M&A Radar H1 2024: Ukraine

Substantial international financial support continues to ensure that macroeconomic risks remain under control. Despite the monetary pressures of the Russia’s ongoing full-scale invasion, the National Bank of Ukraine (NBU) has been able to maintain a stable exchange rate and control inflationary processes, facilitating a reduction in Ukrainian interest rates and positively influencing domestic and international investment activities.

According to the Ministry of Economy of Ukraine, Ukrainian GDP grew by approximately 3.7% in May 2024 compared to the same month of the previous year, with overall growth for the first five months of 2024 estimated at 4.3% higher compared to the corresponding period in 2023. As for the outlook for the rest of 2024, the IMF projects that Ukraine's GDP growth will likely fall within a more conservative range of 2.5% to 3.5% by the end of 2024, a slight revision of previous projections based on ongoing war-related developments. Ukrainian GDP growth is nonetheless expected to continue due to the increasing stability of the now well-established Ukrainian maritime corridor, as well as strong domestic demand for construction services supported by infrastructure reconstruction funding.

A number of recent programmes aim to accelerate new capital investment and economic recovery in Ukraine, such as the launch of the Export Credit Agency (ECA) and a USD350 million insurance programme delivered through the collaborative efforts of professional services firm AON and the US International Development Finance Corporation. Such developments are expected to help mitigate war risks and ultimately boost investor confidence. The "Made in Ukraine" platform launched by the Ukrainian Ministry of Economy also aims to attract investment by improving communication between the state and entrepreneurs, supporting Ukrainian manufacturers, and strengthening the local economy.

These developments, among others, have set the backdrop for ongoing gradual improvement in investor confidence over the last six months, with 25 deals announced in H1 2024 (a 4.3% increase in deal volume compared with H1 2023). Total deal value, meanwhile, was up by 31% compared to the first half of the previous year, increasing to USD510 million.

However, while available data suggests a potential further rebound in Ukrainian M&A activity, lower levels of transparency (48% of deal values disclosed versus 58% in H1 2023) warrants some caution. A more comprehensive assessment of the market's true volume and value can only be made once the year-end figures enable a better understanding of the overall M&A picture. Nonetheless, average transaction value has increased significantly, up from USD28 million in H1 2023 to USD43 million in H1 2024. This growth was driven by two large transactions that exceeded USD100 million: IT firm Creatio’s USD200 million funding round and NJJ Capital's USD120 million acquisition of telecommunications company Datagroup-Volia.

As for outbound activity, Ukrainian businesses continue to diversify their investments and seek opportunities in international markets, with a third of total deal volume (eight transactions) conducted abroad by local Ukrainian investors. Noteworthy deals have involved Ukrainian IT companies like Ciklum and Intellias acquiring companies in the USA in order to facilitate expansion into the North American market, as well as investments by Ukrainian energy firm DTEK in a wind and solar park and a battery storage facility in neighbouring Romania and Poland, respectively. Ukrainian investors across various sectors have maintained an ongoing trend of expanding operations to neighbouring Central European countries, including industries like agriculture, consumer markets, healthcare and pharmaceuticals, and transport and infrastructure. Expanding positions in international markets and regional diversification will likely continue to be one of the driving forces for Ukrainian M&A in 2024.

Despite a general drop in the share of inbound deals, foreign investors were still fairly active in H1 2024: announcing seven transactions (down from nine transactions in H1 2023) with a total value of USD410 million. The overwhelming majority of inbound deals (six out of seven) were in innovation and technology, another continuation of 2023 trends. The Ukrainian IT sector, with its smaller physical footprint and inherently mobile workforce, has been relatively resilient in the face of wartime conditions and has been able to adapt to new pressures and challenges with minimal disruption to services.

Geographically, inbound deal activity in H1 2024 was concentrated in two locations: Europe (USD155 million total deal value across four transactions) and North America (USD255 million across three transactions), with both regions accounting for the entirety of inbound deal value and volume.

Domestic M&A contributed 9% of the total overall deal value and 40% of overall volume for Ukrainian deal-making in H1 2024. However, the disparity in such figures should be taken with caution due to extremely low level of transparency for domestic deals. 2024 so far has seen the lowest level of value disclosure since 2013, with a mere 20% of transactions disclosing deal values (a substantial decrease from 67% in H1 2023).

Notable domestic deals included Biosfera Corporation’s acquisition of Service Pro, a major distributor of household and hygiene goods. This transaction will increase Biosfera’s vertical-integration as a manufacturer of such goods and underscores the resilience of Ukraine’s consumer goods sector, as well as the potential for growth in this area. Horizon Capital has also continued to follow an active investment strategy in Ukraine. In January the firm announced investment in Viseven, a provider of technology-driven marketing solutions and services in the pharmaceutical and life sciences industries. This marked the third investment in Ukraine for Horizon Capital's Growth Fund IV, underscoring a commitment to support the growth of innovative and technology-driven businesses in the country.

In addition to consumer goods and IT, domestic Ukrainian M&A spending in H1 2024 was centred around two other mainstays of the local investment landscape: real estate and construction, and agriculture.

Despite ongoing challenges and unprecedented levels of uncertainty from Russia’s ongoing invasion, the Ukrainian economy has continued to demonstrate resiliency in the face of adversity. In addition to Ukrainian tenacity and NBU policies, this is also in no small part thanks to a vote of confidence from the international community in the form of external financing. The extended arrangement of the IMF’s Extended Fund Facility, for example, just concluded its Fourth Review in June which enabled the disbursement of an additional USD2.2 billion in budget support. Working with the Ukrainian government, the IMF considers such sustained support crucial so as to “safeguard macroeconomic stability, restore fiscal and debt sustainability, and enhance institutional reforms”.

Such support goes hand in hand with Ukraine’s continued successful implementation of long-anticipated and wide-ranging structural reforms. According to Sergii Marchenko, Minister of Finance of Ukraine, these reforms have included improvements in “public finances, the financial sector, monetary and exchange rate policies, governance, anti-corruption, and the energy sector”. Enhanced governance and the diminishing influence of corruption, Mr Marchenko continued, will accelerate Ukraine’s progress toward EU accession and “help lay the foundation for post-war growth”.

Similarly, the Ukrainian government’s increasing focus on privatisation, as embodied by the work of the State Property Fund of Ukraine, has been a positive step towards attracting greater levels of investment and further stimulating economic growth. The first five months of 2024 saw more funds attracted through privatisation than over the entirety of 2018, with the average number of bidders on online auctions for state assets hitting an all-time high at 5.15 on average. Growing levels of investor interest in state assets demonstrates enhanced confidence in the Ukrainian economy and its prospects for post-war recovery.

Despite having one eye to the future though, Ukraine has had to contend with perennial war-related challenges as the conflict enters its third year. These include blackouts which, if left unchecked, will continue to significantly constrain growth throughout 2024 and 2025. Mitigating this risk is therefore among the Ukrainian government's top priorities. The following steps are aimed at increasing manoeuvrable and decentralised power generation in order to further enhance power infrastructure resilience:

• DTEK plans to build several powerful wind farms, including the 650MW Poltavska WPP project, in order to quickly increase Ukraine's energy capacity with renewable sources whose peak production season is during crucial and energy-intense winter months.
• Ukrnafta is also preparing to construct manoeuvrable power generation facilities with the backing of the European Bank for Reconstruction and Development (EBRD) and Ukrainian government, as well as expertise from Siemens Energy Global and Deutsche Bank’s support in raising private investment. These ambitious construction projects include plans to build more than 1000 MW of gas generation worth USD1 billion over the next three years.

Maintaining the theme of long-term prospects, Ukraine aims to restructure USD20 billion of international bonds before the current payment moratorium agreement with bondholders expires on 1 August. Successful restructuring would provide much-needed financial relief and demonstrate Ukraine's commitment to its financial obligations, as well as preventing the risk of going into default. An agreement is yet to be reached between bondholders and the Ukrainian government, however.

Nonetheless, there is both reason and cause to remain cautiously optimistic. As a bellwether of Ukraine’s overall economic health for many years, prospects for the Ukrainian M&A market continue to reflect the country’s resilience in the face of Russia’s full-scale invasion. Increases in deal volume and deal value in H1 2024 are welcome positive signals of growth for domestic and international investors alike. While the role of substantial international financial support will continue to be vital for Ukraine’s economy, this should not diminish the hard work by the Ukrainian government and the NBU in their ongoing commitment to reforms and the launch of initiatives aimed at boosting investor confidence. These factors, in combination with the tenacity of Ukraine’s civilian population and defence forces, have significantly contributed to maintaining stable economic indicators and collectively suggest that the market has the potential for further recovery in the second half of 2024.

We are pleased to announce an interactive version of KPMG M&A Radar in Power BI format, spanning the period from 2013 to H1 2024. This version offers several advantages:

• The data in KPMG M&A Radar can be filtered by various time periods; including yearly, half-yearly, and quarterly intervals.
• Most analyses in KPMG M&A Radar are interactive, allowing you to filter the data by period, sector, region, etc. You can easily apply filters using the period selector, sector filter, or drop-down menu on the relevant page.
• Certain visual elements in KPMG M&A Radar provide access to additional information. Simply click or hover over a specific element in a graph (such as a bar or a section of a doughnut chart) to view more details.