While many companies report billions of losses and seek for rescue programs, others work out development programs.  Some are planning to buy unlucky competitors, others – to promote new brands and explore absolutely new business lines.

Faina Filina, editorial director

Some companies didn’t get scared neither of negative forecasts of prolonged crisis, nor of weak reports of many international corporations, nor of financial market turbulence.  They believe that the crisis can be used in their favor if they prove competent in alignment of forces and setting the priorities.

In the current year the most popular way of business development among these companies will be buying-up of assets of their industry counterparts or simply attractive and promising companies that suffered from crisis. Corporate lending is almost at zero now, so business owners, suffering from lack of funding and current assets, eagerly get rid of assets that generate losses at quite a low price.  Another method of business expansion can be called wait-and-see method:  Unlucky rivals exit the market to leave discontented customers and unemployed specialists behind. Quick players with thoroughly worked out strategy only have to take the rival’s place and start to expand their business, production and implement new brands in the market.  They know that exploration of free niches and new business lines is much cheaper now. It became possible thanks to a sharp fall in labor costs and more opportunities to “persuade” suppliers to give discounts.

Though “the luckiest” ones are generally state-owned companies of social industries (production of prime necessities), as well as firms that anticipated the crisis and cut their costs in advance.  

A tortuous road to Eldorado

The law of nature says: the strongest survive; the weakest have to retreat.  The same law is applied in business. For example, it appears that “Eldorado” — one of the largest national retailers of household appliances – can be simply taken to pieces after the company suffered from serious financial problems.  Some buyers for its assets have already emerged in the market. 

The first potential buyer is a mobile operator MTS.  MTS Company believes crisis is not the reason to give up development programs. On the contrary, in these hard times many troubled companies may provide a good buying opportunity.

According to analysts, MTS urgently need to buy 2-3 retailers to reach the position of VimpelCom in the market, which bought the leading retailer “Euroset” last year. “The “Euroset” transaction between VimpelCom and Alexander Mamut became a sort of a stimulus for frenzy buying in the mobile phone retail market”, tells the senior analyst of “Telecom-Expert” Anna Marakushina.  — As is known, to comply with FAS conditions (i.e. a retailer has to remain a multibrand chain) “Euroset” proposed to charge all mobile operators a commission in the amount of 3% of the incoming payments. The average compensation at that time was about 1.7%.  This is quite an unsophisticated method to put the competitors under pressure and a good source of income at the same time. After the mobile phone retail leader was bought by a Big Three member, it would be quite reasonable if the competitors responded in some way to sustain their sales in the market”. 

To date the biggest player of the mobile phone retail market “Euroset” has 4.9 thousand outlets in Russia. MTS Company has 1.7 thousand of its own shops and 650 of “Beta Link” shops, which has been working with MTS on a franchise since last fall.  

After the receipt of FAS approval MTS will carry out audit of the “Eldorado” shops to assess the feasibility of purchase of this mobile phone retailer. The audit may well lead to a significant lowering of the chain stores price.   Whether the transaction takes place or not and, if yes, at what price, will depend on the financial position of the asset and its debt load. At the same time MTS was taking steps towards other retailers. On the 10th of February it announced about the purchase of Cyprus Narico Holdings Limited, which owns 100% of ZAO “Telephon.Ru” (CJSC) (512 shops). The transaction amount was about $60 mln, including $22.4 mln of stock. Also MTS will pay $25 mln to “Telephon.Ru” sellers in a year or year and a half, if their performance meets the contract requirements (these requirements are confidential yet).   According to analysts, the purchase of “Telephon.Ru” will help MTS to extend its outlet amount to 2.8 thousand.

In turn, “Eldorado” owns 380 mobile phone shops. According to the company data, in 2008 the turnover was about $340 mln. According to “Eldorado” specialist estimation, the retail chain showed the fourth biggest turnover and sold 2.3 mln handsets in 2008.  But experts reckon that the role of the retailer in the market is not that important. “The total share of the “Eldorado” shops in the market is only about 2%”, says the senior analyst of «Mobile Research Group» Eldar Murtazin, – “and the cost of the asset itself now is no more than $10 mln”. According to “Eldorado” CEO Igor Yakovlev, the approximate amount of the transaction with MTS is $25 mln.

On top of that, MTS is holding negotiations with “Svyaznoy” managers about the management of the “TS-Retail” chain (MTS mobile chain stores). This information was confirmed by the «Svyaznoy» officials. Thus, it appears that the mobile operator can benefit from the crisis and expand its share in the market and strengthen its position.

However, the Napoleonic development plans of MTS can be destroyed by the competitors.  For example, at the beginning of February the information appeared that another mobile operator — «Megafon»- also filed to FAS an application for purchase of shares in the mobile retailer «Tsifrograd». Besides, “Megafon” shows interest in «Telefon.Ru».  “Beeline” is close at their heels.  To ruin MTS plans, «Euroset» now asks the permission of FAS to buy the shares in three retailers – “Telefon.Ru”, “Beta Link” and “Tsifrograd”. The experts assess the possibility of approval of all three transactions as low. “The thing is that if “Euroset” do buy, the retailer’s share in the market will be 38.5%”, explains Eldar Murtazin.

 Anyway some of them can be approved by FAS. It seems that an auction can began in the mobile phone retail market, what can cause a serious reorganization of the market. The golden age of the Russian retail industry coincided with the economic growth, when people changed their mobile phones quite often, the credits at low interest rates were easy to get, and the sales of mobile phones on credit were also rather high. Nowadays people spend less money of handsets, sales on credit also have fallen as bank approvals of consumer loans continue to decline. And the corporate loans are now hardly available.

“Loan approvals are generally declining. The bank models on consumer loans and express loans were reassessed 1-1.5 years ago (the programs partly were closed or the conditions tightened), and now we can see how this tendency gain momentum and affects business», explains Deputy General Director of «Expert RA» rating agency Pavel Samiev.

“Retailers now are hardly doing well, says Anna Marakushina. The main factor here is a heavy debt load on the back of extremely low level of availability of new borrowings.  Companies are just forced to respond to the third-party investors’ offers”. According to her estimations, the leading operators also likely have borrowed funds, but they are large corporations that are able to remain on foot in the face of crisis phenomena such as drop in domestic demand or increase in interest rates on credits.

Other potential buyers of the “Eldorado” assets are Czech PPF Group and European insurance giant of Italian origin — Generali Group. PPF Group noticed the retailer in fall when the Czech company extended the credit to it against 51% shares of Tenteko Company, which, in turn, owns 100% of the Eldorado shares. This money was used by the household appliances seller to satisfy multi-million claims from tax authorities and banks to pay off credits.

The tax officers proved that the company used “grey” schemes of appliances import and one-day firms.  As a result the chain retailer was claimed for about 15 bln rubles. The banks that used to credit the company on a regular basis asked it to pay off debts of the total amount up to $400 mln, and several suppliers stopped working with “Eldorado”.

PPF Group money saved the company: the outstanding debt to the suppliers reduced from $390 mln to $64 mln. But the aid was short-lived. Let us note that only in fall experts estimated the cost of “Edorado” (excluding mobile phone shops) at $3-4 bln including debt, which at that moment was about $1 bln. Now such estimations look more than optimistic.

According to the official representative of PPF Group in Russia Alexey Behtin, one of the conditions of the extended credit is a possibility to convert it into a significant holding of the “Eldorado” shares (up to majority).  That’s why the PPF structures filed a petition to FAS to buy the retailer in compliance with the Russian legislation. “But the permission of FAS to purchase shares of the company does not mean that the transaction of credit-to-ownership conversion will take place. The transaction also can depend on how successful “Eldorado” will be in implementation of its anti-crisis program», says Alexey Behtin.

It appears that the buying interest in “Eldorado” is persistently refused by Alexey Behtin as well as by the official comments of PPF Group, despite the creditor special terms. It’s as clear as a day. The share that eventually passes to PPF Group will be determined after the company reports sales results for 2009. The better the results, the less the share of PPF Group. That’s why the only thing that the Czech group can do is to “monitor closely the development of the anti-crisis program of the Eldorado chain as well as all steps taken by its owners”. This is what is said in the official report of PPF Group. Meanwhile, Czechs decided to get FAS approval to purchase such an “easy” asset in advance just in case.

On January, 29 Tromson Enterprise Limited, the subsidiary of PPF Group, received FAS approval to purchase 100% of “Eldorado”. “For us it is not the end, but the beginning of the negotiations with all parties concerned”, told the magazine Alexey Behtin after FAS approved the transaction.

Having such a debt load “Eldorado” is hardly attractive as a valuable investment. On the other hand, PPF Group would not invest in nothing. “Eldorado” is an asset with stores areas all over the country. In the case of a large international retailer entering Russian market (for example, Wall-Mart that has been talking about its plans in Russia long ago) the “Eldorado” chain can be quite an attractive acquisition. Then PPF Group will gain.

Improve you health – buy a competitor

According to the reported plans, in 2009 a large international player in the pharmaceutical market Pfizer Inc. is going to become no less than the leading producer of the biotherapeutic drugs and vaccines. To achieve its goal Pfizer primary reduces its expenses in order to increase the performance in the face of crisis. 1.5 thousand workers have already been dismissed, some laboratories have been closed, some enterprises have been put on sale.

However, according to Pfizer management, it is possible to succeed not only by means of cost reduction. May be it was the reason why the pharmacist decided to buy its industry colleague at the end of January. What’s more, Pfizer showed interest not in some troubled company that could be bought for a penny, but Weyth – one of the biggest research pharmaceutical companies in the world.  The price was set at $68 bln.  Pfizer officially announced about its M&A deal.

According to the chairman of the board of directors and CEO of Pfizer Company Jeffrey Kindler, the merge of Pfizer and Wyeth creates a unique opportunity for positive changes in pharmaceutical industry. “The merge will give rise to the company №1 in the pharmaceutical industry”, he said. Bernard Poussot – the chairman of the board of directors, president and CEO of Wyeth – agrees with him. He believes that the merge will not only help to take the leading position in the market, but also will bring more opportunities for invention of new drugs.

According to the terms of the transaction, each share of Wyeth will cost $33 in cash and 0,985 of a Pfizer share. As a result, apart from cash, Wyeth will hold 16% of the Pfizer shares. Pfizer informed that the transaction will be financed by its own shares, cash and borrowings in the amount of $22,5 bln from the consortium of banks: Goldman Sachs Group, Bank of America, JPMorgan Chase, Barclays, Citigroup. Taking into account the climate in the US banking sector, the choice of borrowings as a means of payment looks more than just odd.

According to the plans of the pharmaceutical giant top management, in two years after the transaction the adjusted earnings per share of Pfizer will rise. In three more years the company will be able to save about $4 bln in sales, research, production, as well as administrative and information sectors.

The company will benefit from the additional production sites, particularly, the Irish plant of Wyeth, Grange Castle – the biggest integrated plant for the production of biological drugs in the world.

The transaction between the pharmaceutical leaders, which can become the largest transaction in the market in 10 years, certainly brings some advantages for both companies.  However there is a fly in the ointment.  On the back of the planned merge Pfizer board of directors decided to reduce quarterly dividend payments per share to $0.16, starting from the second quarter of 2009. Besides, according to mass media, in order to achieve $4 bln economy, the united corporation will have to cut up to 10% of jobs and close five plants.

One more transaction came to the surface in January – now in the Russian market. “Valenta” company, one of the largest national producers, is planning to sell its minority stake.    “At the moment we are considering how we will change the size of our business”, told the magazine CEO of the company Laslo Shugar. The analysts mention Polish Polpharma, which is already the owner of «Akrihin» in Russia, and also Hungarian pharmacist Gedeon Richter among the potential buyers. According to the inside sources, “Valenta” needs funds for development. Although, the facts says that there is no point in talking about the development in the case of “Valenta”. In order to reduce expenses the domestic pharmacist halted the work at Schyolkovsky vitaminny zavod (vitamin plant in Shchyolkovo) on December, 31, 2008. Moreover, at the end of 2008 “Valenta” sold its stake in «Krasfarma». “We cannot lift prices as aggressively as increased our expenses, tells Laslo Shugar.  — At the same time it became more difficult to sustain liquidity, revenue is falling, and we still have to pay compensation and for raw materials every month. And the natural result is cash deficiencies, which have to be dealt with”. Dmitry Efimov, CEO of “Nizhfarm”, confirms that these problems exist in the pharmaceutical market. “Bearing in mind the lesson of 1998, we can expect a rise in demand for Russian drugs because of their competitiveness.  But it won’t affect positively the earnings of pharmaceutical companies, as higher sales are offset by significant rise in cost of production.  If «Valenta» sells its minority stake, a large industry-specific investor represented by one of the foreign pharmaceutical companies can join Russian pharmaceutical market”, he says.   According to CEO of “Komkon-Farma” Oleg Feldman, among the negative tendencies in the pharmaceutical industry is also weak government support.  This, in turn, will result in more difficulties for pharmacists to develop new drugs on their own. 

According to Viktor Dmitriev, president of Association of Russian Pharmaceutical Manufacturers, M&A activity among pharmaceutical companies is not the direct consequence of the global crisis. “The risks in this industry are higher than anywhere else, as it will be 7-10 years before we can see the effects of the investments in research work. At the same time pharmacy industry requires rather abundant funding.   That’s why the M&A trend that emerged in the global drug producing industry some years ago today picks up speed”, tells Viktor Dmitriev. Besides, he says, we cannot speak about Russian market separately from the global market, as many domestic producers are financed by the foreign funds. According to Association of Russian Pharmaceutical Manufacturers, imported drugs account for 70-75% of Russian market in money terms.  In the near term some more national companies are likely to find themselves in the focus of the foreign investor interest. “The crisis can somehow adjust the cost of some local pharmaceutical companies, which may find competition with international giants much more problematic”, concludes Viktor Dmitriev.

Partnership is a power

Another purchase of the month in the consumer market is the acquisition by the German Otto Group, one of the leaders of the distance trade industry, of 90% of Russian company “Na dom” from its Russian counterpart Direct Group. The acquisition also included “Promopost” company owned by Direct Group, which develops production and logistics center in Tverskaya oblast. According to the managing director of Otto Group Hans-Otto Schrader, “this transaction complies with their strategy of consistent investments in the most attractive and rapidly growing markets. As a result we will be able to boost sales in Russia and become a leader in the home shopping sector in the Russian market”.

The information was confirmed by the managing director of Direct Group in Russia Paskal Kleman.  The amount of the transaction is kept in secret, though experts estimate it at E10 mln.

According to Mr Kleman, “Na dom” turnover in 2008 was E90 mln.  “Russian customer is demanding; we began with only a small catalogue of products, while today we have to open up offices in many countries of the world to satisfy inquiries, and this is quite costly, he tells. — Business development requires significant investments, and this is one of the reasons why we offer a stake to Otto”. “We initiate projects in Russia, raise them to the level of an efficient enterprise, and then exit them and launch the new ones”, underlines Paskal Kleman. The expansion of the center in Tver (there are 4 buildings now: logistics center, stock houses and other services), orders via Internet based on Otto and “Na dom” catalogues, as well as launch of absolutely new project are among them. The core of this project is to set a company that would be responsible for goods delivery not only for Otto and «Na dom», but also for other retailers interested in such services. According to preliminary estimates, to launch such a project will cost E2-3 mln.

According to the president of National association of distance trade Alexander Ivanov, this acquisition will allow Otto to expand its own customer base. “The German company has some hundreds of thousands of customers in Russia; transaction with Direct Group will help it to enlarge the number through «Na dom» customers”. Otto bought not a dead weight, but a lively and efficient business”, underlined Alexander Ivanov. According to preliminary estimates of National association of distance trade, the market volume in 2008 was about E3.15-.2 bln.

And the president of the association thinks that the crisis has not affected the distance trade market much yet.  “Yes, the growth rate dropped from 40% in 2007 to about 25% in 2008. Yes, the rising dollar affects our prices and, as a consequence, narrows our audience, tells Alexander Ivanov.  — But the catalogue trade is a long-term business, so the impact of negative factors is delayed in time and also smoothened by it.  The structure of the distance trade is complex and heavy, and serves as a solid and supportive foundation for business”. According to the expert’s data, about 50 mln people in Russia at least once in their life bought products from the catalogues, and 25 mln more people do it on a regular basis.

According to analyst estimations, in the time of crisis the distance trade is one of the most prospective types of business. Low-cost clothes and household items will be in demand. However, the situation with foreign products is not so clear.  The rising exchange rate of the foreign currency to the Russian ruble will definitely lead to higher prices for imported goods and, hence, the demand for them will drop. In this context the goal of the German company, buying its Russian partner, is clear. In this way Otto wants to offset the outflow of Russian customers of the German catalogues because of price increase, namely to expand its customer base via “Na dom” company.  Time will show how effective this strategy is.   

Fight in the carbonated waters

Crisis times in the world as a whole and in Russia particularly do not scare PepsiCo top management, too. Moreover, in such difficult times the company plans to grow and aggressively develop new business lines. The nearest competitor of Pepsi — Coca-Cola Co. — keeps up with it. What’s more, in the current unstable economic conditions the unwound fight for the leadership is more than serious.    Will they manage without victims?

The thing is that demand in the soft drink market declined in 2008. And the crisis is hardly the main reason for that. People give up drinking soft drinks in favor of fruit juices, energy drinks and low-alcohol drinks. For example, research company Canadean Ltd. forecasts that the soft drink market volume in Russia contracted by 2.6% in the last year. By contrast, in 2007 this sector in Russia showed rise in demand by 13.2%.

Very likely, that it is the fall in the soft drink market that stimulates the leading companies to launch new large-scale projects.   In 2008 PepsiCo announced a total re-branding of some of its key products in the North America market — Pepsi-Cola, Mountain Dew and Sierra Mist. A lucky surprise for the company was the inauguration of President Barak Obama:  somehow the colors and images used by the Democrats’ leader in his election campaign coincided with colors and idea of the PepsiCo logo. On inauguration day of the first black US president Pepsi started massive advertising campaign of updated drinks under the slogans “Hope” and “Joy”. According to analyst estimates, re-branding expenses of Pepsi exceeded $1 bln.

However, PepsiCo management following the examples of almost all global corporations worked out on cost reduction, too.  At the end of the last year the company announced job cuts by 3 thousand jobs and shut-down of several production sites in the USA, what, according to the top management plans, was to reduce the corporation expenses in the difficult 2009.

As is said, cut down in some areas, expand in others. As for Russia, last year PepsiCo together with Pepsi Bottling Group bought the largest national fruit juice producer “Lebedyansky”. The amount of transaction hit a record in the domestic food market (at about $2 bln).  What’s more, PepsiCo alters its product profile as dynamically as possible.  It already produces a variety of sport drinks and water with vitamin additives. Notwithstanding the crisis PepsiCo continues to invest in Russian economy. “Two manufacturing complexes — drink producing plant in the Moscow region and snacks producing plant Frito Lay in Azov in the Rostov-on-Don region, the construction of  which cost $170 mln – will be put into operation in 2009”, tells Communication Manager of PepsiCo Russia Alexander Kostikov. The costs of new production projects do not scare the company management as this should help them to expand the market share in all segments of PepsiCo business.

Coca-Cola Co is going to catch up with its main competitor. The chief executive officer of the company Muhtar Kent notes that Russia is the 12th largest market of the company and in the future will be among the first five markets in the terms of income and revenue. 

Although developing countries have already been hit by the global crisis, Coca-Cola top management continues to regard them as the key markets as these regions do help to offset sales of soda drinks in the USA that have been dropping since 2005. Even in these hard times, when Russian economy cannot be less stable, Coca-Cola expands its presence instead of giving up business in Russia.

Since last May the company has introduced 8 new products in the domestic market, including its version of kvas called “Kruzhka i bochka”(Mug and barrel).  Besides, the company is planning to launch new large-scale advertising campaigns, though the final budgets are not disclosed yet.

In the current critical conditions in the world and in Russia such an active position of both players seems at least odd.  On the other hand, according to Euromonitor International data, the market share of each of these two leading companies in the aggregate soft drink market was 23.5% in 2008. Given such a competition, the reason why PepsiCo and Coca-Cola are planning to grow further and do not intend to cut advertising budgets for 2009 is obvious.

Dmitry Petrov, the president of the Soft drink producer association sticks to another opinion. “The companies might choose such an active position for two reasons. On the one hand, PepsiCo and Coca-Cola may well have a deeper insight of the market trends. The downturn in the soft drink market is assigned by some people not to the crisis, but to the seasonal factors (cold summer), as well as to the fact that people now prefer healthy and functional drinks to a common soda drink.  In other words, if the competitors decide to “drop in” the related market segments (fruit juices, kvas, energy drinks), they may well succeed, explains Dmitry Petrov. — On the other hand, only a year ago no one thought the crisis would hit Russia so hard, that’s why PepsiCo и Coca-Cola marketing specialists could simply misunderstand the situation and price in budgets such large-scale development programs”. 

Buy a dealer

By now everybody, including automakers, understands that 2009 will be marked by a sharp fall in demand for autos in Russia. This particularly concerns foreign cars, which will cost much more due to the rise in custom duties and depreciation of ruble against foreign currencies.    According to the forecasts of the Association of European Businesses (AEB), national sales of Russian and foreign cars will decline by nearly 20% this year, and while in 2008 the number of sold cars was 2.93 mln, in 2009 it can decrease to 2.4 mln. Some analysts even think this forecast is too optimistic.  “A number of experts expect sales in Russia will fall by 50%, which is a huge step back”, says senior editor of Avto.ru project Alexander Aliev.

Anyway, automakers do their best to avoid slump in sales. Over the last years almost all main foreign players built or started to build their plants (Ford, Тoyota, Renau, Volkswagen, Nissan, Chevrolet, Peugeot, Citroen, Mitsubishi, Hyundai, etc.) After Russian market ended 2008 as one of the European leaders in sales, it faced a «grown-up» competition, and the automakers began to think how to cut the chain of intermediaries and enhance the quality of services, provided by Russian dealers.

It seems that Kia Motors is thinking of its own efficient dealer. In order to sell its cars independently Kia this January concluded an agreement about the purchase of Sokia dealer chain from Sok Group that assembles Kia cars at “IzhAvto”. Sokia dealer chain consists of 119 certified Kia Motors dealer centers in 78 cities. Director of Marketing at “Kia Motors Rus” Daniil Proskurin told to press earlier that in the course of the transaction an importer with its personnel, business processes and stock of 3000 cars was bought. “Organization of the distributor work from the very beginning would take years. Purchase of the existing distributor will help to accelerate the process.  The aim is to prevent the sales process from halting”, explains Daniil Proscurin.

Let us note that the former official distributors of Kia were “Sok” and “Avtotor”, and each had its own assembly rooms. According to experts, there definitely were tensions between the two companies, and the image of the Korean brand itself suffered most.   

“The market ballooned, and the need emerged for Kia Company to make its own way in the market, notes editor in chief of “Auto Business Review” Roman Gulyaev.  It’s much easier to work with a dealer chain through your own importer. It ensures growth both in aggregate revenue and revenue against the distributor margin (about 5%). A centralized importer helps to maintain tighter control over the sales of spare parts and compliance with the trademark standards”.

Now the Kia distributors will lose their status and part of their income. According to experts, “Sok” and “Avtotor” income from Kia amounted to 10% of the aggregate revenue, i.e. about $140 mln per year. The former distributors of the Korean trademark also sell Mitsubishi, Daewoo, Suzuki and Fiat cars.

Apart from buying the dealer chain, Kia plans to take steps in another direction, namely increase production at the new Huyndai Motor plant in St. Petersburg (these two companies belong to the Huyndai-Kia autogroup — the 6th global automaker). Huyndai Motor project is estimated at $400 mln.  The production will take place in the Petersburg industrial zone Kamenka.  It is expected that the first cars will roll over the production line in 2010. Huyndai Motor has not decided yet what models it will produce and whether to join the Kia project or not.  However, the negotiations are already being held.

Arguably, the acquisition of the dealer chain and launch of the production in St. Petersburg will help Kia not only to improve its image in the auto market, but also to increase revenue and improve its results for 2009. According to the AEB data, Russians bought 88 152 cars in 2008, an increase by 12% compared to 2007.  Anyway, the company lost $317 mln.

Alexander Aliev believes that Kia as a rather competitive brand has good perspectives in Russia, given that several popular Kia models are assembled here.  So the purchase looks justified.

While now it is not the right time for M&A among auto giants, some M&A transactions are quite possible. “For example, Russian Sollers Company is prepared to buy a 4×4 production line from SsangYong, tells Aliev. — The financial state of SsangYong now is quite vulnerable, even though the Korean government does its best to restructure the company.  Thus, Sollers has a chance”.

Following the automakers the problems were faced by Russian dealers as they have a large debt load in foreign currency. Today many dealers speak about the possible losses as few of them invested their «own» funds in development. The last two-three years were characterized by a sharp growth, especially, thanks to broadly used cheap borrowings. Usually 30% of funds were provided by a company itself, and 70% were borrowed.  Today when banks themselves got into a scrape most of them increasingly require early redemption of the credits extended to dealer chains.   That’s why experts think M&A transactions in this sector should not be disregarded.  “However, bankrupts should not be excluded, too”, stressed Alexander Aliev.

Note that a drop in car sales as a whole and a sharp drop in sales on credit in particular are expected in 2009. «Banks tightened conditions for mortgage and auto loan borrowers, notes Pavel Samiev from «Expert RA». — On the back of high risks as well as income and permanent employment factors banks cut approvals in these areas».

Alexander Aliev from Avto.ru agrees with him: “Our survey of the leading banks in auto lending showed that almost all banks continue to give auto loans, but the interest rates in rubles merely force the client to shrug off any thoughts of a loan”. — There is another tendency:  many banks try to make loans (including auto loans) in dollars or euro, what also do not encourage higher auto sales.  In order not to sound unsubstantiated, I’ll give an example. Recently I talked to the management of the Russian division of one of the European manufacturers: sales of their brand on credit in January 2009 rose only by a few percentage points while usually they were at least 25% of the total sales”.   


Russian M&A market

Period

Number of transactions

Amount, USD mln

GDP

III quarter, 2008

237

15 246

3,1%

II quarter, 2008

298

56 968

13,0%

I quarter, 2008

352

19 565

5,3%

 

Top transactions in the Russian M&A market

 

Name

USD bln

Rusal-NorNickel

15,7*

VimpelCom-Golden Telecom

4,233

Evraz-Privat assets

2,666*

Interesting facts

Turnover of the Eldorado branch specializing in household appliances and electronics was $5 at the end of 2008, 17% lower compared to 2007 results (about $6 bln). The company own stores demonstrated the biggest turnover – over $4.1 bln. The turnover of franchise stores was $370 mln.  Another $500 mln were earned by the Eldorado shops in Ukraine, mobile phone shops and HiTechnic service division.

Over a year Eldorado chain invested in development $50 mln, opened up 55 shops in 42 cities, the total area of its own stores rose by 105 thousand m2 and hit 660 thousand.

By the end of 2009 the company intends to occupy 40% of the Russian retail market of household appliances. Moreover, experts expect that sales of household appliances and electronics in Russia in 2008 will be about $35 bln.

Amusing statistics

While the last year was marked by a sharp rise of bankrupts among large companies that failed to escape crisis, 2009 may well hit record in M&A transactions. In January alone the amount of M&A transactions with failed companies rose to $14 bln. This is already by 9% more than the total amount of transactions conducted in 2008. What’s more, some analysts anticipate that the number of M&A transactions with failed companies will rise by 91% this year. Over the last year the companies on the brink of failure conducted 213 M&A transactions, which is by 55% more than in 2007.

Survey

The results of the survey, carried out by KPMG among 200 top managers of the auto industry, showed that the manufacturer management and dealers expect drop in revenues and rise in bankruptcies for the next five years, which, in turn, will trigger more restructuring and M&A operations.  According to the KPMG manager of auto companies in Russia and the CIS Cristoph Schenk, almost half of the respondents expect volatile revenue and cannot be confident of their business growth.   “This level is extremely high which is bad for the industry highly dependant on long-term planning”. The industry representatives reckon that the risk of restructuring of producing companies and dealers is particularly high: 71% of the respondents are confident that during the next five years producing companies will get engaged in M&A transactions.  Only a year ago such forecasts were two times lower.  In this year study six out of ten experts forecast restructuring of dealer companies.

It is interesting to note that, according to KPMG survey, 33% of the respondents believe that Russian producers will increase their share in the market. “A noteworthy fact that 64% of the global auto industry executives believe that a Chinese or a Russian producer will become one of the top tens in their domestic market in the next five years”, adds Christoph Schenk.

Analytics

About 200 US companies with its rating falling below the investment level on the back of the crisis may announce themselves bankrupts in 2009, say S&P analysts. The total debt of these companies exceeds $350 bln. S&P experts say that 185 companies with their debt amount over $341 bln are the most exposed.  The most risky sectors are retail, restaurant and gamble business, manufacturing and sale of autos and spare parts, mass media, press and entertainment.  Ford, the largest casino chain Harrah’s Entertainment and a retailer Claire’s Stores are among the largest potential bankrupts.