Since this year’s financial and economic turmoil has cut off most of third-party financing for Ukrainian businesses, a lot of Ukrainian companies are now hardly surviving, having almost exhausted their own financial reserves. By the end of 2009 when the need for investment capital became a hot issue in Ukraine, many investors again start considering Ukraine as perspective investment opportunity. Market experts believe that first investment projects in Ukraine will begin in the first half of 2010 in FMCG, agriculture, and heavy industry sectors. However, during the course of the next year the investments will be very moderate and the investors will be selecting their targets more rigorously than they did prior to the crisis.
In our opinion, one of the key elements that will be carefully reviewed by the potential investor is the transparent and clear corporate structure. This will be true both for M&A, equity and debt capital markets transactions. Today the proper consolidated group structure is an important decisive factor not only for the Western investors, but also for Ukrainian ones as well. Those who learned the hard lesson of a crisis will no longer buy a “pig in a poke.”
Our experience shows, that many Ukrainian companies have fragmented group structures with nominal shareholders formally owning various companies of the group. Most of the Ukrainian groups do not have vertically integrated structures with direct formal control by their real owners. Ukrainian groups are very chaotically structured and often resemble medieval towns where streets were developing on their own – and this frightens the investors. On the other hand, some of the companies may have new integrated structures, which are not operational in practice. For example, some groups are well structured from the taxation standpoint, but have week legal or managerial aspects.
Those companies, which will restructure their groups, remove problematic assets, and prepare proper financial statements in a timely manner, will be more attractive to Western investors, both private and public. We are sure that such companies will have the competitive advantage in attracting investments, which will gradually start to flow into Ukraine next year. Besides, the wave of M&A deals that many experts are expecting next year, will be impossible without corporate restructurings of Ukrainian companies. Until the group becomes consolidated and vertically integrated, such group cannot count on any serious investment opportunities.
Ukrainian companies are dramatically different from their peers in Europe: while in Ukraine there are very few companies, which were created with a transparent structure acceptable to a foreign investor, in the West transparency of the group structure is absolutely required from the group’s creation and throughout its existence. Thus, Western companies understand restructuring in a different way. In developed countries, restructuring is often done after a merger of two companies and it is aimed to address administrative issues, such as removal of unnecessary functions or departments, consolidation of several subsidiaries into one company, improvement of the corporate governance structure, and co-ordination of various business functions within the new large group. Thus, in such case, restructuring is the internal integration within the group after the merger. Ukraine, on the other hand, may see such types of “Western” restructurings only in several years after initial restructurings mentioned above have been completed.
Furthermore, today yet another group of market players is interested in the transparency of Ukrainian companies. This group is the commercial banks, including Ukrainian banks, which will push Ukrainian businesses to undergo group restructurings. Before the financial turmoil, the banks were rarely interested in the consolidated corporate structure of their borrowers. However, when the banks resume loan financing, in light of their previous miscalculations, they will dramatically change their approach to the group structure of their clients.
According to our expertise opinion, commercial banks will be first of all interested in the consolidated group structure of their corporate clients. The banks will not only seek to know the ultimate beneficial owner of the group, but also will demand to see how the latter controls the entire group. The consolidated group structure should prove to the bank that there is no possibility for channeling funds outside of the group bypassing the investors and creditors.
Increasingly more Ukrainian businessmen plan to restructure their business groups. However, despite that restructuring is becoming more popular in Ukraine, most companies still delay these difficult decisions and they start the consolidation of their groups only when they need to attract new investments. Thus, we often recommend that our clients first of all speak to recognized investment banks, which have experienced corporate finance professionals and may educate the company about various requirements of foreign investors. We also recommend that companies gradually consolidate their accounts and prepare them under IFRS (international financial reporting standards), so that when the right time comes the group is ready to speak same language with investors.
Most restructurings involve establishment of holding companies abroad (e.g., Cyprus, The Netherlands or Luxembourg), obtaining approvals of the Antimonopoly committee of Ukraine, and receiving individual licenses for investments abroad. Thus, the restructuring process often requires significant time (from 3 to 6 months) and we recommend starting it in advance. We strongly believe that a transparent structure of the group will remain an advantage for many years ahead!