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Financial Investors Fuel Metals Deal Activity in the First Quarter of 2013
04/30/2013 - Deal activity in the U.S. metals sector declined dramatically during the first quarter of 2013, with total volume of transactions at its lowest since the first quarter of 2009, and total deal value just above that of the first quarter of 2010, according to a just-released report from PwC's Industrial Products practice.
Deal activity in the metals sector declined dramatically during the first quarter of 2013, with total volume of transactions at its lowest since the first quarter of 2009, and total deal value just above that of the first quarter of 2010.
Economic uncertainty in advanced economies, as well as sequestration concerns in the United States, with the federal government likely to reduce the budget for non-defense agencies by about $85 billion between 1 March and 30 September, helped drive the decrease in activity. Additionally, the Eurozone’s economic output decreased more than had been expected in the last quarter of 2012. On the other hand, Japan, a major steel producer, experienced better growth than was expected in the fourth quarter of 2012, and economies in South Korea and Australia continued to grow.
PwC analysts are monitoring several additional trends expected to affect the values and locations of deals in the metals sector:
· Some developing nations appear to be on the rebound: China’s GDP increased more than was expected in the fourth quarter of 2012, and the country’s Purchasing Managers’ Index (PMI) improved in March, compared with the previous month. Both metrics suggest increased demand for metals products. Also, in India, the prospect for growth remains strong, with the country’s government forecasting that it will return to much stronger economic activity by 2014. With these countries increasing construction spending, and a growing middle class increasing its spending on automobiles and durable household goods, both key end-user markets in the metals sector, the metals sector is likely to experience positive future growth.
· The proportion of M&A activity driven by financial investors increased dramatically, as demonstrated by the $1.15 billion acquisition of Sweden-based Hoganas by its largest shareholder, Lindengruppen. Additionally, a consortium including private equity firm EQ Partners and other investors offered $1.11 billion for mines in Canada currently owned by ArcelorMittal Mines. These two deals, valued at more than $2.25 billion, accounted for more than one-third of the first quarter’s deal volume.
· Overcapacity remains a concern for the steel market — not only finished steel products, but also iron ore. With a large amount of iron ore expected to come on line in 2013, many analysts believe that as much as a 10% increase in demand will be required to absorb the increased supply, particularly in light of lackluster demand forecasts expected in the United States and Europe.
· Steel prices throughout the rest of 2013 are expected to remain flat, negatively affecting returns on steel capital investments.
Given the existing issues of concern, metals M&A is not expected to grow in the near future. However, US plans for investing billions of dollars in infrastructure may increase demand for steel and iron and, to a lesser extent, aluminum in the United States. Also, given the increased growth in the economies of Japan, South Korea, and Australia — all major metals-producing countries — combined with improving demand in several emerging economies, long-term improvement may occur in these countries. However, significant M&A growth is not expected soon in the sector.
Contrasting from the historical trend of strategic investors dominating mergers and acquisitions (M&A) activity in the metals industry, transaction value was fueled by financial investors during the first quarter of 2013, accounting for almost 59%, or US$4 billion of the quarter’s total deal value of US$6.8 billion, according to PwC US.
Overall, M&A activity slowed during the first quarter of 2013, with 18 deals worth US$50 million or more accounting for US$6.8 billion in total value, compared to 33 total deals worth US$50 million or more, which generated US$20.1 billion, in the first quarter of 2012. First quarter 2013 average deal value totaled US$379 million, a 37% decline from the US$610 million average deal value in the first quarter of 2012. There were two mega deals (deals valued at US$1 billion or more) during the first three months of 2013, which were driven by financial investors, accounting for almost US$2.3 billion of the quarter’s total transaction value.
“Broad economic uncertainty in the advanced economies and the overall decline in commodities pricing have all contributed to the drop in deal activity in the first quarter, as metals companies returned to the sidelines with a ‘wait and see’ approach,” said Sean Hoover, U.S. metals leader at PwC. “Given the current economic climate, players in the metals sector remain in a holding pattern regarding acquisitions and are looking inward by investing in capital improvements to enhance their operational effectiveness.”
During the first quarter of 2013, U.S. transactions continued to play a significant role in the metals deal environment, similar to the trend seen during the previous quarter. Deals involving the U.S. accounted for more than US$2.6 billion, or almost 39% of the total transaction value. Asia and Oceania drove deal volume, with China accounting for six of the 18 total deals worth US$50 million or more announced in the three-month period. “Some developing nations appear to be rebounding as we see with the growth of China’s GDP in the latter part of 2012 and the improvement in the country’s Purchasing Managers’ Index in March. Both point to China’s continued activity in the metals M&A space with smaller deals driving deal volume,” continued Hoover.
Metals in the “other” category, which includes copper, nickel and other non-precious metals, dominated M&A activity during the first quarter of 2013, diverging from the historic trend of steel being the main player in the metals deal environment. Of the four metals categories (steel, aluminum, iron ore and other), the “other” category made up 47% of the total deal value, while steel accounted for 25% and aluminum made up 8%, during the first quarter of 2013. According to PwC, this change was driven more by a decline in steel activity rather than any intrinsic increase in deal activity within the segment.
“Until the economy recovers, the metals deal environment may be focused on smaller deals for the rest of the year, as players continue to direct their attention internally while keeping a watchful eye for the right transaction opportunities,” added Hoover.
