Russian M&A review

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Augustus Edgar Chapman
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1 Russian M&A review Deal financing and market structure February 203 «Gazprombank» (Joint Stock Company)

2 TOP 3 largest Russian banks (from total volume, RHS) Key findings Closed M&A deals in Russia (value) Value of closed M&A deals in Russia decreased by 45% - from $99. bln in 20 to $54.2 bln in 202. The cash part Pending for 203 of the deal consideration, including deferred payments, Index RTS decreased by 30% - from $58.3 bln to $40.8 bln. The total number of deals fell by 7% to a little over $50 mln in value terms. As of January 203, the total value of deals pending for 203 amounted to more than $70 bln. This exceeds 202 value by 40%. The series of deals by state-owned Rosneft for acquisition of TNK-BP are expected to contribute the most to the total deal value for 203. The share of foreign acquisitions in the total deal value has been falling since 2008 from 22% ($8.5 bln) to Closed deals in Russia (volume) % ($6. bln) in 202. Taking into account current situation in the foreign financial markets this share is unlikely to increase in the medium term. Number of deals excluding stock and asset payments, debt assumption and offset 2 Participation in at least one of the roles: one of the parties to the deal, financial advisor for one of the parties or the lender to the buyer Outbound deals made by Russian companies abroad contributed 27% of the total deal value in 202 (-2% in ). The three largest Russian banks (Gazprombank, VTB and Sberbank) have continued strengthening their market positions. M&A deals involving 2 these banks formed more than 60% of overall deal value and 40% of the total deals number. February 203 2

The total number of deals fell by 7% to a little over $50 mln in value terms. As of January 203, the total value of deals pending for 203 amounted to more than $70 bln. This exceeds 202 value by 40%.

3 Acquisition financing (as % of cash consideration, excluding deferred payments) Number of closed deals in Russia Sources of M&A deal financing The overall volume of the debt financing of acquisitions equaled $7.2 bln which slightly exceeded the values for 20 (+3%). However, on the back of the overall reduction in the M&A activity in 202, the share of debt financing rose from 32% to 45%. Bank loans remained the main source of debt financing. An increase in the share of borrowed funds in M&A financing was explained by an increase in the proportion of large deals, liquidity injection in the financial system and greater participation by Russia s largest banks. Corporate cash reserves and cash flows were the main source of financing: 5% of cash consideration, excluding deferred payments. Asset sales and equity offerings were not a major source of deal financing in 202. The share of this type of financing was under %. Share of state equity investments (through Deposit Insurance Agency, VEB, Rostechnologii, Rusnano and others) was relatively small around 4%. At the same time, the activity of banks and companies where the state holds a controlling share has remained significant (see slide 5). February 203 3

Bank loans remained the main source of debt financing.

4 Contribution growth of the three largest Russian banks The three largest Russian banks Gazprombank, VTB and Sberbank over the course of the past five years have been growing their presence in the M&A markets. Over the last several years, the Russian banks have gained significant experience in deal financing and consulting, risk management for M&A projects. The scale of their activities and complete range of banking instruments have allowed the Russian banks to play a leading role in the largest and most complicated deals including those involving the government and Russia s blue-chip corporations. As a result, the role of the largest Russian banks is increasing. In 202 the three largest Russian full-service banks participated in more than 63% of the M&A deals by value (50-60% in ) and in 42% of deals by count (around a third in ). By comparison, in 2008 the three banks participated in less than 0% of deals by value and less than 5% by number. The proportion of deals involving one of Russia s three largest full-service banks Deals involving three largest Russian full-service banks (by value 2 ) Participation in at least one of the roles: one of the parties to the deal, financial advisor for one of the parties or the lender to the buyer 2 Excluding deferred payments February 203 4

The scale of their activities and complete range of banking instruments have allowed the Russian banks to play a leading role in the largest and most complicated deals including those involving the

5 State and state-controlled companies in the Russian M&A market Dynamics of the deals involving the state and statecontrolled companies (by value) Deals involving the state and state-controlled companies (as % of total value) Overall value of the deals involving the state and statecontrolled companies decreased by 43% in 202 compared to 20: from $38.6 bln to $22. bln. The cash consideration in deals with participation of the state and state-controlled companies has increased. Around 2/3 of such deals in 202 were financed with cash. In 20 significant volumes of closed deals were due to asset consolidation by large government corporations (particularly Rostelecom, RusHydro, Inter RAO UES). The share of privatization deals in was relatively stable at 9-0% level. Almost 2/3 of privatization deals in 202 took place in transport and logistics sector. In the near future, the state and state-controlled company activity will continue to play a major role in the Russian M&A market; currently work is being carried out on several large deals. The most recent example is a series of deals announced by state-owned Rosneft for its acquisition of TNK-BP, valued at around $6 bln. The deals are expected to close in 203. Deals involving the state and state-controlled companies include in this review the following: privatization, purchase and sale of assets by companies and banks where the State s effective share is over 50%, as well as the state s direct equity investments. February 203 5

to $22. bln. The cash consideration in deals with participation of the state and state-controlled companies has increased. Around 2/3 of such deals in 202 were financed with cash.

6 International deals and finance sources The share of foreign acquisitions in overall acquisition volume in Russia has continued to decrease. This tendency started in 2008 when the share of this financing type was at 22%. By 202 this share dropped to % of the total cash value. Traditional European buyers have reduced their activity recently while emerging investors from China and India are yet to achieve high volumes in Russian acquisitions. It is likely that the share of foreign acquisitions will not grow substantially in the medium term. Total deal value made by Russian companies abroad started to grow in 20 and this tendency has continued into 202. Several large cross-border deals were closed in finance, telecommunications, infrastructure, oil & gas and other sectors. Russian and foreign financing sources (as proportion of cash value ) Internal and cross-border acquisitions (as % of total value) +3 p.p. p.p. Excluding deferred payments February 203 6

Traditional European buyers have reduced their activity recently while emerging investors from China and India are yet to achieve high volumes in Russian acquisitions.

7 Breakdown of M&A deals in 202 by sectors Telecoms and media has been keeping the leading positions in the M&A deal structure for the second consecutive year mainly due to persistent activity of the main players (Vimpelcom, Rostelecom, MTS, Megafon) and their shareholders. Industrials sector has been dominating in terms of the number of deals in 202 as well as in 20. However, average deal size in the sector was only $263 mln. Growth of total deal value in Finance sector may be primarily explained by strengthened activity from the major Russian banks in domestic and foreign acquisitions. The series of privatization deals closed in Transport and logistics sector in 202 led to growth in this sector s share from 8% in 20 to 3% in 202 in monetary terms. Deals in breakdown, (% of total value) Average deal size in 202г., USD mln Deals in breakdown, (% of total volume) Power & Utilities Consumer goods & services Industrials & machinery Real estate Transportation, logistics & infrastructure Oil & gas 725 Finance 85 Telecoms & media Including metals & mining February 203 7

However, average deal size in the sector was only $263 mln.

8 M&A Consulting and Merchant Banking GPB(JSC) Contact details A Alexander Sapozhnikov First Vice-President, Head of Corporate Finance Department Office: +7 (495) Michail Rodionov First Vice-President, Head of Oil & Gas Projects Department Office: +7 (495) Dmitry Borisov Managing Director, M&A Advisory Office: +7 (495) Elena Lomakina Managing Director, Merchant Banking Office: +7 (495) Alexei Belous Head of Project and Structured Finance Department Office: +7 (495) Project and Structured Finance Olga Pestova Executive Director, Leveraged Finance Office: +7 (495) Any questions regarding the content of this review should be addressed to Vladimir Merkushev Director, Corporate Finance Department Vladimir.Merkushev@gazprombank.ru Office: +7 (495) (доб ) February 203 8

Banking Office: +7 (495) 428-50-02 Alexei Belous Head of Project and Structured Finance Department Office: +7 (495) 980-43-9 Project and Structured Finance Olga Pestova Executive Director, Leveraged

9 Information regarding the review and disclaimer Unless otherwise stated, all data used in this review concern acquisitions in Russia (by Russian or foreign investors), as well as acquisitions made by Russian companies abroad. Included are closed deals over $50 mln related to acquisition of no less than 25% of share capital or a series of related deals related to acquisition of control. All rights are reserved by Gazprombank. This presentation could not be distributed to third parties, reproduced or quoted without prior written permission from Gazprombank. The information is based on sources we view reliable but neither GPB (JSC), nor any other entity provides any assurances, guarantees or pledges regarding its accuracy and completeness. Where not otherwise indicated, all opinions and assessments contained in this report, represent only the opinions and assessments of GPB (JSC) on the date of the report and may change without prior notice. Neither GPB (JSC), nor any other affiliate of the Gazprombank group of companies, or any other individual will carry responsibility for any losses in any way caused as a result of using this report and its contents or in any other way associated with this report. February 203 9

All rights are reserved by Gazprombank. This presentation could not be distributed to third parties, reproduced or quoted without prior written permission from Gazprombank.

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