On Thursday, July 5th, UniCredit Bank agreed to acquire a 95% stake in Ukrosotbank, valuing the company at a record USD 2.07 billion.
This follows the collapse of a deal agreed over a year ago when Italian Banca Intesa looked to purchase the bank. The deal had been continuously postponed due to various legal issues from both the Italian bank and Ukrsotsbank’s owners, the Interpipe group.
The most significant difference in this new deal is the value of the bank: the Banca Intesa deal originally valued the bank at USD 1.1 billion which was subsequently raised to USD 1.4 billion in September 2006.
The acquisition is being achieved through the purchase of the majority stake from Interpipe group, owned by Viktor Pinchuk, the son-in-law of former Ukrainian President Leonid Kuchma. UniCredit will pay a further USD 130 million to other shareholders for its share in a capital increase to be completed before the deal goes through.
Record deal for Ukraine’s finance sector
“This is the biggest deal in the financial sector of Ukraine which no doubt will positively affect the business and economic reputation of the country. We are glad that the process of searching for a strategic investor in one of the best banks of Ukraine has finally been achieved successfully,” Gennadiy Gazin, Chairman of the board of Interpipe, told local press.
It remains unclear who bears the brunt of responsibility for the collapse of the Banca Intesa deal as both parties made mistakes, but given Ukrsotsbank’s strong results, it was in Interpipe’s interest to hold off on the deal until a higher valuation could be reached.
The new valuation of USD 2.07 billion is 48% higher than the price Banca Intesa valued it at in September, which reflects the strong growth seen by Ukrsotsbank in the past year.
Nonetheless, the price over book value (POB) has remained in the same range. Alexander Viktorov, analyst at Concorde Capital Bank, says: “In absolute terms, Interpipe did a good deal in selling the bank at almost double the amount, but when you take into account the POB, the price remained the same. POB in this deal is 5.5, which is the same as the Banca Intesa deal a year ago.”
Ukrsotsbank assets were estimated at USD 3.4 billion, making it the 6th largest bank in Ukraine with a 5.2% market share at the end of 2006. Last year the bank, which has 497 branches, saw its profits more than double to USD 57.3 million.
Capitalising on Ukrsotsbank’ solid brand
Retail is the backbone of the bank’s activities, and it is currently in the top four retail banks in Ukraine with an estimated 14% share of the mortgage market and retail lending making up 55% of its loan portfolio (45% corporate). The bank’s stated objectives are to have 75% retail loans by the end of 2009.
According to Fedele Di Maggio, Chief Operating Officer of UniCredit Bank Ukraine, this was a very good deal for UniCredit Group. As for the branding of Ukrsotsbank, he says: “In other countries where banks have been purchased that have such a strong brand name, in Croatia or Bulgaria for example, the bank retained its name and the UniCredit logo was added.”
The main interest for UniCredit is to tap into Ukraine’s fast growing retail market. Starting from a very low mark, growth is expected to be very strong, with 60% forecast for next year.
One of the main challenges for UniCredit will be to update the systems, which lag some ways behind European standards. Jacques Mounier, President of the Board of Management of Calyon Bank, says: “The question mark in retail banks is the quality of the systems. I would be surprised if the systems were very up to date from a western perspective.”
Another potential issue for UniCredit will be to familiarise itself with the inner workings of the bank. “Banks in Ukraine and elsewhere are to some extent black boxes, you never know the real quality of the assets. Whatever you do, you might find surprises, you might not. My impression is that Ukrsotsbank has been well managed and so the surprises should be limited. It is probably one of the best managed banks in Ukraine,” says Mounier.
UniCredit’s remarkable growth
UniCredit is the fastest growing of the big Italian banks. In the past two years it has completed deals worth USD 25 billion, and has tripled its assets in three years. With a market capitalisation of EUR 70 billion and total assets of over USD 1 trillion, it is one of the largest banking groups in Europe.
This is UniCredit’s third acquisition deal this year, and by no means the largest. Earlier in the year it purchased domestic rival Capitalia for USD 29.5 billion, which was followed in June by the take over of ATK Bank in Kazakhstan for USD 2.2 billion.
UniCredit is the leading international bank in Central and Eastern Europe, with 3,100 branches and 24 million customers in Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Kazakhstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.
This deal comes amidst a flurry of M&A deals in Ukraine in the past three years seeing price over book values reach record highs. In February, Swedish Bank Swedbank bought TAS-Commerzbank for almost seven times book value.
These astronomical prices started in 2005 when Raiffeisen bought Aval for a then record price, but the price paid, however, is not all important as future growth is expected to compensate. “The question of price is relative,” says UniCredit’s Di Maggio. “Everyone said Raiffeisen was paying too much for Aval, but when you look back, it was a very good deal. UniCredit paid USD 2 billion for Ukrsotsbank, which is not much for us, and in 5 or 6 years it might be worth USD 6 billion.”
This sale also represents the last of the big Ukrainian banks for the time being. “This is the last biggest bank available for sale in the short term. We also have Privat Bank but it will not come up for sale in the foreseeable future. They will definitely sell, it but it will not happen in the next year. However, it is only a matter of time and price,” says Viktorov at Concorde Capital.
Future takeovers likely
Of the remaining top-ten banks, those with potential are Nadra, Forum and Finance and Credit, which could be considered a short-term acquisition target. “Finance and Credit was recently transformed from a closed joint stock company to an open joint stock, which signals they want to do at least private placement and most probably sell the bank,” Viktorov says.
Other foreign players have also noted interest in entering the Ukrainian market, such as Societe General from France, American Citibank, and others from Germany and Greece, all of whom will be interested in tapping into the country’s retail growth.
The transaction, which UniCredit will finance with existing resources, is expected to be finalised in the last quarter of 2007. Before it can be completed, the deal will also need the necessary authorisations from various regulatory bodies, including the Bank of Italy, as well as the approval of the National Bank of Ukraine, and the local anti-monopoly authority.
