22/08/11 Global Metals M&A Activity Increases 57 Percent in Q2 2011
22nd August 2011
PwC US reports in Forging Ahead, that the recovery in global metals merger and acquisition (M&A) activity, which started last year, continued with mixed results during the second quarter of 2011 with a 57 percent increase in volume of deals compared to the same period in 2010. When compared to the first quarter of 2011, the metals M&A market remained active with 11 more deals announced in the second quarter.
However, second quarter 2011 values dropped significantly. In the second quarter of 2011, there were 36 large deals worth $50 million or more, accounting for $6.9 billion in total deal value – a decrease from the $17.5 billion in the second quarter of 2010. During the first half of 2011, there were 61 total deals with a total value of $19.9 billion, in contrast to the first half of 2010, which had 47 deals contributing $23.8 billion.
Compared to the first quarter of 2011, total deal value during the second quarter declined from $13 billion. Average deal value during the second quarter also declined to $191 million from $500 million during the first quarter of 2011. The decrease in total deal value and average deal value is attributed to a lack of mega deals in the second quarter of 2011, or deals valued at $1 billion or more, according to PwC. Despite the dip in value of deals, PwC believes that the recovery in the metals market is expected to continue.
"As the second quarter of 2011 proved, the metals industry has stayed on the path of recovery – and the trend in financial liquidity and profitability shows that the sector continues to position itself for increased growth," said Bob McCutcheon, U.S. Industrial Products and Metals Industry leader at PwC. "In fact, a recent survey we conducted of the top 50 publicly traded global metals companies reveals that these companies have, on average, significantly higher cash balances than just a year ago. This cash on hand, combined with low interest rates, makes opportunities for growth through acquisitions increasingly attractive. Not withstanding the recent uncertainty in the financial markets, we continue to believe that the outlook for M&A throughout the rest of 2011 is positive."
The majority of activity during the second quarter of 2011 for deals worth $50 million or more resulted from M&A targets classified as steel manufacturers, contributing almost 41 percent of the deals. For the first half of 2011, steel was also the key driver at approximately 36 percent, although iron ore, the primary driver for the first quarter of 2011, was close behind at about 35 percent. PwC believes that the interest involving steel manufacturers is in line with expectations as companies seek to integrate reliable steel supplies into their organizational structures.
For deals worth $50 million or more, the Asia and Oceania and North America regions led overall deal value in the first half of 2011, contributing $11.8 billion and $7.1 billion, respectively. There were 29 domestic deals in Asia and Oceania totaling $5.3 billion during the first half of 2011, and six in North America totaling $5.8 billion, with a combined value of $11.1 billion of the worldwide total of $12.6 billion in regional domestic deals. According to PwC, Asia and Oceania will continue to see the highest value total for regional domestic deals through 2011 as smaller Chinese companies look to combine and achieve economies of scale.
Europe, according to PwC, was the primary driver for outbound deals during the first half of 2011, with five deals totaling $2.8 billion, and South America had two outbound deals combining for $2 billion. Asia and Oceania dominated inbound deals with seven deals contributing $5.2 billion of the $6.6 billion total.
"The activity in Asia and South America fueled a reversal of a trend seen since 2009 as acquirers from advanced economies, due to the focus on smaller deals this quarter, captured a smaller proportion of overall activity, while activity picked up from emerging and developing markets," added Jim Forbes, Global Metals Leader at PwC. "We expect that Asia and Oceania will see large inbound activity as companies in other regions seek a foothold in emerging nations and look for ways to reduce operating costs; however, companies doing deals in these emerging regions need to be cautious in countries with higher instances of corruption."
As the deal recovery continues, PwC expects emerging and developing markets to remain attractive for metals companies looking to do deals. However, in the wake of the "conflict minerals" provision of the Dodd-Frank Act and the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) stepping up enforcement actions mandated by the Foreign Corrupt Practices Act (FCPA), PwC believes that metals companies need to proceed with caution.