Q3 2010 Metals Sector Deal Activity Continues to Improve with $49.8 Billion in Deal Activity, According to PwC

M&A Deal Volume Climbs 35 Percent in Third Quarter Compared to Q3 2009

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Nov 04, 2010, 08:00 ET

NEW YORK, Nov. 4, 2010 /PRNewswire/ -- The merger and acquisition (M&A) deal activity in the global metals industry in the third quarter of 2010 shows continued improvement, as measured by both deal value and volume, from the first half of 2010 as well as Q3 2009, according to the PwC US report, Forging ahead: Third-quarter 2010 global metals industry mergers and acquisitions analysis. The ongoing improvement in M&A activity, including a 35 percent year-over-year increase in deal volume with 31 deals in Q3 2010, is representative of companies looking to acquisitions to boost growth as confidence in the economic recovery takes hold.

Representing a broader trend in the overall M&A market, the recovery continues in the "mega deals" market, categorized as deals with a disclosed value of at least $1 billion, with four announcements this quarter, compared with five in all of 2009. This mega deal activity led to the $49.8 billion total deal value in Q3 2010, which is the highest quarterly total deal value since Q2 2009. One major driver of the high deal value in Q3 2010 is a $39.7 billion mega deal; however, even with an adjustment for the impact of this deal on the quarter, the value of announcements remains robust in comparison with most recent periods.

Additionally, the proportions of mega, large and middle-market deals announced increased in Q3 2010, while the proportions of small deals and those with undisclosed values declined. This trend of greater activity for larger targets has been supported by the general recovery in metal commodity prices over the past two years, which has given buyers the necessary financial means. The recuperation in market valuations alone has also served to increase the transaction value of companies in the sector as well as contributed to larger deal sizes.

Another sign of recovery in the M&A environment is the decline in minority stake purchases in favor of controlling-interest transactions, which can be interpreted as a signal of greater wherewithal to make deals. The relatively large prevalence of divestitures, which involve a change in control, also contributed to the decline in minority stake transactions. Many of these divestitures involved steel and iron ore targets, indicating that companies in this more fragmented part of the sector are still repositioning their assets for the economic upturn.

"Acquirers from advanced economies increased their relative participation in the deal market during the third quarter, many of which had been focused on internal initiatives, such as cost reduction and liquidity improvement, during the economic downturn" said Bob McCutcheon, U.S. metals leader at PwC. "This is encouraging, as the involvement of these acquirers is essential to continuing the recovery in metals M&A activity and is a factor contributing to the increase in the deals we're seeing, despite the relatively high valuations in the emerging economies."

Cross-border activity during the third quarter remained above that of 2009, a trend related to the continuing shift in focus of companies that are now seeking to enter new markets - or increase their exposure within certain existing markets - to augment growth. In addition, the regional distribution of deal activity by number of deals indicates fairly balanced participation in the deal market. Activity by Asia and Oceania acquirers has been primarily driven by Chinese entities continuing their pursuit of overseas mining assets and consolidating the local steel industry, matching previous expectations.

"We expect larger deals will become the norm as the environment grows more conducive to financing, both through internal sources and improved access to capital markets," said Jim Forbes, PwC global metals leader. "Strategic acquirers are likely to initiate these larger agreements as they reenter the deal market to capitalize on growth opportunities or downstream integration, which leaves us optimistic about the metals M&A environment as we enter the final quarter of 2010."

Curate's egg: The changing deal environment

The third quarter Forging Ahead report takes a closer look at a global economy characterized by instability and its impact on the M&A deal environment. Today's global economy is like a curate's egg. Economic expectations are good and bad, positive and negative.

The concept of a mixed bag is especially relevant to the metals industry's M&A market. On the positive side, the volume of deals announced during the third quarter of 2010 shot up significantly from the previous year, an indication that the global economy is stabilizing. The downside is that worries about a protracted economic recovery or another recession have many global buyers and sellers taking a wait-and-see approach to deal making.

Due to increased uncertainty, companies are structuring deals in new ways and handling them differently. Specifically, many are avoiding large, staged auctions, except in cases that involve a sizable, high-profile asset. Instead, companies are trending towards one-to-one negotiations in off-market deals, where the buyer proactively identifies and approaches the target. Additionally, metal companies have become more cautious and diligent about what they are buying. They no longer favor diversification as a global M&A theme but rather are looking for deals that can provide new strategic opportunities.

More than ever, deals today must fit strategically and commercially with existing operations and drive synergistic growth.

For information on Forging Ahead and to access the full report, including the special section on the changing deal environment in the metals sector, visit: http://www.pwc.com/us/industrialproducts.

About PwC's Global Metals practice

PwC's Global Metals practice is composed of a worldwide network of industry professionals serving metals clients and strategically located in more than 30 countries. PwC services global clients involved in ferrous and nonferrous primary and secondary metals production by bringing experience, leading international industry practices, and a wealth of specialized resources to help solve business issues.

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SOURCE PwC