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Cautious level of optimism in Russian M&A industry for the year ahead

The latest results of the Deal Drivers Russia survey, published by CMS in cooperation with mergermarket, reveal that optimism is returning to the M&A industry, albeit slowly.

Only one per cent of respondents thought that M&A activity will decrease during 2010, as against the views of 33 per cent at the end of 2009.

Deal makers in Russia are overwhelmingly optimistic about the future of Russian M&A with 81 per cent of those surveyed feeling positive about the prospects of the Russian economy in 2010 compared to 2009. An additional six per cent even claim to feel very positive about Russia’s M&A prospects.

Tight credit conditions and the lack of liquidity in the market are viewed as the biggest threats to the growth prospects of Russian firms over the next 12 months. Thirty two per cent of respondents view it as the greatest threat, while 30 per cent see it as a major issue.

Fifty eight per cent of those surveyed by mergermarket say that they expect the overall level of M&A activity in Russia to increase over the next 12 months, with a further three per cent even thinking it will increase greatly.

A sizable 48 per cent of respondents expect the TMT sector to witness the most M&A activity in Russia over the next 12 months – in stark contrast, a mere eight per cent felt the construction sector would be the hottest sector.

Sixty nine per cent of respondents consider that the bulk of Russian M&A transactions will be worth less than EUR250m over the next year.

Russian M&A activity over the course of 2010 is most likely to be driven by large corporates disposing of non-core assets according to nearly half of respondents (47 per cent).

An overwhelming majority of respondents feel that, over the course of 2010, an increasing number of cross-border acquirers will be targeting Russian assets (77 per cent).

Overseas TMT targets will attract the most attention from Russian outbound acquirers over 2010, say just over half of respondents (51 per cent), while foreign energy, mining and utilities assets also remain attractive for Russian buyers (38 per cent).

Forty per cent of respondents believe that the wider economy’s underlying weakness will pose the biggest challenge facing Russian firms looking to finance acquisitions over the next 12 months – a marked shift from similar findings in 2008, when the single largest obstacle facing Russian businesses looking to finance a deal was the cost of leverage.

More than half of respondents feel that the potential number of corporate defaults and restructurings in Russia over 2010 will remain similar to levels seen in 2009. Last year, however, the majority (83 per cent) expected the number to increase, perhaps suggesting that while the worst of the credit crisis is over.

Private equity deal making set to rebound in 2010, say 45 per cent of respondents, while 44 per cent think it will remain the same.

Securing deal finance is highlighted by over 50 per cent of respondents as at least a very serious obstacle facing private equity firms – with exactly one-third highlighting this as the most serious issue facing the asset class.

Respondents are split on whether foreign or local private equity firms will dominate the M&A landscape in 2010, polling nearly 50 per cent each, with private divestments and public takeovers likely to be the most frequent sources of private equity acquisitions in Russia next year.

2009 saw a total of 164 deals announced in Russia, worth a collective EUR17.6bn. Compared to the previous 12 months this represents a fall of 40 per cent in terms of deal volume, while valuations declined by 52 per cent.

The total domestic deal count amounted to 117 transactions collectively valued at EUR14.1bn, a decrease of around 40 per cent from the prior year in both volume and value terms.

David Cranfield, head of corporate practice of CMS Russia, says: “We are cautiously confident about a slight increase in M&A activity in 2010. Prices are becoming more reasonable while business opportunities are still here."

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