Leveraged Buyouts as a Driver of the Russian M&A Market

Maxim Rakita
Managing Director, Corporate Finance
National Bank TRUST

It is no secret that the Russian M&A market contracted drastically during the crisis in 2008-2009. According to various estimates, the market lost up to 100 percent in deal-value terms and up to 50 percent to 80 percent in terms of deal numbers. This naturally had a major impact on the work of consultants for this kind of deal.

Investor activity remains low, and there is nothing much to boast about on the sell side, either — the only firms voluntarily putting themselves up for sale are those that otherwise would not be able to survive. All else being equal, their assets are of fairly low investment interest. Now all consultants in this sphere are full of optimism about the Russian M&A market and are engaged in finding gems among these firms and in offering them to the small number of investors currently receptive to these deals.

These “gem” firms should possess a number of characteristics that, in the current conditions, make them attractive to potential investors. They should belong to a sector not showing a significant downward trend in the last year, and they should have a low level of leverage, no excess production capacity, clear development prospects and the ability to successfully “digest” investments.

The growth potential of many sectors oriented toward mass consumption lies in consolidation. Many markets still have an extremely low level of concentration, which limits the firms’ capacities for managing their costs and makes them uncompetitive against larger rivals. The latter, as experience has shown, are very much interested in acquiring their smaller comrades, but often they do not have the financial capacity to carry out such deals.

Leveraged buyouts, or LBO deals, have a serious chance of becoming the driving force behind the Russian M&A market, meaning that investors involved in these processes also will demand that consultants provide them with assistance in organizing financing for such transactions. Collaboration with investment banking consultants able to organize and help finance LBO deals could be extremely useful for all of the parties involved.

In the absence of a significant number of reliable borrowers, LBO deals could be an excellent means for banks to expand their credit portfolios, as this form of lending allows the bank-organizer to minimize credit risk through involvement in all aspects of the deal — including in selecting an acquisition target, analyzing strategy in detail, developing a transaction plan, working on business optimization, exerting post-deal asset control, and receiving assets of the target company as collateral. Meanwhile, the buy-side company gains a unique opportunity to achieve horizontal or vertical integration without pulling significant funds out of its core business activities.