Auto industry's woes continue to have an adverse effect on the metals
TORONTO, May 26 /CNW/ - The pace of global deal activity in the metals
industry significantly declined in first quarter 2009 as falling end-market
demand and weak commodity prices created a difficult operating environment,
according to a report released today by PricewaterhouseCoopers LLP (PwC):
Forging ahead: First-quarter 2009 mergers and acquisitions analysis.
- Eighteen deals (five completed; 13 pending or intended) with a
disclosed value of at least US$50 million each were announced in Q1,
showing a strong slowdown compared with the 142 total deals of
similar value in 2007 and 138 deals in 2008.
- Total deal value declined sharply, resulting in only US$12 billion in
deals announced for metals targets in Q1, far behind the pace set in
2007 (US$298.2 billion) and 2008 (US$78.6 billion).
Although the pace of deals is showing a decline in 2009, PwC found that
the average value for deals announced during the first quarter remained
similar to the average value announced in 2008.
Additionally, interest in minority stake purchases increased
dramatically. Acquirers seeking less than 50 percent ownership accounted for
more than 55% of the deals announced in first quarter 2009, up from 33% of
deals announced in 2007 and 2008.
"The decline in deal activity for the metals sector in the beginning of
2009 does not come as a surprise, given the continued economic struggles this
sector faces globally," said Jim Forbes, global metals leader at PwC. "With
strategic buyers' general aversion to risk, as well as tight credit and weak
commodity prices, we are likely to continue seeing acquisitions of minority
stakes as the preferred deal type throughout 2009."
Forging ahead reported that organizations are putting high-priced deals
on hold, as seen during first quarter 2009, when only two large deals (worth
at least US$1 billion) were announced. This compares with 31 higher-priced
deals during 2007 and 18 in 2008. The falloff of large deal activity
contributed significantly to the overall decline in overall deal value during
the first quarter. With the most credit-worthy strategic buyers focusing on
capital preservation and deal interest changing toward minority stake
purchases and divestitures of noncore assets, large deal activity likely will
maintain a moderate pace throughout 2009.
Nearly all deals made in the metals sector in first quarter 2009 came
from strategic investors, similar to years past. Strategic investors accounted
for 98% (US$11.8 billion) of announced deal value during the quarter, while
the remaining 2% came from financial investors. This is consistent with deals
by investor groups over the past two years, when strategic investors accounted
for 93% of announced deal value in 2007 and 77% in 2008.
Continued anxiety over the economy caused a significant decline in US
deal targets; no deals were announced for US companies in first quarter 2009.
This coincides with the decline seen in fourth quarter 2008, when only two
deals for US companies were announced, and is notable especially because US
targets accounted for 21 percent of the total deals announced in both 2007 and
2008. The region saw a lack of deals in 2009 because of the relatively
consolidated state of the domestic metals industry, as well as a weak economic
environment compared with several emerging markets.
Consistent with regional trends from 2008, Asia and Oceania companies
again accounted for the majority of mergers and acquisitions announced during
first quarter 2009. Chinese acquirers were the driver of these deals, with
nearly 90% of the deal value announced globally during the first quarter.
Investments in targets from Australia, an area of Chinese influence, accounted
for 80% of deal value and one-third of all deals during the quarter. Russia
showed a serious decline in activity compared with 2008, when the region
accounted for 30% of total deal value. During first quarter 2009, Russian
companies made no deals, in large part because of the fragile financial state
of metals companies in the region.
In first quarter 2009, deal values remained relatively significant
outside aluminum targets, with 79% of total deal volume in iron ore targets.
Aluminum targets made up 10% and steel targets 9% of total volume. This is a
significant decline for the steel targets in particular because they accounted
for 41% of total value in 2008.
"In general, M&A transactions in the metals sector remained weak for the
first quarter of 2009. However, when considering the metals sector as a
percentage of overall M&A activity throughout all sectors, metals remain above
10-year averages," said Forbes. "With that said, we anticipate that
well-capitalized buyers will continue to use the state of the economy as an
opportunity to invest in mining assets and attractive metals. However, we
believe overall metals M&A activity likely will remain slow."
The report includes executive commentary on the effects of the federal
economic stimulus bill and the developments in the auto industry on the metals
sector, including the ways in which automotive losses translate to
difficulties for metals companies. For information on Forging ahead and to
access the full report, visit: www.pwc.com/metals.
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