PricewaterhouseCoopers says that after a lull in mega metals deal activity last year, two mega deals-fueled by a quest for iron ore by Chinese companies-were announced during the during the first quarter of this year.
Both of these deals involve iron ore, as well as Chinese acquirers, PwC noted in its report, Forging ahead: First -quarter 2010 global metals industry mergers and acquisitions analysis.
The largest deal announced in the first quarter was Chinalco’s $1.35 billion minority stake transaction in Rio Tinto’s Simandou (Guinea) iron ore joint venture. In their analysis, PwC analysts noted, “This deal is also characteristic of the rise in the use of joint ventures as an acquisition technique.”
“Although the proportion of minority stakes is not likely to rise significantly through the balance of 2010, joint ventures should continue to contribute substantially to deal totals,” the analysts said. “This is due to an interest in mining assets reviving as commodity prices recover, as well as companies’ need to bring in financially strong parties to help develop attractive mining projects.”
The second mega deal announced in the first quarter is the $1.22 billion East China Mineral Exploration & Development Bureau acquisition of Brazilian iron ore miner Itaminas Comercio de Minerios, which is estimated to have 1.3 billion metric tons of iron ore reserves.
PwC predicts that, in the next six to 12 months, the metals industry will likely turn its attention to mergers and acquisitions, depending on how cautious lenders will affect metals companies’ ability to finance future deals.
Signs of recovery already appeared in the metals sector during the first quarter of this year as 21 deals were announced with a total combined value of $5.9 billion.
PwC also suggests that the increased use of stock swaps in deals “may be related to improved equity market performance, which makes the financing of acquisitions through stock more attractive.”
“Though it is difficult to predict the relative use of this form of acquisition going forward, divestitures are likely to continue to be favored as a source of deals as sector constituents seek to improve their balance sheets and realign their asset portfolios.”
PwC’s analysis also forecasts that, in the future, “Chinese outbound deals should drive total acquisitions among emerging and developing economies as well as total cross-border deals, the latter of which increased slightly on a relative basis during the first quarter. It is also likely that Chinese local-market acquisitions will contribute significantly to deal totals as the central and state governments advocate for some of these transactions.”
“This continuation of mega deal activity provides evidence that some acquirers are ready to engage in deal-making at the higher end of the value spectrum,” said Robert W. McCutcheon, the U.S. metals leader for PwC. “Supporting this are higher commodity prices, improved access to capital, and greater confidence in the strength of the recovery.”
“Looking forward into 2010, the sector’s M&A flow will likely continue to grow,” he predicted.
PwC Global Metals Leader Jim Forbes noted, “Globally the relative sense of urgency to engage in new deals is likely greatest for steel companies, which face a consolidated basis of iron ore suppliers. This could lead to additional horizontal mergers among steel constituents or backward integration.”
“Although many strategic buyers have been slow to resume their M&A activities, we believe it is only a matter of time before these acquirers look more seriously at potential growth opportunities,” Forbes added. “A more stable global economy, generally supportive capital markets, and improved financial positions should encourage these entities to enter the deal market.”