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M&A market review in the Ukrainian agricultural sector in 2018

The seller has the upper hand: at the M&A market in the Ukrainian agricultural sector the demand outpaces supply, buyers are ready to overpay...

InVenture Investment Group and Landlord magazine has interviewed the main market actors - investment-banking and legal services providers on the main M&A market development trends in the agricultural sector of Ukraine.

In the interview took part representatives of Dragon Capital, Concorde Capital, Alexandrov & Partners, Asters Law Firm and InVenture.

1. Describe TOP-3 main trends at the M&A market in the agricultural sector of Ukraine in 2018?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

  1. Market redistribution between the companies that have already in operating (their optimizing behavior). In a long while of relative stagnation after the crisis and destabilization in the country (although at the M&A market deals were even in this time), companies became active. Today the main trend and necessary is work on structure effectivization and optimization. Therefore holdings sell ineffective parts of the structure.
  1.   The large investors outside Ukrainian market show interest to the Ukrainian agriculture sector.  It has been observed that foreign investors without work experience have become more interested in purchase large amounts of land. The deals for entering the Ukrainian market are expected in 2019-2020.
  1. There was a certain kind of phenomenon after the financial crisis when investors formed a land bank with a concentration of small agricultural enterprises, processing 1,000-2,000 ha.  Now there is a growing number of land in a single deal.

Sergey Chuikin, Managing Director of Investment Banking Department, Concorde Capital

  1. There is a continued market consolidation  - larger players buy/merger the smaller ones.
  2.  The cost of agricultural farms is growing mainly due to the cost increase in land lease rights.
  3.  Slightly changing the geography of acquisitions  - investors became more interested in northern and western regions of Ukraine. One of the reasons is a slight climate change - the humidity shift gradually from south to north.

Yuri Astakhov, Director of Investment Banking, Dragon Capital

The growing interest of foreign investors, the further land price increase with lease rights and secure of seller’s market status due to disproportionality between supply and demand for high-quality assets.

Alexey Demyanenko, Partner at Asters Law Firm

  1. The dominance of domestic investors, the land bank expansion with current agrarians by assets consolidation.
  2. The need to expand the area of cultivated land,  low demand for equipment and real estate.
  3. Getting the purchase price for assets outside Ukraine.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

  1. Foreign investors continue to consider the possible merger of agricultural assets in Ukraine. They both interested in the companies that already operate at the market and in new players.
  1. The most active and confident are domestic investors with medium-size capital, who managed a Ukrainian land bank from 5,000.
  1. A lot of M&A deals have fallen through in 2018 due to the discrepancy between price expectations of agribusiness owners and asset pricing of potential buyers.

2. How do you assess the price development of agricultural assets in Ukraine in 2018? What are the main factors, that changing the price?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

The main factor has always been the state of the company.  If it's a good-operating business with well-established processes and well-formed land bank, the price is higher.  Due diligence is essential for a business purchase. Layers and auditors have to check not only the deal risks but also define business shortcomings which can be used as an argument to lower the price.

In general, there were two factors in 2018:

  1. The market price increase in general. Today company fighting for every shareholder and almost all land in a medium or long-term lease. Therefore good agricultural enterprises are bought up very quickly. In case of SME, buyers give a down payment for company purchase in cash and even without proper legal documentation. Sometimes speed erases risks.
  1. Along with price increase, it is increased sellers' requests.  In 2018 there were more cases when the seller requires the advance payment at the lesser of 10% from the enterprise value to allow layers to do an audit.

Also, sellers are extremely tenacious and tough concerning prices. They act under the principle "Either you buy with money that I named, or I will find another buyer."

Sergiy Chuikin, Managing Director of Investment Banking Department  in Concorde Capital

The agriculture assets prices are increased over the past few years and are going to rise in 2018. The main factor is the price increase of the land lease rights. The profit investment ratio of plant growing is gradually equating to investment yield in any other real economy of Ukraine - a payback in 5 years.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

The development is positive, although the pace is slowed down.  The main drivers are the smaller supply's volume of quality farms than in previous years.  The market is already much more consolidated. Now the prospect of land reform no longer looks so illusory as 3-5 years ago.

Alexey Demyanenko, Partner at Asters Law Firm

The main price factors are region of land location and soil quality; the area of cultivated land; and the duration of the registered lease agreements.

Expanding land bank, some farmers offer a high price for land in proximity to their clusters, especially for registered lease rights with a residual term from 5 years.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

In Ukraine, the cost for the agricultural land use right is rising year on year. For example, if in 2004 we completed the deals on the sale of agricultural companies with the lease right for 7 years at $350 - $400  per 1 ha, in 2018 owners estimate such land for $1000-1300 per 1 ha.

3. How do you evaluate the balance of investors' demand and sale offers of agricultural companies?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

Now the advantage is clearly on the buyers' side -  requests exceed offers. But you should always pay attention to the assets' quality. It's quite common when under the guise of the operating company it is selled a half-dead enterprise with doubtful land title and old equipment. As for the high-quality structured business, the demand is extremely high.

Sergiy Chuikin, Managing Director of Investment Banking Department  in Concorde Capital

The market demand for agricultural assets exceeds supply. However, there are a few offers in comparison to a lot of people willing to expand land bank almost in all regions of Ukraine.

Alexey Demyanenko, Partner at Asters Law Firm

There are demand and supply at the market, but price expectations of buyers and sellers do not match often.

The sellers are interested to sell an asset entirely - with the equipment and premises. Buyers have its own. Therefore their interest is limited with rental rights.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

At the Ukrainian market, there is definitely a lack of supply on agricultural companies for sale in plant growing with high soil quality and land bank size from 1,000 to 10,000 ha.

4. What are the main reasons for sale agricultural companies in Ukraine in 2018?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

The main reason for sale agricultural companies in 2018 is cut off a part of the ineffective business by the holding. For example,  the production remoteness from elevator complex creates an inefficient transport leg, etc.

Far too often the sale of an ineffective asset is followed by the purchase of another one - more attractive and convenient. Holdings start to move in this sequence (first sale and then purchase) in order to avoid raising foreign money and deriving circulating capital for the quick acquisition of a new enterprise.

If we talk about selling 100% share, not a part of the business, the reasons for assets disposal were connected with the owner's temptation to sell the company on favorable terms.  It often happens this way: the owner put up the company for sale at an attractive price for him (although it's often overpriced) and keeps working. If business in good condition, the buyer ready to pay the estimated price will be found quite quickly. The business seller does not always completely leaves the agricultural complex - he buys another smaller enterprise, and begins develop it, staying with business and with part of the earnings.

Sergiy Chuikin, Managing Director of Investment Banking Department in Concorde Capital

As a rule, business sales the one, for whom plant growing isn't the key or main business, the one with financial difficulties, who has a high debt load,  and the one to solve their financial issues this way.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

Generally, this is private obligations of the shareholder-sellers or the land-bank optimization. It is important to note that reinvestment in other sectors, including renewable energy and real estate.

Alexey Demyanenko, Partner at Asters Law Firm

Start of another business. The favorable offer from the buyer.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

The main reasons for owners to sale agricultural companies can be divided into the following categories: sale due to health deterioration; old age and default of issue to effectively manage agribusiness; emigration; problems with the financial condition of the business; pressure from the competitors (neighbors).

5. How do you assess the attractiveness of the Ukrainian agricultural sector in terms of purchase the agricultural companies in 2018? What type of investors is interested in investment in the agricultural sector of Ukraine?

Oksana Kryzhanovskaya, Senior Partner in Alexandrov & Partners

The Ukrainian agricultural sector has always been and remains an attractive investment haven. In 2018 all types of investors behaved quite aсtively:

- Producers of niche crops and organics. Also, investors were interested in gardening, where showed small amounts of land plots - 100-1,000 ha.

- There are a lot of small foreign farmers, who wants to create a small agribusiness in Ukraine - about 1,000 ha.

- The middle segment buys up to 8,000 ha.

- Large investors.  There were quite a lot of requests for the formation of a land bank in the amount from 10,000 ha.

- The particularly large system investors (from 20,000 ha), for examples pool of funds or individual foreign funds, are looking for possibilities at the Ukrainian markets but shows high interest.

Sergiy Chuikin, Managing Director of Investment Banking Department  in Concorde Capital

The agricultural sector is one of the most attractive investment industries in Ukraine. On the one hand,  over the past few years, we see the intensification of M&A activity in the agricultural sector, but on the other hand, we don't see a large number of new players at the market, especially foreign ones - generally, all deals are domestically between local players.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

Ukraine still has high country risks for foreign investors and international strategic investors, who seek a diversification and cost-effective resource base.

For financial investors, private equity in the plant growth is rather an exception.

Alexey Demyanenko, Partner at Asters Law Firm

The dominance of domestic investors.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

The portrait of current buyers of agricultural assets in Ukraine:

- private farmers, succeeding in agribusiness in order to increase land under management;

- Ukrainian and foreign agriholdings in order to expand and optimize a land bank;

- agritraders in order to build vertical integration;

- new players, change of business activity.

6. How active are foreign investors, who do not operate in Ukraine, in order to enter our market by M&A deals?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

The activity of foreign investors is high. Most of them want to acquire 100% for the agricultural enterprise for business activity.  They rarely consider the idea to create a partnership with Ukrainian businessmen.

Herewith there are several factors, which impact on investor's desire to buy a Ukrainian enterprise:

- the quality of the land and  the relief;

- the maximum absence of cut up fields;

- long-term lease agreement.

The price of the enterprise has a secondary importance.  If an agricultural company fits for an investor, he will buy it even overpriced and with assets, what seller sells 'in load' (for example, old equipment).

Sergiy Chuikin, Managing Director of Investment Banking Department  in Concorde Capital

Unfortunately, foreign investors are not very active.  The main reason is the country risk and the negative experience in the past.  A large number of large foreign funds and strategic investors do not consider Ukraine for investments due to the political situation.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

More actively than before. A lot of foreigners enter the market from  Russia, where they have already tried to have agribusiness and now see advantages in Ukraine.

Alexey Demyanenko, Partner at Asters Law Firm

The number of deals increases compared to previous years.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

Now we see several large strategic foreign investors, which consider the possibility to enter the  Ukrainian agricultural market today. They consider the land bank with the amount from 30,000 ha - 100,000 ha. There are also several individuals from Europe and the East.

7.  Is the moratorium the main bottleneck to purchase the agricultural companies in Ukraine? What number and volume M&A deals could we expect in case of moratorium lifting at the beginning of the year?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

More yes than no. In Ukraine, there is an established mechanism to acquire land rights,  namely the purchase of corporate rights of the company with which we signed lease agreements.

We doubt, that when a moratorium would be canceled, the number of M&A deals in the agricultural sector will increase, taking into account that such mechanism will be relevant for many years after lifting of the moratorium because lease agreements often signed for 7 years and more.

In practice, each investor is interested in the prospect of opening a land market. This is a mandatory question, which is discussed right at the first meeting with consultants, lawyers or brokers.

Sergey Chuikin, Managing Director of Investment Banking Department in Concorde Capital

In my opinion, today a moratorium on land sale is the main obstacle to attract the large foreign capitals and significant development of the agricultural sector.

The moratorium lifting could be the trigger, that would allow attracting truly large investments in our country. It's hard to assess, what effect would we get. In my opinion, the volume of investments would be valued by tens of millions dollars.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

This is still one of the main factors, containing private equities in the sector.  A lot of investors would 'rush' here as soon as the full market would be opened.

Alexey Demyanenko, Partner at Asters Law Firm

I do not think so. The moratorium lifting will lead to the purchase of farmers lands, who are willing to sell it to existing tenants.  I expect many farmers refuse to sell.

Other agricultural companies will attempts  to pick up the land from the existing tenants.

Alexey Oleynikov, Managing Partner at InVenture  Investment Group

It is clear that  the opening of the Ukrainian agricultural land market will become a signal for many foreign investors to enter the agricultural market. At the same time, the decision of the foreign investors to buy assets will take quite a long time: after objects' due diligence, assessment of the market environment and legislation, the analyzing of features and the practice of land purchase by foreigners. Therefore the number of M&A deals will increase in 1-2 years after lifting of the moratorium.

8. What are the barriers and bottlenecks M&A deals grow in the agricultural sector of Ukraine?

Oksana Kryzhanovskaya, Senior Partner at Alexander & Partners

It's corruption, bureaucracy and military operations. Foreign investors are interested to invest in Ukrainian agro-industrial complex, but now monitoring these factors and waiting for the situation to stabilize.

Sergey Chuikin, Managing Director of Investment Banking Department in Concorde Capital

I would like to sign out the land reform. The moratorium is an anchor for the further development of the agricultural sector.  Besides a significant part of the market is still lies in shadow. The business transparency is one of the main terms to attract large foreign capital.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

The absence of the land market, rising assets value and corruption scare off foreigners.

Alexey Demyanenko, Partner at Asters Law Firm

The lack of confidence in the stability of the Ukrainian legal system, effective protection from raider attacks. Conflict at the East of Ukraine.

Alexey Oleynikov, Managing Partner at InVenture Investment Group

The negative business reputation of Ukraine, the imposition of martial law in certain regions of Ukraine will be an obstacle for the grow of M&A deals in the agricultural sector of Ukraine.

9. How do you assess 2019 from the perspective of the M&A market of the agricultural sector of Ukraine?

Oksana Kryzhanovskaya, Senior Partner at Alexandrov & Partners

In general, trends are going to rise. Large agricultural holdings are planning to develop, and have the loudest and the largest purchases.

In the case of Ukraine, it's illogical to give one scenario of M&A market development in the agricultural sector of Ukraine. We have too unstable politic and economic situation.  Therefore we can consider two options: pessimistic and optimistic scenarios

The optimistic scenario.  The market will develop extremely active.  The foreign investors became especially active.  But at first, we should fulfill a number of politic and economic conditions.

Pessimistic scenario. Many economists talk about the high risk of crisis after next elections and hryvnia’s meltdown. Therefore before the elections and after will be a downtime in investments and Ukrainian holdings will continue its optimization.

But in future M&A  deals in the agricultural sector of Ukraine will activate in any way (there is a huge amount of optimism in the pessimistic scenario).

Sergey Chuikin, Managing Director of Investment Banking Department in Concorde Capital

Taking into account future elections in Ukraine, I don't expect much activity and a large number of transactions at the market. Of course, there will be deals, there will continue consolidation at the market with large players. But I don't expect the large foreign capital in Ukraine in near future.

Yuri Astakhov, Director of Investment Banking in Dragon Capital

It's possible, that the activity will decrease slightly, but it certainly will not be lost.  According to election results, which would not have negative for the investment climate, the number of deals and investment glow will start to grow.

Alexey Demyanenko, Partner at Asters Law Firm

I do not expect significant changes as compared to 2018.

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