Ukrainian banking: deal heat expected to move towards mid-tier targets over next 18 months - analysis18 November 2006

M&A in the Ukrainian banking sector will remain vibrant in the coming months with between five and seven deals completed in 2007, intermediaries have said.
However, deal heat is expected move away from deals involving top-20 banks and further towards the mid-tier banking sector, according to the same sources.
Speaking at the Adam Smith Institute’s Ukrainian banking forum in Kiev, Vitaly Struckov, managing director of Ukraine specialist boutique Concorde Capital, said he predicted a minimum of five transactions in the Ukrainian banking sector in 2007 with the total value of deals “probably exceeding USD 2bn”. Within two years all the major banking deals in the country would be completed, he added.
He noted that over the past three months between five and seven tenders had started for the sale of controlling stakes in Ukrainian banks but said his advice to would-be buyers is that mid-tier banks provide better value for money than the country’s remaining large banks.
He noted that top-20 banking deals were coming in at around 4x book value where average book value was around USD 100m. He added: “The question is, why pay such a high premium for a larger bank when you can buy a mid-size bank with a good platform, a good network, a good management team and inject USD 50-100m capital and in one year you can be in the top-20?”
He said he believed mid-tier banks would offer better value for money at circa 2-4x book value – although this would depend on the bank, the region, and the quality of the business.
A similar view was espoused by Dragon Capital director Brian Best on the first day of the conference when he said he expected the Ukrainian banking sector to be an attractive place for new external investors for the coming 12-18 months.
He added that he believed a further seven or eight deals would be completed by the second quarter of 2007.
In common with Struckov, Best said he believed the next step would be for smaller banks to become targets. He noted: “We'll also see further consolidation in the banking sector over the next year or so as foreign investors that have already bought banks in the Ukraine will look to acquire some middle-tier banks where they see that there are some synergies that can be gained.”
Foreign groups that have made such investments include Raiffeisen International (RaiffeisenBank Ukraine and Aval), Banca Intesa (Urkotsbank), Unicredit Group (HVB Ukraine and PEKAO Ukraine Bank), BNP Paribas (UkrSibBank) and Credit Agricole (Index Bank).
Despite the optimism for further deals, a number of speakers at the conference highlighted the potential barriers to straightforward acquisitions.
Struckov noted that he believed of all the registered banks in the Ukraine not currently under foreign control only “between 10 and a maximum of 15… deserve to be targets for foreign banks”. He added: “There are many factors that make Ukrainian banks not attractive and far from easy to acquire.” He said his advisory currently had two sell-side mandates.
In her presentation to the conference, Jaroslawa Johnson, partner of law firm Chadbourne and Parke, indicated eight main factors of concern to foreign investors in the Ukrainian banking sector that could potentially break banking deals. They were a lack of transparency over shareholdings, the size or lack thereof of branch networks, a lack insight into a bank’s target business, the quality of loan and client portfolios, the quality of the target bank’s securities portfolio, the quality of the target bank’s fixed assets and a poor history of capital adequacy. Any of these factors could break a potential deal, she said.
Johnson noted that, on the buy side, her law firm had received five mandates. One transaction had closed, two transactions had signed but not closed and in two transactions the acquirers walked away after due diligence, she said.
On the sell-side, she said her firm had represented three sellers. One transaction was signed but not closed, a second seller was initially rejected but has since found a suitable investor and is going to proceed to due diligence; while a third seller saw its investor lose interest during due diligence.
The Ukraine has 166 registered banks, of which around 25 were at least partly owned by foreign investors as of April 2006.
Ukrainian banks that are understood to be currently up for sale or to have received expressions of interest from foreign bidders include Ukrin Bank, TAS Kommerzbank, Rodovoid Bank, Nadra Bank and Forum Bank.

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