- The number and value of ‘classic’ M&A transactions on the Russian agricultural market remains low.
- Consolidations are expected in several agribusiness sectors.
- Agribusinesses look for new ways to attract PE and institutional investors.
Lockdowns all over the world, growing food prices, and historically high yields. These are the main reasons why the experts are calling the Russian agricultural regions the ‘beneficiaries’ of the pandemic. Nevertheless, the situation with agribusiness in Russia remains unclear, especially with climate change slowly eroding the fertility of the soil in its southern regions.
Hence, crop production seems to be the most lucrative segment in Russian agriculture as the demand is substantially higher than the supply. Consolidation of these businesses is highly likely, especially considering the risk of new regulations (e.g., export taxes). In other sectors, M&A activity is not so dynamic. For instance, in livestock production, most deals are targeting distressed assets.
The M&A Community drew a rather comprehensive picture of the Russian agribusiness during a topical webinar in January 2021.
‘Classic’ M&A and Distressed Assets
‘What we are seeing now is relatively low activity in the classic M&A segment of agribusiness,’ says Alexey Khabarov, Head of Investment Banking at Russian Agricultural Bank.
He adds that deals on this market are a small fraction (just above one percent) of the total mergers and acquisitions volume. The last couple of years have not shown any specific change of dynamics; in terms of transaction amounts in 2020, the Russian agricultural market may shrink YoY.
Khabarov says that the average deal value remains small, ca. $20-25M. ‘All other factors aside, it’s worth mentioning that the lion’s share of such transactions are non-public. Typically, third-party consultants do not take part in the deals. Quite often, these M&A transactions are not structured in a traditional way, but as an assignment of debt or an insolvency proceeding’.
He points out another important feature of the agricultural M&A in Russia, namely the participation of strategic Russian investors, state-controlled and quasi-public companies like United Grain Company and VTB daughter structures. Foreign investors, Khabarov adds, are rarely seen on this particular market. Private equity funds, both Russian and foreign, are showing some interest in the Russian agribusiness, but are not yet especially active.
Among the most significant agricultural M&A deals of the recent period, our panelist lists:
- The consolidations of transport and infrastructure assets in agriculture by the VTB Group
- Acquisition of the once distressed VEB asset, Eurodon, by Damate LLC.
- Cherkizovo Group acquired debts of the agricultural holding, Belaya Ptitsa, gaining control over its meat production assets.
- Rusagro Group acquired the holding company, Solnechnye Produkty, with its three fats plants and three oil extraction plants.
‘Generally speaking, the market remains opaque, so it is complicated to obtain public information about the deal values or multipliers. As a rule, you can only get such numbers from the M&A participants.’ Khabarov says. In the medium term, he adds, the Russian agricultural market will remain lucrative, growing faster than the overall economy.
Khabarov expects that M&A activity, especially consolidations, will speed up soon in this industry. There are several reasons for this, namely:
- The sector has significantly evolved in recent years; several large companies have grown from scratch since 2005-2010.
- These businesses emerged and prospered mainly due to government-provided benefits and credits. This capital flow is bound to end, while many companies still have heavy debt burdens. Often, M&A is the only solution for these issues for middle-level companies.
- Compared to other agricultural markets, the Russian one remains highly fragmented. Consolidation is a natural way for this industry to develop further.
- Competition is growing, profitability is sinking, while food prices are under pressure. ‘Only the strongest and the largest players will survive,’ Khabarov believes.
Crop Production and Land Prices
M&A deals in agriculture, especially in crop production, are tightly connected with the price of land, reminds Vladislav Novoselov, Managing Partner at BEFL LLC. He adds that crop production became a ‘beneficiary’ of the pandemic situation. This particular market in Russia got an additional boost also due to the Rouble devaluation, higher yields (compared to more southern countries), and growing digitization of the agribusiness sector in general.
What were the outcomes? Novoselov points to the following trends:
- Increase in agricultural prices, both in Russia and on the global market;
- Surge of agribusiness profitability, emergence of disposable capital;
- High profitability expectations for 2021;
- Growing interest of ‘non-core’ investors to the industry;
- Readiness of banks to support agricultural M&A transactions;
- Rising demand for agricultural assets, especially in good-rainfall areas; deficit of proposition resulting in a ‘seller’s market.’
According to FAO, global wheat prices rose by 23-26 percent YoY in November 2020. Corn prices grew in certain regions (Argentina, Ukraine) by up to 40 percent. At the end of the year, sunflower prices were also almost twice as high as they were in December 2019, as BEFL data shows.
Simultaneously, Novoselov says, land prices are skyrocketing. Comparing the land deal values in 2012 and 2020, one can see that the price growth is between 230 and 500 percent in the Central Federal District of Russia. For instance, one hectare (2.471 acres) of agricultural land in the Kursk region cost 150K rubles (ca. $2K) in 2020.
‘Hence, the question arises, what is next? What will businesses in this industry do?’ follows up Novoselov and describes the market expectations.
- Partial decline of the heated interest towards agriculture and of high demand. ‘Now, a long soap opera with export taxes has started. At first, it was about wheat, then sunflower products, now other crops as well…’
- The growing interest of investors towards the underrated periphery of major agricultural districts, where land prices remain relatively low.
- Consolidation of middle-sized agribusiness players, the emergence of new, large landowners with a landbank over 100K hectares (ca. 247K acres).
- Development of the options to attract PE and institutional investors to M&A deals in crop production.
‘We expect new capital to come. There should also be a new push for the increase of agricultural land prices,’ Novoselov concludes.