particular, SG-Trans, a Moscow-based provider of gas transportation services, was acquired by AFK Sistema for USD734 million, and Mechel-Trans (together with its associates) acquired a 73% stake in the Vanino Commercial Sea Port for USD501 million, while SUEK acquired a 25% stake in the Murmansk Commercial Sea Port for USD100 million.

The only outbound transaction during the year was Russian Railways acquisition of a 75% stake in GEFCO, the French-based transport and logistics company, for USD1 billion from Peugeot-Citroen SA. Some key Russian players restructured shareholdings and further consolidated the transport logistics segment. In May, NefteTransServis (NTS) acquired Transgarant, the rail transportation company, from Far Eastern Shipping Company (FESCO) for USD714 million, subsequent to which, Summa Group acquired FESCO for USD938 million. In August, NTS acquired EvrazTrans from Evraz for USD300 million while Globaltrans Investment acquired Metalloinvesttrans and MMK-Trans, the captive freight rail operators of Metalloinvest and MMK Group for USD540 million and USD325 million respectively.

There were a number of key deals in the seaport sector, apart from the privatizations of the Vanino and Murmansk commercial sea ports. Maersk, one of the leading international shipping companies, acquired a 37.5% stake in Global Ports for USD863 million. United Shipbuilding Corporation, a Russian State-owned company, acquired a 75.8% interest in Northern Shipyard, a military shipbuilder, for USD385 million. In October, the Ukrainian Kernel Group, together with a subsidiary of Glencore International, acquired the deep water grain

Total deal value: USD10.1 billion (+66%)Total deal volume: 34 (-31%)Market share by value: 12% (2011: 9%)

M&A in transport, logistics and infrastructure, 2009–2012


6

4

2

0

10

8

2009 2010 2011 2012

70

40

20

10

0

Tota

l dea

l val

ue, U

SD

bln

Num

ber of deals

0.5 3.2 6.1

10 12

4950

60

30

10.1

34

19 Excluding the USD4 billion privatization of 75% of Freight One20Excluding the two deals during the year valued in excess of USD1 billion



export terminal in Tampa Port, Russia, from EFKO Group for USD265 million. Global Ports also consolidated its interest in the Russian container terminal, Vostochnaya Stevedoring Company to 100% through the acquisition of the 25% stake held by DP World Limited for USD230 million.

In the aviation industry, Sheremetyevo International Airport (MASh) acquired Terminal, the Russia based operator of Terminal D at Sheremetyevo, from Aerofl ot, Vnesheconombank and VTB for USD283 million, in the form of MASh shares. MASh, which was formerly 100% owned by the Russian government, has been valued at USD1.7 billion, and the transaction will enable the partial privatization of the company.

Elsewhere, Changi Airports International, the Singapore-based airport operator, and Sberbank agreed to acquire a 50% stake in airports in the Krasnodar region from Basic Element for a minimum consideration of USD250m. Basic Element will contribute its shares in the airports of Sochi, Krasnodar, Anapa and Gelendzhik, with an asset value of USD500m into a new holding company. Basic Element will hold 50% plus one share in the new entity, Changi Airports 30%, and Sberbank the remaining 20%. This deal demonstrates the continued interest of foreign investors in the Russian aviation sector, and follows the participation of Germany’s Fraport in Pulkovo International Airport under a concession arrangement.

Ten largest transactions in transport, logistics and infrastructure in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 JSC Freight One Freight / transport services

Vladimir Lisin (Private Investor) Russian Railways OJSC 25.0% 1,616

2 Gefco SA Freight / transport services

JSC Russian Railways (RZD) PSA Peugeot-Citroen SA 75.0% 1,036

3 FESCO PLC Freight / transport services Summa Group Industrial Investors 56.0% 938

4 Global Ports Investments Plc Freight / transport services

APM Terminals Management B. V. Transportation Investments Holding Limited 37.5% 863

5 JSC SG-trans Freight / transport services AFK Sistema Government of Russian Federation 100.0% 734

6 Transgarant LLC Freight / transport services NTS Far Eastern Shipping Company 100.0% 714

7 Metalloinvesttrans Freight / transport services

Globaltrans Investment PLC Metalloinvest Management Company LLC 100.0% 540

8 Vanino Commercial Sea Port Port OAO Mechel Government of Russian Federation 55.0% 501

9 JSC Shipbuilding plant Severnaya Verf Shipping OSK Central Bank of Russia 75.8% 385

10 MMK-Trans Freight / transport services

Globaltrans Investment PLC OJSC MMK Group 100.0% 325

Ten largest transactions total 7,652As a % of total transport, logistics and infrastructure deal value 75.8%



41

71

26

7

1

2011

2012



Outlook

M&A activity in the transport, logistics and infrastructure sector is expected to continue to be driven by privatization during 2013, due to the need to attract private investment to develop and modernize seaports, airports and transport logistics infrastructure.

A number of Russia’s major stevedoring, airport and rail freight operators are on the government’s privatization program for 2013-2016. The public offering of the shipping company Sovkomfl ot, has been rumored for the Russian market in 2013, and Russian Railways is said to be considering the sale of a 25% stake in Aeroexpress to Transgroup AS.

Consolidation, through both vertical and horizontal integration, and formation of conglomerates, is another trend visible in the transport and logistics sector, driven by further economies of scale, synergy opportunities, and supply chain optimization. The need to meet fulfi llment expectations of international companies will drive industry players to improve quality, leading to increased divestments and restructuring of business models.

Public Private Partnership (PPP) activity in transport infrastructure is likely to gain momentum as the pressure to reform restrictive federal law №115 On concession agreements mounts and more regions look to attract private investment. As the number of obsolete State-owned infrastructure assets which are unattractive to private investor’s increases, the government will seek ways to attract fi nancing by engaging private capital through sharing the risks and providing guarantees or other forms of support.

We believe that there will be further appetite to acquire interests in eastern European rail logistics assets on the back of the GEFCO acquisition, driven by a greater focus on the integration of Russian and European markets. AFK Sistema recently announced its intention to spend up to USD6 billion creating a major Russian rail freight operator in the near future, and the Russian government is also rumored to be considering auctioning its 50.1% stake in Transcontainer.

Moscow airports remain attractive assets for European investors, who are seeking to diversify away from mature airports into a more vibrant and promising Russian market. Reports suggest that Sheremetyevo and Vnukovo airports may be merged in 2013. However, we expect the fi nalization of a development strategy for all Moscow airports to delay entry by foreign investors.

We expect continued focus on infrastructure related to specifi c events such as the 2014 Winter Olympics in Sochi 2014 and 2018 FIFA World Cup. Going forward, we expect greater interest in the Russian market from major international logistics players and conglomerates with signifi cant logistics divisions. The dynamics will, however, depend on the availability of models for private participation, availability of long-term funding and overall levels of economic activity.

Transport, logistics and infrastructure



M&A in sectors not separately covered in this survey, have been included within ‘other markets’.

A total of 65 transactions with a combined value of USD3.3 billion were announced across the 14 different industries which comprise other markets in 2012. However, the top ten deals were concentrated in six sectors – aerospace, automotive, equipment and machinery, forestry, healthcare and pharmaceuticals – which between them accounted for 85% of total M&A and 55% of deal volume within other markets.

More than two thirds of deals within other markets were domestic transactions, although cross-border deals accounted for more than half of the total value of M&A. The majority of transactions in other markets were valued at less than USD100 million during 2012, with only 9 deals exceeding this amount.

Key driversThe automotive sector accounted for the largest share of M&A in other markets, with three deals totaling USD1.2 billion. In December, Renault-Nissan and State owned Russian Technologies confi rmed the creation of a new JV, Alliance Rostec Auto BV, to hold their interests in the car maker AvtoVAZ. The deal, which is expected to complete by June 2014, will see Renault-Nissan invest USD742 million and hold 67.1% of the JV, and Russian Technologies 32.9%. Troika Dialog will sell its shares in AvtoVAZ to the JV over the same period. This is an important step in the restructuring of AvtoVAZ, and will give Renault-Nissan majority ownership of a key player in what is expected to become the largest car market in Europe. Prior to this deal, Russian Technologies increased its stake in AvtoVAZ to 29% by acquiring 10.2% of its shares for USD420 million.

Another example of State participation was the acquisition of a minority stake in Russia Forest Products (RFP) Group by the newly established Russia-China Investment Fund from the shareholders of Evraz and Renaissance Capital for USD200 million. RFP Group is the fi fth largest forestry company in Russia and second largest forestry exporter to China, and was the fi rst investment by the Fund.

Six deals were announced in the Russian pharmaceuticals market, four of which were inbound transactions. The largest of these resulted in Valeant Pharmaceuticals investing USD370 million to acquire Natur Produkt from Renova Group and, certain production assets located in Russia and the CIS from Gerot Lannach, as part of its emerging markets expansion strategy.

M&A activity in the equipment and machinery sector, which accounted for 21% of deals, was partially attributable to mandatory tender offers to squeeze out minority shareholders and, demand for machine tools and power generators. Hydraulic Machines & Systems Group was the most active investor, completing three deals including the USD168 million acquisition of Kazan Compressor

Total deal value: USD3.3 millionTotal deal volume: 65Market share by value: 4%

Number of deals by sector in 2012

AerospaceAutomotiveChemicalsEngineeringEquipment and machinery

ForestryHealthcarePharmaceuticalsLeisure and tourismOther

53

11

4

143

6

6

5

10



Engineering Plant, which analysts at Troika Dialog referred to as “a valuable but overstated acquisition”. The Russian conglomerate Borodino sold its machine tools business to Taiwan’s Fair Friend Enterprise Group for USD167 million, while Mr. Alexey Mordashov acquired the remaining shares in a St. Petersburg based manufacturer and wholesaler of power generation equipment which he did not already own for USD163 million.

The healthcare sector accounted for 9% of deal volume and 7% of transactions value in other markets, and included Baring Vostok Capital Partners USD100 million acquisition of a 27% stake in United Medical Group Limited, the parent company of the European Medical Centre Group of Companies (GEMC). This is one of the largest deals in the Russian healthcare sector, and will enable GEMC to fi nance its projects up to 2015.

Aerospace was also an active sector during 2012, following the launch of a State program to increase Russia’s share of the global helicopter market to 30% by 2025. Russian Helicopters was responsible for all but one of the fi ve deals in the sector during the year – consolidating its ownership of Kazan Helicopters, the Rostov-On-Don helicopter manufacturer RostVertol, and Ulan-Ude Aviation Plant in four separate mandatory tender offers totaling USD138 million. These transactions refl ect the company’s strategy to consolidate ownership of the Russian helicopter industry.

Ten largest transactions in other markets in 2012Target Sector Acquirer Vendor % share acquired Value USDm

1 Avtovaz Automotive Renault-Nissan BV and Rostekhnologii JV Troyka Dialog 20.5% 742

2 Avtovaz Automotive Rostekhnologii JV Avtovaz 10.2% 420

3 RFP Group Forestry Russia-China Investment Fund Shareholders of Evraz Group S.A. and Renaissance Capital

Undisclosed minority 200

4 Gerot Lannach-Ceratin Assets Pharmaceuticals Valeant Pharmaceuticals International, Inc.

Eyetech and Probiotica Laboratories Ltda Certain assets 185

5 Natur Produkt International, JSC Pharmaceuticals Valeant Pharmaceuticals

International, Inc. Renova Group 100.0% 185

6 Kazankompressormash JSC Equipment and machinery HMS Hydraulic Machines PLC SINKh 74.5% 168

7 Sachman Rambaudi S.p.A.; Jobs SpA; Sigma; DMC

Equipment and machinery Fair Friend Enterprise Group Borodino 100.0% 167

8 OJSC Power Machines Equipment and machinery Highstat Ltd Minority shareholders 13.1% 163

9 United Medical Group Ltd Healthcare Baring Vostok PE Fund IV Ex-shareholders of UMG Limited 27.0% 100

10 Kazan Helicopters, JSC Aerospace Russian Helicopters, JSC Minority shareholders 13.7% 78

Ten largest transactions total 2,407As a % of total other markets deal value 72.2%

AerospaceAutomotiveChemicalsEngineeringEquipment and machinery

ForestryHealthcarePharmaceuticalsLeisure and tourismOther

Deal value by sector in 2012

5%

36%

7%2%18%

6%

7%

13%

2%



Outlook

The Russian M&A market is still relatively less developed outside of the eight key sectors separately analyzed in this survey, as refl ected by our analysis of ‘other markets’.

However, it is likely that there will be further activity within the diversifi ed industrials sector, as large fi nancial groups continue building strategically focused investment portfolios, and divest non-core assets as part of this strategy.

State-owned enterprises such as Russian Technologies, RUSNANO and the Federal Agency for Management of State Property (FAUGI), will continue to play a key role by divesting assets which are not considered to be core to their long-term objectives and by building their presence in strategically important sectors and asset classes. We also expect to see further consolidation within the aerospace sector, driven in part by the government’s objective to build dominant positions in specifi c segments of the market.

The pharmaceutical and healthcare sectors are anticipated to remain active during 2013, driven by population demographics and aspirations to improve the overall quality of healthcare service.

Other markets



Our report is based on a internal KPMG database which was compiled using information available from MergerMarket and Thompson Reuters. Our database includes deals which were completed in the period from 1 January 2012 to 31 December 2012, or were announced during this period but were still pending at 31 December 2012.

Financial details for a number of the completed and announced deals included in the MergerMarket and Thompson Reuters information were not disclosed. We have supplemented information from these sources with additional KPMG research to identify or estimate deal values using other sources, including for example press releases issued by the target, acquirer or vendor, Bloomberg, DealWatch Russia and M&A Journal. We have excluded deals where it has not been possible to determine deal values from other sources, as well as certain ‘non-commercial’ transactions such as the transfer of assets from one state-owned enterprise to another.

Figures disclosed within our report on the value and number of Russian M&A deals include domestic transactions where the target and acquirer are Russian, as well as cross-border deals where either the target (inbound) or acquirer (outbound) is Russian.

Data on the Russian M&A market in 2012 was compared to the data for 2011 based on the KPMG database and sources mentioned above. Historical data presented in this report may differ from earlier versions of the survey where databases have been retrospectively updated.

Deals are allocated to individual industry sectors based on the industry sector of the target, which may involve using our judgment and in such cases the allocation is therefore subjective. We have not been able to extensively verify all data and cannot be held responsible for the absolute accuracy and completeness thereof.

Analysis of different data sources and data sets may yield deviating results to those presented in this report.



MoscowNizhny Novgorod

Kazan

St.Petersburg

Ekaterinburg

Novosibirsk

Rostov-on-DonDonetsk

Tbilisi

Baku

BishkekAlmaty

AstanaYerevan

Lvov

Atyrau Krasnoyarsk

PermKiev

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Russia.

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

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Sean TiernanHead of Transactions and RestructuringPartnerT: + 7 (495) 937 4477 E: [email protected]

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Peter LatosTransactions and RestructuringDirectorT: + 7 (495) 937 4477 E: [email protected]

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Russia M&A

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