Russian M&A Market

Russian M&A Market Overview 2009

Contents Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Key characteristics of Russian M&A market 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Key trends by sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Oil and gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Metals and mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Construction and real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Financial services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consumer products and retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Other industries (Telecommunications, Machine-building, Technology) . . . . . . 15 Russian M&A development forecast for 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Contact information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Russian M&A Market Overview 2009 Contents

1

Introduction Ernst & Young presents its seventh annual overview of the M&A market in Russia. This document contains the results of our research into Russia’s M&A market in 2009 and explores the key trends that, we believe, will characterise the market in 2010. We hope this overview will be of interest to a broad audience, including owners of major corporations and SMEs, managers of all levels, strategic and financial investors, public officials and market analysts.

2

Russian M&A Market Overview 2009 Introduction

Methodology The M&A (Mergers and Acquisitions) market in Russia has grown more transparent and open. In certain cases, however, accurate and reliable information is still difficult to obtain. Whereas the terms of most international transactions are generally disclosed, levels of disclosure on domestic transactions remain fairly low. The financial crisis has also had an adverse effect on transparency, resulting in lower levels of disclosure.

Therefore, we have used certain estimates and assumptions to measure the market volume for the purposes of this overview, including: • Where the relevant information was available, transaction amounts were determined on the basis of announced transaction values.

• Where no reliable information on a deal’s value was available, expert estimates were used. As such, we understand that the actual aggregate volume of 2009 M&A deals may be understated in this overview, as information on a number of transactions has not been made public.

• Quantitative data used in this overview and an analysis of this data are based on disclosures relating to transactions completed between 1 January and 31 December 2009. A transaction was considered to have completed if information was available that the relevant closing agreement had been signed in this period (unless there remained

material conditions precedent), or if the closing had been announced by public sources. The materiality of conditions precedent was determined on a case by case basis.

• Additionally, Ernst & Young’s database and information from public sources such as MergerMarket, DealWatch, Bloomberg, Thomson ONE Banker and Mergers & Acquisitions magazine were used to support our calculations.

affiliation between the seller and the acquirer, these were considered not to be affiliated.

• Restructuring deals and asset transfers performed to repay debt were also excluded from the M&A market volume.

• Key M&A market indicators for 2009 included in this overview were compared against previous years’ figures (based on the sources mentioned above).

• In our M&A market volume calculations, we included all domestic deals and international transactions involving Russian acquirers or targets. This overview does not include international transactions in which both the acquirer and target were based outside Russia nor those were Russia-based companies acted only as sellers.

• Initial Public Offerings (IPOs) and Secondary Public Offerings (SPOs) carried out by portfolio investors were also excluded from the M&A market volume calculation.

• Debt and investment commitments were excluded from a stated deal value where it was possible to separate these out.

I ntercompany transactions, i.e. transactions in which assets were transferred within one and the same holding, were also excluded from the analysis where possible. However, where no reliable information was available regarding the

Russian M&A Market Overview 2009 Methodology

3

Key characteristics of the Russian M&A market 2009 Quantitative characteristics

Investment activity continued to slump in 2009 as most market players cut their extensive development budgets and opted to have a wait-and-see position.

According to our estimates, in 2009 the total value of M&A deals fell sharply to US$45.1 billion, a 62% decline from 2008.

The number of deals closed fell by 50% year on year to 513.

The average size of transactions decreased by almost 19% to US$109 million, primarily due to general impairment of Russian

assets affected by the financial crisis and also by the declining number of large deals.

We estimate that the total value of M&A deals involving Russian targets declined year-on-year by 74% to US$35.8 billion.

Acquisitions of foreign assets by Russian investors decreased by 79% to US$9.3 billion. The number of acquisitions of Russian assets decreased by 52% to 463, and the number or acquisitions of foreign assets declined by 34% to 50, respectively.

Figure 1. Aggregate volume of the Russian M&A market (US$ billions) 140

120

120 100

63%

bn US$

100%

85%

67% 42%

80

50%

71,3

60

-9%

50,2

40 20

150%

131,7

133%

45,1

30 7,9

-50%

12,9

-62% -100%

0 2002

2003

2004

2005

2006

2007

2008

2009

Acquisitions by Russian investors in Russia

Acquisitions by Russian investors abroad

Acquisitions by foreign investors in Russia

Annual growth (%)

Source: Ernst & Young research

Hereinafter, the estimated indicator is based on the transactions whose value is available.

1

4

0%

Russian M&A Market Overview 2009 Key characteristics of the Russian M&A market 2009

Industry overview In 2009, as in 2008, the highest volume of transactions were in the oil and gas and metals and mining sectors. Construction and real estate, which did not have significant M&A volumes in 2008, recovered to

products and retail, and telecommunications sectors.

second position in 2009. These sectors accounted for 70% of the Russian M&A market in 2009.

2009 was not marked by a significant number of transactions in the energy sector, which had been the leading sector in 2008.

Relatively high investment activity was also observed in financial services, consumer

Table 1. Number and total value of M&A deals in Russia 2009 Industry

Number of deals

Aggregate value of deals, US$ million

Average deal value, US$ million

Oil and gas

38

22,192

584

Construction and real estate

79

5,447

69

Metals and mining

36

4,175

116

Financial services

76

2,290

30

Consumer products and retail

74

2,184

30

Telecommunications

19

2,033

107

Machine building

33

1,055

32

Other (Technology, Chemicals, Media, Transport, Energy, Agriculture)

158

5,690

36

Total

513

45,118

109

Source: Ernst & Young database, public sources

Figure 2. Aggregate value of M&A deals by sector in 2009 13%

49%

Metals and mining

5%

7%

Oil and gas Construction and real estate

2%

Figure 3. Number of M&A deals by sector in 2009 Oil and gas Construction and real estate

15%

31%

Metals and mining Financial services

Financial services

5%

Consumer products and retail 5%

7%

Telecommunications

Telecommunications

Machine-building

Machine-building 9% 12%

Source: Ernst & Young research

Other (Technology, Chemicals, Media, Transport, Energy, Agriculture)

Consumer products and retail

7%

15% 4% 14%

Other (Technology, Chemicals, Media, Transport, Energy, Agriculture)

Source: Ernst & Young research

Russian M&A Market Overview 2009 Key characteristics of the Russian M&A market 2009

5

Major deals

In 2009, the largest individual M&A deals by value were closed in the oil and gas, financial services, and metals and mining sectors.

Table 2. Major Russian M&A deals 20092 No. Target

Target industry

Interest

Acquirer

Acquirer's industry

Deal value, US$ million

1 Gazprom Neft

Oil and gas

20%

Gazprom

Oil and gas

4,200

2 Severneftegazprom

Oil and gas

25% - 1 share

E.ON AG

Oil and gas

3,960

3 Bashkir oil and gas companies

Oil and gas

AFK Sistema

Diversified holding company

2,000

4 MOL Magyar Olaj

Oil and gas

21.2%

Surgutneftegas

Oil and gas

1,852

5 Sibir Energy

Oil and gas

60%

Gazprom Neft

Oil and gas

1,806*

6 SeverEnergia

Oil and gas

51%

Gazprom

Oil and gas

1,600

7 LukArco

Oil and gas

46%

LUKOIL

Oil and gas

1,600

8 NOVATEK

Oil and gas

13.1%

Volga Resources SICAV-SIF S.A.

Private equity fund

1,555*

9 COMSTAR-UTS

Telecommunications

50.9%

Mobile TeleSystems (MTS)

Telecommunications

1,322

Metals and mining

37%

Suleiman Kerimov

Private investor

1,249*

10 Polyus Gold

Total top 10 Russian M&A deals, 2009

19,144

Sources: Ernst & Young database, public sources * Analysts’ estimates

Qualitative characteristics

Key M&A trends in 2009: • Overall slowdown in M&A activity In 2009, the slowdown in investment activity was mainly due to attributed decline in the overall economy, financial positions of certain companies, and significant differences in price expectations between bidders and sellers. In other words, bidders were not ready to pay pre-crisis prices and sellers did not reduce the prices to acceptable levels.

Furthermore, most potential investors were focusing on resolving issues with their existing assets, and so their appetite for new acquisitions significantly declined.

• Increase in the number of failed deals The marketplace witnessed growth in the number of failed deals continuing a trend first noticed in Q4 2008, which was largely the result of differing price expectations mentioned above and the nonapplicability of traditional valuation approaches, risks and investment appeal in the current economic environment. The proposed sale of General Motors’ Opel to a consortium of Canada’s automotive supplier Magna and Russia’s Sberbank was the largest failed deal in 2009.

• Increase in the length of deals’ closing periods There was an increase in the length of deals‘ closing periods (defined as the length of the time from the date of signing a transaction agreement to the date of the final payment and closing of the transaction) in 2009. Equally, a significant number of such deals were put on hold or did not close during the course of the year.

• Overall slowdown in foreign investors’ and private equity funds’ activity In 2009, the M&A market saw a significant slowdown in foreign investors’ and private equity funds’ activity, which mostly resulted from the factors described above. Moreover, investors

Based on our methodology, we did not include a USS5.5 billion merger of Russia’s VimpelCom and Ukraine’s Kyivstar in our 2009 M&A market valuation as the deal was not completed in 2009

2

6

Russian M&A Market Overview 2009 Key characteristics of the Russian M&A market 2009

faced certain restrictions linked to restructuring and/or government financing.

• Increasing role of the government In H2 2008, the Government’s role in the national economy became more substantial and in 2009 it continued to increase. On the one hand, many companies received significant financial assistance from the Russian government as part of its anti-crisis policy. On the other hand, poor financial position of many enterprises allowed for stateowned corporations to continue to consolidate attractive assets.

• Assets restructuring Continuing a trend noted in the last year’s overview, assets sales and/or transfers effected in the process of debt restructuring accounted for a significant portion of the M&A market in 2009.

Nevertheless, they are noteworthy as they reflect the adverse effects of the crisis most vividly. The major deals effected during the course of restructuring are shown in the tables below.

Typically, such deals were not disclosed.

According to public sources, however, pledged assets of over US$15 billion were transferred to lenders in 2009.

In line with our methodology, such transactions were not included in quantitative indicators of the M&A market volume in this report.

Table 3. Major deals closed in the process of debt restructuring 2009 No.

Target

Interest

Acquirer

Deal value, US$million

1

Land owned by Moscow Stud Farm and Leninsky Luch Collective Farm

100%

VTB Capital

2,400*

2

Rostelecom

40.2%

VEB, Deposit Insurance Agency

2,172*

3

RUSAL

4.5%

ONEXIM Group

2,000

4

Mortgage portfolio of KIT Finance Investment Bank

18.1%

SMA GPB-Ipoteka Tri

1,165

5

Sistema-Hals

19.5% + call option for 31.5%

VTB Bank

708

Sources: Ernst & Young database, public sources * Analysts’ estimates

Russian M&A Market Overview 2009 Key characteristics of the Russian M&A market 2009

7

Key trends by sector Oil and gas Figure 4. Number of cross-border and domestic deals in oil and gas sector

34%

66%

Cross-border

Domestic

Source: Ernst & Young research

Figure 5. Value of cross-border and domestic deals in oil and gas sector

42%

58%

Cross-border

The number of M&A deals completed in the oil and gas sector in 2009 declined by 25% year-on-year to 38. However, the aggregate value of deals was US$22.19 billion, up by more than 1.7 times from 2008. This growth was mostly attributed to the ongoing asset consolidation strategy of the industry leaders and the readiness of owners to sell assets at a lower price, given the uncertain future of oil prices. Oil and gas deals comprise the most significant portion of the largest M&A deals in 2009.

The largest oil and gas deal involved Gazprom’s execution of a call option to buy Gazprom Neft’s 20% interest from Italian ENI. The call option agreement was signed in April 2007. As a result, Gazprom’s share in Gazprom Neft grew to 95.68%. The deal was worth roughly US$4.2 billion. To finance the acquisition, Gazprom raised loans from a number of Russian banks.

An asset exchange between German E.ON AG and Russian Gazprom was the second largest deal in the oil and gas sector (estimated value is US$3.96 billion). As a result, E.ON obtained 25% minus one ordinary share in Severneftegazprom and, thereby access to the Yuzhno-Russkoye field. Gazprom received 49% shares in ZAO Gerosgaz, which holds 2.93% shares in Gazprom.

Domestic

Source: Ernst & Young research

8

Russian M&A Market Overview 2009 Key trends by sector

The largest acquisition by Russian investors abroad involved Surgutneftegas buying a 21.2% stake in MOL Magyar Olaj , a Hungarian oil and gas company. The deal was part of Surgutneftegas’s strategy to continue its vertical integration and achieving greater proximity to end user markets.

In 2009, domestic M&A deals comprised two thirds of all oil and gas deals. However, the aggregate amounts of domestic and cross-border deals were broadly comparable – US$12.9 billion and US$9.2 billion, respectively.

In 2009, foreign investors, such as from the USA, Canada, Germany and China, acquired Russian assets worth US$4.6 billion (20% of the aggregate value of deals in the sector).

Giving the strategic role of the oil and gas sector in the Russian economy, many transactions in the sector involved stateowned companies. The amount of such deals increased significantly from US$2.0 billion to US$12.3 billion year-onyear as the government became more active in the M&A market.

Metals and mining Figure 6. Number of cross-border and domestic deals in metals and mining

25%

Domestic deals accounted for two thirds of aggregate deal value (almost US$3.0 billion versus US$1.2 billion of cross-border deals).

Among cross-border deals, Russian acquisitions abroad were the largest deals in value terms. In 2009, they totaled roughly US$1 billion.

75%

Cross-border

Domestic

Source: Ernst & Young research

Figure 7. Value of cross-border and domestic deals in metals and mining

29%

With a comparatively high level of industry concentration and virtually no independent players remaining in the domestic market, Russian companies seek expansion through acquiring assets abroad.

Thus, NefteKhimMash purchased 97.23% in Zabaikalsky Mining and Processing Company from TVEL. The acquired entity is focused on fluorspar production; it also has sufficient capacities to manufacture tantalum-niobium, lithium and beryllium concentrates and to process gold.

Besides, as the financial market turmoil became more severe, many private and institutional investors increasingly focused on gold as a hedge instrument. Investors consequently increased the share of gold in their precious metal portfolios and therefore encouraged investment demand to grow, particularly obviously so in the first months of the year. A large portion of M&A deals in gold extraction and processing (6 deals totaling US$1.6 billion) also confirms this trend.

The industry’s major deal was Suleiman Kerimov’s consolidation of his 37% stake in Polyus Gold performed in two stages: Kerimov purchased 22% shares from Vladimir Potanin in March and acquired the remaining 15% in April. The total value of the 37% stake was approximately US$1.25 billion.

Despite a significant decrease in investment activity and an overall shortage of liquidity, the most financially stable companies were able to acquire additional assets at lower prices.

71%

Cross-border

In 2009, the aggregate value of deals in the metals and mining sector, the leader by value of deals in 2008, decreased by 81% to US$4.17 billion on a year-on-year basis. the total number of deals in 2009 was 36 (2008: 103).

Domestic

Source: Ernst & Young research

Russian M&A Market Overview 2009 Metals and mining

9

Construction and real estate Figure 8. Number of cross-border and domestic deals in construction sector

12%

In 2009, M&A deals in the construction and real estate sectors, most gravely affected by financial crisis, continued to decline. The number of deals decreased from 145 to 79 and their aggregate value from US$12.4 billion to US$5.4 billion (-56%).

In real estate, only 54 deals (2008: 99) worth a total of US$4.6 billion (-45%) were closed, including cross-border deals totalling US$1.2 billion.

88%

Cross-border

Domestic

The largest real estate deal involved the acquisition of Vivaldi Plaza business center located in Moscow by the German KanAm Group. The estimated value of this transaction was US$700 million.

Source: Ernst & Young research

Figure 9. Value of cross-border and domestic deals in construction sector

10%

90%

Cross-border

Domestic

Source: Ernst & Young research

10

Russian M&A Market Overview 2009 Construction and real estate

The second largest deal was Russian businessman Suleiman Kerimov’s purchase of a 20% interest in PIK Group, which was facing difficulties repaying its debt. Among construction companies seeking state assistance, PIK was the first to be considered by the government. The deal value totalled US$410 million. As Kerimov had already held a 25% stake, his share in the company increased to 45%.

In 2009, investors were most active in commercial real estate; the most significant deals in terms of number and aggregate value were acquisitions of business centers.

Market players entered into 15 such deals worth US$2.5 billion or 56% of the aggregate value of M&A deals in real estate in 2009.

Only 25 transactions (worth a total of US$883 million) were closed in construction sector (22% of the 2008 value). In 2009, cross-border M&A deals accounted for a mere 10% of the total deal value and

totalled US$86 million compared to US$399 million in 2008.

Figure 10. Number of cross-border and domestic deals in real estate

Figure 11. Value of cross-border and domestic deals in real estate

In 2009, the most significant deals were acquisitions of companies focusing on construction, reconstruction and maintenance of such special-purpose facilities as

nuclear power stations, railway facilities, communication networks, etc. The value of those deals totaled US$384 million, whereas volume of M&A deals in residential construction and construction materials amounted to US$250 million each.

Figure 12. Acquisitions of business-centers in real estate

19% 28% 44% 56%

72%

81%

Cross-border

Domestic

Cross-border

Domestic

Acquisitions of business-centers All other deals

Source: Ernst & Young research

Source: Ernst & Young research

Russian M&A Market Overview 2009 Construction and real estate

Source: Ernst & Young research

11

Financial services Figure 13. Number of cross-border and domestic deals in financial services

14%

86%

Cross-border

Domestic

Source: Ernst & Young research

Figure 14. Value of cross-border and domestic deals in financial services

22%

As of the end of 2009, the financial services sector ranked fourth by total value of closed deals (US$2.3 billion) and second by the number of closed deals (76), down 75% and 52% from 2008, respectively. Average deal value was only US$30 million, which is mainly attributed to a significant decline in the value of companies and the lack of major deals in the sector in 2009.

In 2009, the financial services sector witnessed a significant slowdown in the activity of foreign investors who acquired Russian assets worth only US$146.5 million compared to US$3.9 billion in 2008. This decline resulted from the crisis, affecting the financial services sector worldwide.

Russian investors also showed little interest in purchasing foreign assets; the same situation was seen in the prior year. Year-onyear, the value of such deals declined from US$386 million to US$361million.

In 2009, major deals in financial services included Rosgosstrakh’s purchase of Russki Mir insurance company from Vladimir Kogan for US$320 million (based on market analysts’ estimates), Standard Bank Group’s purchase of a 33% stake in Troika Dialog and Sberbank’s acquisition of a 93% interest in Belarus BPS Bank for US$281 million.

78%

Cross-border

Domestic

Source: Ernst & Young research

12

Russian M&A Market Overview 2009 Financial services

As in 2008, the banking and insurance subsectors were the most active sectors in the financial services industry, both in terms of the number and value of M&A transactions.

Continuing the trends noted in last year’s overview, in 2009, most banking sector deals were reorganizations and/or recapitalizations of financially unstable credit institutions performed in conjunction with the Deposit Insurance Agency, and consolidations of regional players by federal banks or larger regional companies. In 2009, a number of deals involved the sale of Russian subsidiaries of foreign financial institutions in the process of their global restructuring on and a few purchases of banking licenses by various investors.

Russian commercial banks entered into 45 deals with a total value approximating US$1 billion.

In 2009, investment activity in the insurance sector slowed versus 2008: there were only 7 deals with a total value approximating US$390 million compared to 22 deals worth a total of US$3.5 billion in 2008. The largest deals involved takeovers of significant regional players by pan-Russian players with sufficient resources to acquire such assets at a comparatively low price.

Consumer products and retail Figure 15. Cross-border deals in the retail sector

25%

75%

Russian investments abroad Foreign investments to Russia

Source: Ernst & Young research

After an increase in both the number and value of M&A transactions in consumer products and retail seen in 2008, investors grew far less active in 2009. The total value of deals declined from US$8.9 billion to US$2.2 billion, down 75%. During the year, the total number of M&A deals in the sector almost halved from 156 to 74.

The largest deals were concluded in the retail subsector. Their value totaled US$1.2 billion, accounting for 56% of overall acquisitions in the industry. The number of retail M&A deals totaled 32.

In terms of deal value, food retailers accounted for more than the other retail segments. In 2009, food retailers entered into 11 deals totaling US$706 million. X5 Retail Group was the most active retail player. Notably, the company acquired Paterson retail chain for an estimated US$190 million.

In 2009, investors purchased retail assets in consumer electronics, pharmaceuticals, clothes, cars and automotive components segments.

Russian M&A Market Overview 2009 Consumer products and retail

In the retail sector, Russian acquisitions by foreign investors totaled US$242.5 million, whereas Russian investments abroad amounted to only US$80.4 million.

Consequently, the aggregate amount of cross-border M&As in this segment totaled US$323 million (26% of the total deal value in retail). The largest cross-border deal was a US$110.6 million joint purchase of 35.4% shares in the Lenta hypermarket chain by the private equity fund TPG Capital and VTB Capital.

The aggregate value of deals in consumer products was US$957 million. The number of M&A deals in this segment totaled 42, the most notable of them was Vostok Confectionary’s purchase of snack producer Sibirsky Bereg. The value of the deal was estimated at US$150 million.

Cross-border deals accounted for 40% of the aggregate value of M&A deals in the consumer products sector and totaled US$387 million. The largest cross-border deal was the acquisition of 12% of Russian Alcohol Group by Central European Distribution Corporation estimated at US$145 million.

13

Other industries Telecommunications

Machine-building

Year-on-year, the aggregate value of M&A deals fell from US$10.6 billion to US$2 billion (-81%), whereas the total number of deals declined from 62 to 19 and the average deal value decreased by 38% to US$107 million.

In 2009, the aggregate value of M&A deals in the Russian machinery sector declined by 75% to US$1 billion. The number of deals totaled 33; their average value reduced from US$82.4 million to US$32 million on a year-on-year basis.

The largest deal in the telecommunications sector was Mobile TeleSystems’ acquisition of 50.91% stake in COMSTAR-UTS from AFK Sistema for US$1.3 billion. This deal accounted for over 60% of the aggregate value of the sector M&A deals. In line with our methodology, we did not include the merger of Russian VimpelCom and Ukrainian Kyivstar in the 2009 M&A market valuation. According to expert estimates, the value of the deal was US$5.5 billion.

The largest deal in the sector was French Alstom Transport’s acquisition of 25% + 1 share in Transmashholding, Russian leader in rolling stock manufacturing. Inclusive of this deal, foreign investments accounted for 60% of total investments in machinery sector.

Cross-border deals in telecommunications accounted for US$403.4 million or 20% of the total deal value. The second largest deal was US-based Lazard Funds’ acquisition of 2.6% of Mobile TeleSystems for slightly less than US$310 million.

While Russian investors were more interested in acquiring foreign mobile phone assets over other sectors, their foreign peers sought to purchase media assets in such areas as mobile and Internet content.

14

Technology In 2009, the number of technology M&A deals halved to 14 year-on-year. Aggregate deal volume decreased from US$1.62 billion to US$235.4 million, down 85%.

RUSNANO and RENOVA Group established a joint venture to manufacture solar modules in Russia. The transaction is not classified as an M&A deal according to our methodology, but at is noteworthy.

RUSNANO’s investment in the joint venture was estimated at US$422.5 million.

Russian M&A Market Overview 2009 Other industries

Investment activity was strongest in the areas of acquisitions of small software and security system producers.

In 2009, other industries accounted for 13% of the total M&A market and totalled US$5.6 billion.

The largest M&A deals in the sector included SIBUR’s acquisition of Austrian CITCO Waren-Handelsgesellschaft m.b.H. providing transportation, storage and circulation services for oil and gas and chemical industry (the estimated value was US$1 billion) and ONEXIM Group’s purchase of 80% of the U.S.-based New Jersey Nets basketball club based in North America (the estimated value is US$900 million).

A number of significant deals were also concluded in such industries as energy, chemicals, transport, agriculture, media and entertainment.

Russian M&A development forecast for 2010

Based on our observations, many companies across a wide range of industries have high hopes for 2010. They expect a significant upswing in business activity followed by larger numbers of deals and higher deal values. Major indicators of potential M&A recovery include the stabilization of oil prices, the gradual improvement of both portfolio and strategic investors’ liquidity and overall increase in investors’ activity on the financial markets.

Even if the number and value of deals do not grow significantly in 2010, general M&A activity is likely to increase. This trend is already seen in increased number of companies seeking deals to help their business and investment goals. However, it will take the Russian M&A market a certain number of years to return to 2007 levels.

Another positive trend is M&A activity upturn among medium-sized companies, both Russian companies, which faced with market liquidity shortage and focused instead on business process improvement, and mid-sized international companies attracted by quality assets and seeing opportunities to expand in the Russian market.

As in previous years, deal-makers in oil and gas will include such heavyweights as Gazprom, LUKOIL and Rosneft. In 2010, they are likely to purchase foreign assets to differentiate themselves and expand in new geographical locations. On the other hand, we believe that in 2010 – 2012 new joint exploration/production projects involving both Russian and foreign partners will emerge. In September 2009, top executives of Shell, Mitsui, Mitsubishi, Eni, E.ON and other oil and gas leaders met to discuss

the development perspectives of Yamal, which resulted in announcement of certain initiatives involving these foreign players and gave a positive impetus to new long-term foreign investments in Russian gas industry.

We expect that restructuring processes in construction and real estate will continue through 2010 and players will continue to purchase significant real estate assets.

According to our estimates, 2010 will see a significant increase in metals and mining investments. We expect that Russian metals and mining companies will dispose of their low-margin or loss-making foreign subsidiaries. On the other hand, we expect that both Russian and foreign investors will become more interested in mining assets.

Financial services companies are expected to address bad debt and non-core asset issues; M&A activity in this industry will heavily depend on recovery in the overall economy. Besides, the largest players will continue to consolidate their assets. We also expect that new foreign investors will enter the Russian market in 2010, deals will be struck to complete the restructuring of the global financial institutions as well as transactions involving distressed banking and insurance assets.

significantly affected by Svyazinvest’s reorganization comprising consolidation of its subsidiaries and the establishment of a state-owned telecom operator on the foundation of Rostelecom. To this end, the Board of Directors and Russian Prime Minister approved the respective plan in June 2009. In 2010-2011 the holding company may turn its attention to acquiring large mobile or broadband operators.

We believe that the technology sector will remain attractive for investors. While we expect that in 2010 the role of the state in this sector will continue to grow, primarily through diversification of assets of large state-owned corporations such as RUSNANO and Russian Technologies, we also expect that major foreign developers will grow more interested in Russian distributors and integrators in 2010.

In 2010, retail and consumer products M&A deals are likely to be characterized by companies’ attempts to further consolidate the domestic market.

The largest telecoms are likely to continue consolidation of fixed line assets, cable TV and broadband capacities to ensure a greater scale expansion to regional markets. These processes will be

Russian M&A Market Overview 2009 Russian M&A development forecast for 2010

15

Contact information Hakob Sarkissian

Partner Head of Transaction Advisory Services, CIS Tel: +7 (495) 705 9722 Hakob.Sarkissian@ru.ey.com

Evgeny Trusov

Partner Head of Corporate Finance, Russia Tel: +7 (495) 783 2539 Evgeny.Trusov@ru.ey.com

16

Russian M&A Market Overview 2009 Contact information

Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services.

Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,400 professionals work at 16 offices in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk.

For more information about our organization, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.

Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Š 2010 Ernst & Young (CIS) B.V. All Rights Reserved.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Ernst & Young can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate adviser.