Big agribusiness draws cash

The global growth in foodstuff prices put revitalized investing into agriculture. Increase of activity of Ukrainian agro-holdings on the international capital market in 2010 has brought a good yield – the companies managed to attract over one billion dollars on aggregate.

The large companies in the agrarian sector that proved their economic stability in the times of the crisis were the first to gain access to international stock and borrowing market. Of the large placements, IPO (Initial public offering – первинне розміщення акцій на фондовому ринку) of the Avangard Agroholding owned by entrepreneur Oleh Bakhmatyuk can be singled out. In spring, 22.3% stake of this enterprise was estimated by investors at US $216 mn at London Stock Exchange. By mid-autumn, Avangard attracted another US $200 mn placing its Eurobonds at 10.5% annual interest rate. Myronivskiy Khliboprodukt owned by Yuriy Kosyuk issued Eurobonds with 10.25% profitability for the total amount of US 5330 mn.

Kernel Group of Andriy Verevskiy is also displaying high activity in attracting foreign capital: directing US $82 mn from sale of 6.25% of its shares for acquisition of a competitor – Allseeds Group, the company is now preparing for placement of Eurobonds for US$200 mn.

In addition to that, just last month Agroton of Luhansk entrepreneur Yuriy Zhuravlev made an IPO on the main floor of Warsaw Stock Exchange receiving US $54 mn for 26.2% shares.

According to assessments of Concorde Capital, the Ukrainian agro-industrial sector managed to attract over US $1 bn, taking into account all IPOs and private placements, issuance of bonds and also loans from large financial institutions, including European Bank for Reconstruction and Development and International Finance Corporation.

The reasoning of the holding owners is very clear. “The key reason is relative cheapness of foreign capital. Inside the country, it is difficult to attract a large amount of money (tens or hundreds millions of dollars) for a long term and at a suitable interest rate,” notes Andriy Yastreb, an analyst at Phoenix Capital. The other reason is grown trust of foreign investors towards Ukrainian companies due to relative stabilization of political situation in Ukraine.

It must be emphasized, however, that the interest is mutual. Director of investment and banking management company Renaissance Capital Ukraine Serhiy Alekseyenko says that the companies of Ukrainian agrarian sector remain extremely attractive both for portfolio and strategic investors. Compared with other industries, they have several advantages. First of all, agricultural products, a large part of which is being exported abroad (grain, sunseed oil, rapeseed) enjoys stable demand on the world market. After a dive in 2008-2009, the prices for foodstuffs are climbing convincingly all around the world. Investors want to invest into the so-called real assets, agrarian sector being a part of them. According to assessments of leading economists, it will play a serious role on the world market on the whole in the next 10-15 years (taking into account the growth of consumption of food products and development of bio-energy sphere). Secondly, agrarian sector is nearly the only one in Ukraine that continues to show growth. In the first half of the year, agricultural enterprises stably increased their output volumes by 6-7% per month. However, by the result of ten months the growth slowed down to 0.1% due to export limitations. In essence, agrarian and food companies for Ukraine are the same litmus paper as gas and oil companies for Russia on the international market.

The third reason is a large potential of Ukrainian land. Application of new technologies can double the yield of grain crops without increase of sowing land up to 60-70 mn t of grain per year. By the way, in the efficiency of rapeseed production, Ukraine is even ahead of Europe. Meanwhile, the expenses for growing grain crops of effective agroholdings operating in our country could lie lower (US $250/t) than, for example, in the U.S. – US $300/t or Argentina – US $320/t.

On the whole, the efficiency of operation of agricultural enterprises and holdings, depending on the area of business, region and scale, is within the average range from 40% to 70% from the optimal level. This means that there is space for its further growth.

Vice president for corporate financing of BG Capital Yevhen Chervyachenko confirms growing demand on the part of foreign investors for vertically-integrated agro-holdings that combine growing, processing and sale for export. Companies specializing only on growing or sale of ag products and do not have access to foreign market are not interesting. That is why the agrarians try to build the maximum closed production cycle – “from field to dinner table”.

The president of Ukrainian Club of Agrarian Business Alex Lissitsa says that the companies that survived the crisis became more understandable for foreign investors. “The majority of companies that came out on the world capital market are showing serious and transparent strategy of development for the next several years. This convinces investors that such assets can bring them quite sizeable additional profit in the future” explains Lissitsa.

Ivan Panin, analyst at Sokrat says that agricultural enterprises come out on the foreign capital markets in order to attract funds with the objective to direct them at expansion of their activity, namely increasing the size of the land, building grain storages, purchasing of agrarian machinery, etc. This is not surprising since the owners of agro-holdings, besides development of their business, have to take into account interests of international investors. The latter, as practice shows, are more willing to invest into agrarian companies with capitalization of US $500 mn, rather than companies with capitalization of US S50 mn.

Such approach forced agro-holdings to expand with merger of businesses by related owners becoming the main trend of the past year. In particular, brothers Serhiy and Oleksandr Fedorenko did just that with OJSC Sugar Union UkrRos concentrating the controlling package in UkrRosZerno. West-Ukrainian entrepreneurs Danylo and Mykhailo Korylkevych merged Dakor and Land West Company into Dakor Agro Holding.

Closer to the end of 2010, Ukrainian companies again started speaking about intentions to expand their land areas. Analysts are convinced that this increase won’t be speculative this time like was the case in the pre-crisis 2006-2008. On the one hand, the size of the land area is a key indicator of an agro-holding, because the profit of the company and the company’s share on the market directly depend on it. On the other hand, investors are no longer impressed with figures that include two zeros; they want to know the efficiency of management of the land area. Operational and financial indicators are assessed based on how many thousand hectares of the leased land the company really processes and the profit it receives from it. Lissitsa says that the criteria of assessment of potentially interesting assets have toughened considerably: the financial well-being of the borrower and issuer is now assessed much more thoroughly than in the past. For example, during the road shows, potential investors even ask which seeds and machinery the companies use.

Agrarian sector is nearly the only one in Ukraine that continues to show growth. Use of new technologies can help doubling the yield of grain crops without an increase of sowing lands.

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