MINING FINANCE / INVESTMENT

Global metals M&A deal value could drop 20% -PwC

Although six mega-deals in the global metals sector were announced in the first quarter, only one mega-deal was announced during the second quarter, according to a PwC report.

RENO (MINEWEB) - 

While the second quarter saw declines in both deal volume and value in mergers and acquisitions in the global metals sector, a PwC report made public Thursday revealed that acquirers from emerging and developing economies accounted for 65% of all deal making valued at $50 million or more.

The number of deals worth $50 million or more in the global metals sector fell during the second quarter of the year from 41 deals during the second-quarter 2011 to 20 deals with a total deal value of $8.9 billion reported during each quarter.

Although six mega-deals each valued at $1 billion or more were announced in the first quarter of the year, only one mega-deal was announced during the second quarter. Chongqing Iron & Steel agreed to acquire a new iron and steel production base in the Changshou from corporate parent Chongquin Iron & Steel (Group) Company Limited for $2.8 billion in shares and cash.

If the current low levels of M&A activity continue through year-end, PwC warned the global metals sector could experience a year-over-year decline of nearly 20% in deal value. "Unless and until prices and demand improve, the deal environment is likely to remain constrained," cautioned PwC Global Metals Leader Jim Forbes and U.S. Metals Leader Sean Hoover in the publication, "Forging ahead."

The double-dip recession in the UK and parts of the Eurozone, as well as softness in key end-markets, such as construction contributed to the decline in deal-making in the second quarter, said PwC U.S. Industrial Products Leader, Robert McCutcheon.

"Commodities pricing is a potential concern," said PwC. "Prices for base metals are generally expected to continue to decline through the end of 2012."

"Overcapacity also remains a problem, as new capacity continues to come online from developing and emerging economies," the report noted.

On a regional basis, Asia and Oceania continued to drive local deal value and volume in the first half of the year with 35 deals of $50 million or more for a total value of $18.55 billion. Seventeen of those deals were based in China.

India has also seen four local deals and one cross border deal in the first half of this year. The nation is becoming a major contributor to the local steel industry.

It was announced in February that India's Sesa Goa, a 55.1% owned unit of Vedanta Resources, would be acquiring India's Sterlite Industries, a manufacturer of nonferrous metals products in an all-stock $3.91 billion transaction. Meanwhile, also made public in February was the announcement of China's Baoshan Iron and Steel Company that it would sell its unprofitable stainless steel and specialty steel assets to its parent Baosteel Group for $1.02 billion.

In January it was announced that a consortium including South Korean steel manufacturer POSCO will buy 30% of the Roy Hill iron ore project in Australia from Hancock Prospecting for $1.5 billion. The investment will give the consortium 16.5 million tons of iron ore per year from the mine.

In North America there were six local deals in the first half of the year, three of which, valued at $1 billion, took place in the second quarter. Noting that the dollar has been rising in value recently, particularly against the euro, PwC suggested U.S. acquirers "may be able to pursue relatively cheap acquisitions in the near future."

Meanwhile, financial investments continued to decline as a percentage of all deals during the second quarter. During the second quarter approximately 93% of transactions worth $50 million or more involved strategic investors, according to PwC.

"As noted in the last quarter, strategic investments remain strong, and we are seeing an increase in the volumes of these deals as metals companies (and other strategic investors) seek additional synergies and cost savings opportunities," said the PwC analysis.

"For example, strategic investors generally have longer investment horizons, which support their high involvement compared with financial investors," PwC noted. "Also, upstream assets continue to appeal to strategic acquirers."

"Strategic acquirers may see upstream acquisitions as a way to gain control over input costs and to ensure a stable, adequate supply of raw materials."

For a copy of Forging ahead, PwC's quarterly analysis of M&A activity in the global metals sector, go to www.pwc.com/us/industrialproducts.