The Mergers and Acquisitions Market: M&A Kazakh Style
Sergey Frangulidi, financial analyst at RESMI Finance and Investment House
The merger and acquisition processes have become more dynamic in Kazakhstan and have shown significant changes in terms of both quality and quantity over the past year. The trend is an important indication of the development of sectoral markets and is a reflection of the current processes.
At the end of 2007, the overall volume of Kazakh deals reached $10bn or about 9.1% of GDP, exceeding the figure for 2006 by 7% (chart 1). There has also been an increase in the number of deals: from 35 in 2006 to 50 in 20071, with each deal valued at an average of $195-205m ($300-315m the year before).
1. We took account of deals publicised in the media, although in nearly 70% of the publicised deals the sum was not made public. In this case we estimated $500-600m.
One of the trends in 2007 was a changed M&A market in terms of sectors. Although the hydrocarbon industry remains the largest, its share is gradually decreasing in favour of other sectors (charts 2 and 3). Most of the M&A were in the hydrocarbon industry, financial, and the mining and metals industry. The overall value of mergers and acquisitions in each sector exceeded $1bn, and it is the first time that the mining and metals industry has achieved such a result. In all other sectors, the M&A activity was insignificant, generally no more than $200m.
Figures from Thomson Financial show that, in 2007, the overall value of mergers and acquisitions worldwide was $4.5 trillion, 24% higher than in 2006. The world financial crisis has affected the M&A market as well. Compared to the same period in 2006, the number of such deals worldwide in the third quarter fell by 27% and in the last six months by 46%. Since July, there has only been one major deal (over $5bn), whereas in the first six months of the year there were 32 such deals.
International Mergers and Acquisitions
If we look at foreign mergers and acquisitions (charts 4, 5), in 2007, they showed an increase of 16.7%, accоunting for the lion’s share (84%) of the overall domestic M&A market. Cross-border acquisitions by Kazakh companies are the most graphic expression of this trend. Kazakh companies invested about $3bn in cross-border acquisitions, 6.7 times more than in 2006. Most of that (54%) was in the hydrocarbon industry, with KazMunaiGas acquiring a 75% interest in Rompetrol Group NV (RG) for $1.65bn. The transaction allowed KazMunaiGas to change its status from that of a recipient of foreign investment to that of a donor. It is followed by the mining and metals industry with a value of over $1bn. It shows that domestic companies are now joining the fight over raw resources worldwide. The trend in the financial sector, with the value of about $300-400m, remained the same as far as foreign takeovers of Kazakh banks were concerned.
Foreign acquisition of Kazakh companies has fallen (this includes the acquisition of companies with foreign involvement, and operating in Kazakhstan) to $3.7bn. Unlike before, 2007 was notable for diversification. The reduction in the hydrocarbon industry’s share was partially compensated by a considerable increase in activity in the financial sector. The main deal was the takeover of ATF Bank by the Italian UniCredit. Despite the instability of international financial markets, the sector continues to attract foreign banks. The Austrian Raiffeisen International Bank and the Russian VTB bank, in particular, have shown interest in the Kazakh market. Despite the cross-border expansion of recent years, foreign players are more active on Kazakhstan’s financial markets than local banks abroad. Foreign players are also making larger acquisitions; the value of the ATF Bank deal alone is much higher than that of all Kazakh transactions abroad.
The mining and metals industry is also of great interest. Thus Severstal, an international mining and steel company, has announced the acquisition of Celtic Resources2 Holdings, which owns gold mining assets in Kazakhstan. Foreign investors are also interested in the media and TV and radio broadcasting business.
2. Since Celtic Resources (Ireland) holds mining assets in Kazakhstan (100% in the Suzdal’ goldmine, 75% in the Zherek mine in East Kazakhstan Oblast, and also 50% in the Shorskiy molybdenum mine), we regarded this deal as a purchase of assets in Kazakhstan by a foreign player.
Domestic M&A transactions on the internal market3 account for 16% of the overall value. The reduction in Kazakh M&A transactions by a factor of 2.8 in 2006 is an indication that Kazakh business is reassessing risks due to the instability on international financial markets. The largest is the mining and metals sector. It shows a consolidation of assets in this sector.
3. This also includes deals with enterprises with foreign involvement and operating in Kazakhstan. In calculating the value of these mergers and acquisitions we have not included deals involving the sale of an option for the acquisition of a stake in Kazgermunai and CITIC by KazMunaiGas E&P from KazMunaiGas, which acquired these shares in 2006.
Oil and Gas Mergers and Acquisitions
In 2007, the oil and gas sector accounted for 46% of M&A activity, whereas in 2006 and 2005 it accounted for 83% and 91%4 respectively. Last year, all deals in that sector were valued at $4.6bn, a decrease of 41% on the previous period.
4. The figure for 2005 has been taken from the company Ernst and Young.
The most expensive acquisition of foreign assets by a Kazakh company was the purchase of a 75% interest in Rompetrol Group NV (RG) by KazMunaiGas for $1.65bn. Considering that competition among countries for energy resources has become much tougher, this deal is of strategic importance to Kazakhstan. High profitability and favourable market conditions make the European oil refining M&A sector very attractive and this is why KazMunaiGas has made several foreign acquisition attempts. It looked into the possibility of acquiring the Lithuanian company Mazeikiu Nafta, the Czech Unipetrol and the oil terminal Ventspils Nafta in Latvia. In 2007, KazMunaiGas showed interest in the Turkish Pet Kim and Croatian INA. The purchase of Rompetrol will enable Kazmunaigas to carry out its plans. Not only did it acquire a refining asset, but it also gained the opportunity to sell oil products to Europe, both wholesale and retail.5
5. Rompetrol owns 630 petrol stations in seven European countries and two oil refineries. Rompetrol’s oil refining capacity exceeds 4 million tonnes, and its annual sales total 7 million tonnes of oil products.
KazMunaiGas has also consolidated its status as the main oil player on the domestic market. It concluded two major deals involving the sale of an option for the acquisition of a 50% share in Kazgermunai ($978m) and CITIC Canada Petroleum Limited ($930 m) to its subsidiary KazMunaiGas Exploration & Production. The acquisition has allowed the consolidation of the latter and turned it into the country’s second largest oil extracting company after Tengizchevroil.
There was another major M&A in the hydrocarbon industry with foreign involvement: LUKOIL Overseas completed a deal to sell to Mittal Investment a 50% stake in Caspian Investments Resources, which in turn owns Nelson Resources. The latter has been involved in a number of oil extracting projects in Kazakhstan. The deal was valued at $980m. By bringing on board such a strategic investor, LUKOIL Overseas will not only be able to invest in the oil extraction sector but also acquire other Kazakh assets and gain access to the Indian market. For Mittal Investment, this is an opportunity to diversify its assets. Also, having access to hydrocarbons is important to India’s drive to satisfy its growing demand for energy resources.
The acquisition of the oil extracting company Uralneftegaz by Kazneftekhim is an example of vertical integration in the sector that will enable the buyer to meet its needs for hydrocarbons.
Financial Mergers and Acquisitions
Mergers and acquisitions in the financial sector have shown significant changes in terms of both quality and quantity. The sector’s share of the mergers and acquisitions market totals 48%. The volume of deals has reached $2.7bn, exceeding the figure for 2006 by a factor of 2.6. There has also been an increase in their number: from 17 in 2006 to 24 in 2007. But this sector has been affected by the instability of international financial markets. The wave of correction which began in the second half of 2007 has inevitably led to liquidity problems in the banking sector and to a fall in the quotations of securities issued by Kazakh institutions, and especially banks. This is because the growth they built into the estimation of their value has not been borne out in the given situation. Banks dependent on foreign loans were put at risk of refinancing, which could theoretically lead to a default on their obligations. This is what led to a fall in their credit ratings. Foreign investors, for whom the ratings of developing markets form important criteria for risk, started getting rid of securities issued by Kazakh banking institutions. As a result there has been a sharp fall in the quotations of their securities: among certain banks it has reached 40%. From July to November the volume of securities in nominal holding held in the accounts of non-residents at the Central Depositary fell by 31%, or 468,384 million tenge.
The adverse events on the market have also had an effect on the level of Kazakh merger and acquisition deals, the total value of which fell in the second half of 2007 by 90%. At the same time, virtually all deals were reduced to the purchase and sale of small packages designed to consolidate control.
That said, the first half of 2007 was very rich in mergers and acquisitions. The largest was the acquisition of ATFBank by the Italian financial group UniCredit through Bank Austria-Creditanstalt AG which forms part of its structure. This deal, totalling $2.175bn, accounts for about 81% of all mergers and acquisitions in the financial sector. This is the first sale in Kazakh banking history of such a major player to a foreign “strategic operator”. In spite of the reverberations of instability on the financial markets, the deal went through, and very successfully for the sellers. ATF Bank was bought for 4.4 of its book value. In comparison, Sberbank acquired TexakaBank for less than 3.7 book value, while the P/BV ratio at the moment when the shares of Alliance Bank were listed was about 3.3.
Kazakh banks have remained the main players in the financial sector on the mergers and acquisitions market, whose activity is marked by business expansion, including through the acquisition of non-banking financial assets. In a narrow domestic market they have exploited the favourable growth opportunities provided by their access to cheap loans, and they have invested in foreign assets. Early 2007 was marked by the continuing trend of their expansion abroad. Thus, the non-banking financial group Astana-Finance made an entry to the Russian market with the acquisition of Alfa-Bank Bashkortostan for $15m.
The first acquisition in Russia was completed by Seimar Alliance Financial Corporation (SAFC), which owns Alliance Bank. It bought 92.75% of shares in Tyumen’s StarBank for $50m. The corporation was hoping to use it to develop retail business in the region, which is among the leaders in terms of income among the Russian public. At the same time, Alliance Bank sold the subsidiary FinanceCreditBank KAB to a group of private Kazakh investors. After issuing its IPO for Alliance Bank, SAFC also planned to buy Petrokommerts, which is among the top 20 Russian banks. But the correction to the markets which began in the second half of last year forced the shareholders to adjust their plans and the deal did not go through.
The remaining deals on foreign markets relate not so much to expansion as to increased control in various assets. In particular, BTA increased its stake in the leading Ukrainian insurance company Oranta, acquiring by auction 25% of the state stake for $99.2m (prior to this its affiliated structures already held 45%). The company was rated at nearly four insurance premium multipliers. But BTA is now taking ownership of a promising insurance asset with an extensive network of branches. In addition, BTA has increased its share in the Ukrainian BTA Bank, and has also acquired Ineximbank (Kyrgyzstan) from the subsidiary Temirbank for $20.3m.
As part of the expansion of the Kazkommertsbank group, 50% of the Russian investment company East Capital was bought for $6.8m, as was a small share (3%) in GK Viktoriya, which operates in the food retail sector. In addition, Kazkommertsbank has acquired 100-per-cent legal control of Moskommertsbank after buying 52.11% of its shares.
Eurasian Bank has struck a number of deals aimed at consolidating its already existing affiliates. These include acquisition of 100% of the shares in the insurance company Eurasia and in Bailyk Asset Management.
In overall terms, both the insurance sector and the management and investment companies market, against the backdrop of development in the securities market, are becoming more and more attractive to foreign investors. Thus the German insurance concern Allianz Group, in expanding its presence in the CIS, has acquired 100% of the shares in ATF-Policy. According to some reports, the deal totalled $30m. In addition, Allianz concluded a three-year contract with ATF Bank under which the insurance company has to conduct its sales through its banking outlets.
Hanwha Securities bought 50% of the investment company Seven Rivers Capital, which recently announced that it would provide consultation services for the retail investment fund in South Korea, which intends to invest in Kazakh assets.
KIT Fortis Investments is already present on the domestic management companies market. Russian Renaissance Capital and Parex Asset Management from Latvia have already opened offices. Against the backdrop of the problems in the banking sector the prospects of the securities market are improving, and we will probably hear of new deals there this year.
Mining and Metals Mergers and Acquisitions
The high level of profitability in the mining and metals industry, along with the increase in prices of all base metals and raw materials, makes this sector especially attractive for merger and acquisition deals. The overall value of mergers and acquisitions in the sector has shown most growth among the main markets, reaching $2.53bn, which is eight times the figure for 2006.
With the international competition for raw material assets, this sector was distinguished by processes of consolidation, and vertical and horizontal integration among the players, as methods of intensifying their global influence.
Among the most notable deals in the Kazakh mining and metals industry was the acquisition by Kazatomprom of 10% of shares in the company Westinghouse, 77% of which belongs to Toshiba. The American subsidiary of the Japanese industrial giant specialises in the construction of nuclear power plants and controls over 50% of the world atomic reactors market. The deal totalled $540m. The importance of the deal to the Kazakh company lies in the opportunity to gain access to technologies and world markets for the sale of nuclear fuel. From the point of view of strategic and political significance, it is intended to continue the move into the market for the production of closed-cycle goods and, consequently, to reduce technological and production dependence on Russia.
Gold mining accounts for the bulk (about 40%) of deals in the mining and metals industry, which is essentially a continuation of the previous year’s trend. The interest in this sector can be explained by the considerable growth in the price of gold, which follows the rise in the value of oil and the weakening of the dollar. This precious metal has been going up in price for six consecutive years, which is linked to the increase in China’s purchasing power. But in 2007 the main catalyst for the 31% price rise (to $834 per ounce) was the growing interest in investments in gold as a means of sitting out the troubled times. With the instability in the US economy and the deterioration in the world financial climate, the price of gold in March 2008 had already gone beyond $1,000 per ounce. So gold mining assets are of interest to both local and foreign investors. Most active in the market have been Kazakh companies, which is gratifying.
In 2007, while diversifying the geography of its business, KazakhGold strengthened its positions – its latest foreign acquisition has been a number of assets belonging to a British firm, Oxus Gold. In particular, KazakhGold acquired the mining company Norox Mining Company Ltd, which owns 66.67% in the Talas Gold Mining Company, which in turn owns the mining enrichment plant at the Jeruy field in Kyrgyzstan. It has also increased its stake in Romaltyn to 100% and has bought 86% of shares in the company Marakand Minerals in Turkey. Thus, the overall value of KazakhGold’s “purchases” totals $152m.
The investment holding Visor acquired a 50% stake in the company Jeruy Altyn, the second largest gold-ore field in Kyrgyzstan, 60% of which belonged to the Austrian company GC Holding GmbH. The new investors have announced major investments in the development of the field.
A major deal on the domestic market was the acquisition by Kazakhmys, for $260m, of 96.34% of the shares in the company Eurasia Gold, which owns fields in Kazakhstan and Kyrgyzstan. The deal represents another step by the copper giant in the implementation of its strategy of diversification. Another major deal in the mining and metals industry was the purchase by Kazakhmys of 18.8% of shares in ENRC. The sale of the previously offered EPA option cost the corporation $806.7m. A possible merger of Kazakhmys and ENRC would make it possible to create a company along the lines of BHP Billiton and Rio Tinto.
Among foreign deals in the gold mining industry it is worth noting the agreement on the acquisition of Celtic Resources Holdings by Russia’s Severstal, which offered about $305m for 81.1% of the shares in the Irish company.
Kazphosphate, the largest producer of yellow phosporus in the CIS, was acquired by a group of Kazakh businesspeople for $120m. It is believed that the new owners intend to issue an IPO on the LSE. Considering the company’s good resource base and the favourable situation on the market for mineral fertilisers and chemical goods, this asset could be an interesting target for new deals.
Kazzinc increased its stake in the company Novo-Shirokinskiy Rudnik, and also made an offer for the purchase of the remaining share of the project for the development of the polymetallic field Novoshirokinskoye. It would appear that the company is being forced to diversify its business by the continuing fall in world zinc prices.
Mergers and Acquisitions in Other Sectors
On the telecommunications market, the company Kar-Tel, controlled by the Russian Vympelkom, entered a related market, buying 49% of the Kazakh fixed-line operator TNS-Plus for $5m. This will enable Kar-Tel to use the resources of TNS-Plus for its traffic, rather than the Kazakhtelekom channels.
The Russian company STS-Media acquired 20% of the TV and radio company 31 Kanal. The deal is estimated at $151m. At the same time a new holding is being created in which STS-Media gains control of all companies affiliated with 31 Kanal, including those engaged in advertising. The overall size of the Kazakh media-advertising market, according to TNS Gallup Media Asia, in 2006 alone grew by 37%, reaching $651m, 75% of which was accounted for by television.
Two other deals testify to the attractiveness of the advertising and media markets. The French company JCDecaux acquired 50% of shares in the RTS Perekryostok. This network operates in quite a narrow segment of the street advertising market and holds about 10% of the external advertising market, which overall totals about 38 million tenge. Meanwhile, in terms of speed of growth the Kazakh advertising market holds third place in the world. Michael von Schlippe from the publishing house IMSM (a subsidiary company of the Finnish holding SanomaWSOY in Russia) spent $10m on the acquisition of 20% in ID Partners Media Group, which publishes the Kazakh version of the magazines Harper’s Bazaar, Robb Report and Esquire.
The real estate sector, which is experiencing problems, showed quite modest results. The only thing of note is the acquisition by the company Astana-Nedvizhimost’ of a 100% package of the shares in ZhK Astana and 70% of the shares in Akzhayyk-Nedvizhimost’. But Kazakh investors are continuing to put their capital into projects abroad. Thus, Bargan Development acquired a hotel complex in Georgia for $1.72m, which had been in 100% state administration. According to the terms of the auction, the investor has to invest $3m in the development of the complex. It should be noted that Kazakhstan is one of the main investors in the hospitality industry in Georgia.
A consolidation of assets on the regional market for the production of cardboard and paper goods is indicated by the acquisition of the company Kazupak Ltd by the company Kazakhstan Kagazy for $5m. In addition to this, Kazakhstan Kagazy is taking on the debts of the latter totalling $3m. This deal should strengthen the company’s position on the regional market. It is worth pointing out that just prior to the deal Kazakhstan Kagazy issued an IPO on the LSE, thereby becoming the first company from Kazakhstan’s processing industry to be listed on a Western stock exchange.
Prospects for the Mergers and Acquisitions Market
Instability on the world markets has directly or indirectly affected the development of Kazakh business. In this situation the players are forced to take a certain time-out in order to adjust their strategy and reassess the factors of growth and risk. The difficulties that have arisen should act as a spur to companies in their search for new outlets and levers for development. Investors have to seek out new areas for their capital investments. This means primarily acquisitions of real assets. The metals, mining and oil industries remain very attractive since there is not as yet any sign of a fall in the prices of output in these sectors.
We should certainly expect continued processes of consolidation and diversification. The major industrial giants possess substantial financial resources and capitalisation, which will enable them to acquire foreign assets both from their own funds and from loans. The state again promises to become the main player in the oil and gas industry in the form of KazMunaiGas or its subsidiary structures. Thus, in late 2007 KazMunaiGas had already announced the acquisition of a controlling stake in the company Mangistaumunaigas. As before, the state intends to reinforce its role in the strategic sectors of the economy. If the oil and gas industry has already demonstrated this, then the possible creation of a national mining company indicates a stepping up of this process in the mining and metals industry.
Interest in oil assets on the part of foreign investors, in particular Chinese and Russian, indicates that deals with other foreign companies controlling oil and gas assets in Kazakhstan and the Central Asian region are probable.
The financial sector, which is suffering from the poor current situation on world markets, looks very promising from the point of view of merger and acquisition processes. It is natural that, in the light of the current situation Kazakh banks are being undervalued, but the addition of foreign strategic investors from among the major financial institutions which have suffered least from the problems associated with subprime mortgage credits will increase the chances of development for banking institutions by expanding opportunities for securitisation, improving technology and the quality of business processes, and so on. But there is as yet no reason to talk about any foreign expansion on the part of Kazakh banks.
Merger and acquisition processes are also likely on the oversaturated market of investment management companies, the number of which, against the backdrop of impressive growth figures in recent years, has multiplied. Now, in conditions of instability, the difficulties that have arisen will show each player for what they are and the weakest of them will leave the market.
Against the background of ever increasing consumption and the worldwide growth in food prices, we can expect the fight for assets on the FMCG markets to intensify. The as yet weakly consolidated domestic agricultural and food sector and retail sector offer good prospects. It is the merger and acquisition processes that will drive the growth and strength of the still unconsolidated Kazakh agricultural and FMCG players, and it is possible that foreign companies will become involved.
In our view, the merger and acquisition processes in Kazakhstan will continue to develop: in the mining and metals sector and in industry we can expect an increase in deals involving Kazakh companies, the financial sector will most likely remain the main recipient of investment from foreign “strategic players”, and the promising consumer sector should move to a stage of more active development.
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