Saudi firm chalks up massive Ukraine deal as foreign interest tentatively returns

A source familiar with the deal tells Agri Investor it comes as some international investors explore re-entry into a market many fled three-and-a-half years ago amid heightened tensions with Russia.

A UK subsidiary of the Saudi Agricultural and Livestock Investment Company has purchased Mriya Agricultural Holding Company of Ukraine.

Financial terms were undisclosed, but Ukrainian President Petro Poroshenko, who attended a ceremonial deal signing in the capital city of Kiev, reportedly said the company’s value was in the “hundreds of millions of dollars.” The Financial Times subsequently reported the business was valued at $242 million.

Headquartered in city of Ternopil in western Ukraine, Mriya cultivates wheat, rapeseed, barley, sunflower and other crops on 165,000 hectares of land spread across seven regions in the country’s west. In addition, Mriya operates two starch plants and a potato storehouse with 52,000 tons of capacity; a 70,000-ton seed-treatment and production plant and a network of four grain elevators with a total capacity of about 380,000 tons.

The parent company SALIC is Saudi Arabia’s state-owned agriculture and livestock investment company. It is owned by Saudi Arabia’s $250 billion Public Investment Company. In April, it hired the former chief executive of Chinese state-owned COFCO’s international grain unit Matthew Jansen to serve as chief executive.

Plans call for Mriya to operate in coordination with Continental Farmers Group, a diversified agricultural producer focused on seed rape, potatoes, corn and other crops that SALIC and partners acquired in 2013. In addition to 5,000 hectares of leased and owned land in Poland, CFG already farms about 45,000 hectares inside of Ukraine.

“Over the next two years, we plan to significantly invest into new equipment, infrastructure, agricultural technology and land bank consolidation, as well as work closely with the local management, to build combined Mriya and CFG operations into a world-class farming operation,” CFG chief executive Mark Laird said.

The sale to SALIC comes after Mriya’s former parent company defaulted on its total debt of $1.1 billion in August 2014. Since February 2015, the company’s largely European and American creditors have worked together with local and international partners to restructure the business and bring Mriya out of default.

“The creditors became Mriya’s shareholders by circumstance and are not agricultural business operators,” said Giovanni Salvetti, a managing director at Rothschild & Co, which advised Mriya on the sale. “They understand that for the further development of the company, a strategic investor is needed, with expertise and sufficient resources to bring Mriya to the next level.”

Strength to strength

A source familiar with the SALIC deal told Agri Investor it is in fact a milestone that constitutes a vote of confidence in Ukraine and its agricultural sector. Though most international investor interest in Ukraine’s farmland market was effectively wiped out by conflict with Russia about three-and-a-half years ago, the source said, the time since has seen an increase in agricultural production and land values.

“You would think that macroeconomically it would have dramatically had an adverse effect on the functionality of the agri sector. In reality, what’s happened is it’s gone from strength to strength.”

The conflict has, however, further shaped the make-up of investors active within a farmland market concentrated in the western region of the country, farthest from armed conflict in Ukraine’s east. Over the past two years especially, the source explained, land values in Ukraine have firmed up as large domestic agribusinesses have competed for properties.

“Because of the conflict, there has been a separation of Russian interests and Ukrainian interests, in many cases. Obviously, that’s a generalization, but as a general statement, that’s true,” the source said. “There are now 20 or so very, very, very large Ukrainian agri holdings across the country and it’s those agri holdings – together with the next tier down, and the next tier down and the next tier down – that have been competing more and more for land, and that’s driven up prices.”

The source added that different entities from Saudi have long expressed interest in multiple areas of Ukraine’s agricultural sector and that the relationship between state bodies that played a role in coordinating the deal is not a new one.

‘Very, very modest’ interest

The recent growth in Ukraine’s ag sector has just begun to catch the attention of other international groups, the source said. They explained that aside from NCH Capital (a New York-headquartered firm that devotes about half of its total AUM to agriculture in Russia and Ukraine, and whose $1.2 billion 2007 fund continues to rank among the largest farmland investment vehicles raised) Western capital inflows have come largely in the form of equity, bonds and secured-loan facilities to several of those large Ukrainian farmland holdings.

“There is now interest, just beginning to return, in a very, very small, very, very modest way, from the international market,” the source said.

The way that fledging interest has been expressed, the source said, has been shaped by Ukraine’s long-running debate about a moratorium on putting in place legislation that would facilitate the purchase and sale of agricultural land. Though some do expect such legislation to be put in place in the short-term, the source explained, most in the market remain skeptical.

In the meantime, according to the source, because investors understand they are not likely to be able to own land directly, some have been satisfied to secure leases of between two and 15 years.

“The way that some investors are looking at that is basically getting a foothold in the market – or getting more than a foothold in the market; to lease land – which will then provide, at some point in the future, the ability to acquire some of the land. Possibly all of the land in the long, long, long-run, because there’s likely to be limitations on how much individuals or companies can buy when the law does eventually change,” the source said.

In the nearer term, the source said, local market participants are currently on the lookout for signs of consolidation in a market that has received some of its support of late from climatic challenges elsewhere in Europe.

“Some of the rents that are now being paid are very high,” the source explained. “There are going to be a number of companies that simply do not survive that, in terms of being able to pay those rents, particularly when commodity markets come off of the current highs – which they will at some point, inevitably.”