5 Key M&A Trends on Kazakhstan Legal Market

Allen & Overy has recently published a survey of the global M&A market for the first quarter of 2018. The main point of the survey is that despite continuing geo-political uncertainty, the global M&A market is now enjoying the longest cycle of growth ever recorded. Key regions are powering ahead and mega-deals are back on the agenda in many sectors, indicating an extraordinary level of confidence among investors.[1]

In light of the global transactions market remarkable growth, we would like to highlight 5 major trends we have been witnessing in the last couple of years on the Kazakhstan M&A market. Our insight is based on our most recent experience while supporting domestic and multi-jurisdiction M&A deals in Kazakhstan.

Pharmacy 

Despite the downturn in overall global market deal value, the pharmacy sector continues to deliver large, industry-shifting transactions. M&A in this sector has been generally driven by the need for large pharma groups to refill their product pipelines and move into new treatment areas. Among recent major international deals are Takeda’s USD 76 bln. acquisition of Shire, which dominates the numbers and Sanofi’s USD 11.1 bln. acquisition of Bioverativ.[2]

While the global pharmacy players such as Sanofi, GlaxoSmithKline, Teva, Takeda, Pfizer and others are continuing to expand their business operations in Kazakhstan, strong domestic players now are in the position to comply with the tough competition for customers. Increasing competition in the near term may lead to the necessity for local players to pool efforts through the consolidation and merger of their businesses.

In particular, our firm was recently engaged in a significant cross-border pharmacy products asset deal. We expect more asset and share deals on the Kazakhstan pharmacy M&A market to follow in the near future.

Renewable Energy

The world is looking for a transition from traditional energy resources to renewable energy resources (“RES”). Today, the global “energy pie” consists of 87% carbon-based fuels and only 13% of alternative types. Kazakhstan is in need of the urgent development and implementation of a set of measures and policies to become the RES using countries. The first step in this direction already took place in the summer of 2017 at the EXPO-2017 International Exhibition in Astana. We noted that this exhibition gave a great push to international investments in Kazakhstan’s RES. Recent key acquisitions in the industry took place in East and South Kazakhstan regions, and for the time being we note that Chinese and European investors are champions among investors interested in this sector. In light of a number of deals which our M&A practice supported in the last two years, we will likely see more RES transactions in the months ahead. Good news indeed for further development of alternative energy and cleaner environment in Kazakhstan!

Privatization – something’s still to comeThe national privatization program for 2016-2020 involving more than 877 entities is 76 percent complete as 397 organizations worth 199 billion Tenge (USD 619 mln.) have been sold and 274 entities are set for reorganization and liquidation as reported by Kazakhstan Minister of Finance Bakhyt Sultanov during the 10 April 2018 government meeting.[3] We have seen a keen interest from Chinese investors in scientific research institutions which are put on sale as part of the privatization program.

We further expect to see more large-scale M&A transactions allowing local and international players an access to major strategic assets of Kazakhstan, which have been traditionally (historically) reserved for the state ownership.

Up next for privatization through the IPO on the AIFC Stock Exchange[4] are Kazakhstan’s largest state-owned companies, such as Kazakhstan Temir Zholy company (Kazakh railways), KazMunaiGaz JSC, Kazatomprom JSC, Samruk-Energy JSC, Tau-Ken Samruk mining company, Kazpost JSC and Air Astana JSC.

One Belt, One Road 

Another key driver that may boost the Kazakhstan economy in the nearest future is China’s ‘One Belt, One Road’ project (the “BRI”), the trade and development strategy unveiled by President Jinping Xi in September 2013, which aims to improve trade relations between China and the “Western world”. It is no secret that Kazakhstan must and will benefit from this initiative due to its location in the heart of the BRI and openness to actively work with all players.

The BRI strategy is already well advanced as at the end of 2017, the Chinese government announced that it had signed 100 cooperation agreements with 86 countries and international organizations. In December 2015, the governments of Kazakhstan and China signed investment agreements worth USD 14 bln.

The major areas of Chinese investments in our economy are banking and agro-industrial sectors. For instance, Bank of China and ICBC are already operating within the Astana International Financial Centre and Chinese investors contemplate to build an agroindustrial complex in the South Kazakhstan region worth USD 100 mln.

Acquisitions of “shell companies”

The recent trend related to small/mid-sized level transactions is the way how foreign investors choose to enter into the Kazakhstan market. Considering the significant level of a state regulatory control in some areas of the national economy, difficult and time-consuming licensing/permission procedures, acquisitions of “shell companies” appears to be an excellent option.

The concept of a so-called “shell company” in the Kazakhstan context relates to companies which holds a certain license/permit, but has a dormant status at the time of its acquisition. While direct/indirect acquisition of a “shell company” by a foreign company is a legitimate way of acquiring business in general as it indeed reduces costs and saves time in dealing with all regulatory procedures and approvals which can be a nightmare at times, one should be cautious of risks associated with this business, commercial, legal or otherwise. Therefore it is essential that a foreign investor conducts a due diligence of the “shell company” and assesses and weighs all pros and cons of such option.

In our most recent experience, our firm supported numerous acquisitions by European and Chinese companies of a number of shell companies with the state category 1 construction license and the state category 1 license for exploitation of mining operations. The key point to consider here is to ensure that there is no imminent risk of license revocation or suspension due to prior dormancy status and also to see if all qualification requirements and licensing terms are met and followed.

Finally, corporate and private equity executives foresee an acceleration of M&A activity in late 2018, both in the number of deals and the size of the transactions. [5]We feel hopeful for the future and expect that the trends described in our insight prove themselves in the favor of the domestic and global economic growth.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy, and its legislation and legal system are in constant development. Should you have any questions or want to discuss matters addressed in this Client Update, please contact us.

[1] Allen & Overy, Long distance running, M&A Insights H1 2018

[2] Allen & Overy, Long distance running, M&A Insights H1 2018

[3] https://kapital.kz/finance/66093/bahyt-sultanov-nazval-chastye-narusheniya-pri-privatizacii.html

[4] http://privatization.gosreestr.kz/

[5] Allen & Overy, Long distance running, M&A Insights H1 2018