Total Deal Volume in the Global Metals Sector Rises 7% in 2010, According to PwC

Mega-deals increase 167% year-over-year from 2009

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Feb 08, 2011, 12:05 ET

NEW YORK, Feb. 8, 2011 /PRNewswire/ -- Merger and acquisition (M&A) deal volume in the global metals sector showed improvement in 2010, rising to 101 deals, up 7 percent from 2009, according to the PwC US report, Forging ahead: Fourth-quarter 2010 global metals industry mergers and acquisitions analysis. However, deal value declined slightly, dropping 2 percent to $86.6 billion in 2010 from $88.1 billion in 2009.

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The number of mega-deals, defined as deals with a disclosed value of at least $1 billion, increased significantly with five deals in Q4 2010, bringing the 2010 total of mega-deals to 16, compared with only 6 mega-deals announced in all of 2009, a 167 percent increase. Mega-deal announcements in 2009 tended to involve resource acquisitions, but the rationale for mega-deal announcements in 2010 expanded to include both strategic and financial acquirers seeking targets further downstream. This breadth of rationales will likely be representative of mega-deal activity in 2011.

Deal value (deals worth $50 million or more) in Q4 declined 73 percent from the prior quarter to $13.7 billion. Additionally, overall deal volume also declined from Q3 2010, with 26 deals in Q4 compared to 31 in Q3. Despite the decline in deal volume, the underlying market for metals M&A is very active as competitors look to boost growth through inorganic opportunities such as consolidation or backward integration.

"Deals by mining acquirers flush with cash garnered from the recent, sustained period of high commodity prices continue to attract much of the attention. These deals, including bids for targets outside the metals sector, have defined the market for many observers," said Bob McCutcheon, U.S. metals leader at PwC. "We believe, however, that there are other markets that may be more broadly indicative of the health of the metals industry. More deals are now being driven by financial acquirers re-entering the market for downstream businesses, and mid-sized strategic acquirers are increasingly initiating larger, unsolicited bids across the sector."

From a regional perspective, the breakdown of deal activity during 2010 clearly demonstrates the growing importance of Asia and Oceania competitors in the metals deal market, as the number of local deals in this region exceeded the number of local deals in all other regions combined. This high level of local deals reflects efforts to consolidate relatively fragmented domestic markets and compete more effectively in a highly globalized sector. Additionally, the relatively high number of outbound deals from this region reflects its financial power, with many of these deals representing attempts to secure access to mines outside the region.

Additionally, the regional distributions of deals during the fourth quarter were similar to those for the full year. Advanced economy acquirers slightly increased their relative participation in the deal market during Q4 2010, and emerging market companies remain in a strong position to engage in new deals. Activity will likely remain focused on metals targets, though some metals acquirers may still attempt to put cash to work outside the sector.

"Despite concerns regarding sovereign debt risks or inflation driven by quantitative easing, many constituents with mining assets have been able to use rising end-market demand and higher commodity prices to reduce debt and build substantial liquidity positions," said Jim Forbes, PwC global metals leader. "With strengthened balance sheets, these companies are now able to focus on boosting top-line growth or generating synergies through M&A opportunities. Accordingly, we believe that these factors support a positive outlook for M&A activity in the metals sector during 2011."

Repositioning for Growth: The tax implications of expanding into a VISTA country

The fourth quarter Forging ahead report takes a close look at recent expansion into the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) countries and the associated tax implications. Today's metals companies have already found opportunities for growth through the establishment of operations in the BRIC (Brazil, Russia, India, and China) countries. However, as companies seek to reposition their business strategy to meet new demands, they are now looking for new opportunities in a second wave of emerging markets such as VISTA. When determining how and where to structure a deal, companies should consider the role tax could play in making or breaking the transaction.

In addition to their high gross domestic product (GDP) and rich natural resources, VISTA countries have favorable foreign investment policies. For instance, Indonesia, Vietnam, and Turkey implemented tax breaks for capital investments, subsidies for new businesses, and low-cost financing to attract new foreign business. Free trade zones, where normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered in hopes of attracting investors from around the globe, are also common in several VISTA countries.

As BRIC countries continue to be saturated by multinational corporations, VISTA is an alternate option for consideration. While by comparison, China and Russia give the advantage to local businesses over outsiders, VISTA country governments view foreign investment as an important source of capital for their economies.

For information on Forging Ahead and to access the full report, including the special section on the tax implications of expanding into a VISTA country, 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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PwC network firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

© 2011 PwC. All rights reserved. "PwC" and "PwC US" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate and independent legal entity.

SOURCE PwC