CEE and MEA M&A driven by distressed sales, consolidation and vertical integration, reveals Fitch

Whilst growth prospects for EM corporates are stronger than peers in developed markets, the key drivers for CEE and MEA M&A will remain vertical integration, portfolio rationalisation, consolidation and distressed sales. However, factors such as the uncertain operating outlook, the need for maintenance and organic capital expenditure, shareholder expectations of cash dividends and a desire to strengthen liquidity and to moderate leverage are limiting the appetite and capacity of many Fitch-rated CEE and MEA EM corporate issuers to be more active in M&A. The limited availability of finance also continues to constrain any pick up in M&A activity.

Reflecting the industry's relative stability and more limited prospects in developed markets, telecommunications continues to be one of the main sectors of M&A activity across the EMEA region, and Fitch believes this will continue to be the case, especially in Africa where further deals are anticipated. Recently concluded M&A transactions in the sector include OJSC Mobile Telesystems' (MTS, rated 'BB+'/Stable) acquisition of Comstar, Bharti's acquisition of Zain's African assets and OAO Megafon's (rated 'BB+'/Positive) acquisition of Synterra. In addition, Fitch foresees continued state privatisations such as the Zambian government's sale of a 75% stake in Zambia Telecom to Libya's Lap Green Investments. In Russia, steps to conclude a consolidation of the Syvazinvest regional operating companies under the Rostelecom umbrella are continuing. The combination of Svyazinvest assets is aimed at establishing a nationally-integrated Russian telecommunications operator.

In addition to consolidation driven by the need to improve vertical integration, industrial corporate M&A across the Commonwealth of Independent States (CIS) region is to a meaningful degree being facilitated by vendors who are looking to sell stakes in their companies to service or repay debt. Companies which have seen a change in their ownership and control during 2010 include Russneft, a top 10 Russian oil producer, the Industrial Union of Donbass, a sizeable Ukrainian steel producer and Uralkali, a Russian potash producer. A reverse takeover of KazakhGold by Russia's Polyus Gold is pending.

The CEE region has seen a rising level of interest and activity in the consumer segment with developed market corporates looking to position themselves in anticipation that consumption levels will rise in emerging markets. Recent examples include Nestle SA's (rated 'AA+', Stable) acquisition in February 2010 of LLC Technocom a culinary dehydrated products company located in Karkov, Ukraine, and Danone's decision to form a joint venture with OAO Unimilk (Unimilk) in Russia by merging its CIS regional business with Unimilk to form Danone-Unimilk (57% Danone and 43% Unimilk). As a result of the Unimilk transaction, Russia's OAO Wimm-Bill-Dann, which is keen on making its own acquisitions, bought out Danone's 18.4% stake.

Fitch expects that the Russian oil and gas industry will experience acquisition activity, as Russian producers are keen to acquire assets in CEE to improve their vertical integration. For example, AFK Sistema's (rated 'BB-'/Stable) has moved to acquire 49% of Russneft following its decision to take control of the Bashkir Oil and Energy Group in 2009. If successful, such a move could improve AFK Sistema's vertical integration by boosting upstream production to levels in line with its downstream refining capacity.

Acquisition activity in the Gulf Cooperation Council (GCC) region meanwhile remains depressed despite the fact that some sizeable transactions have been concluded in 2010 to date, including Barwa Real Estate Company's acquisition of Qatar Real Estate Investment Co QSC (rated 'BBB+'/ Stable) and Qatar Holding's acquisition of Harrods Limited in the UK.