Global Metals M&A Activity Increases 57 Percent in Second Quarter 2011, According to PwC US

NEW YORK, Aug. 18, 2011 /PRNewswire/ -- The recovery in global metals merger and acquisition (M&A) activity, which started last year, continued with mixed results during the second quarter of 2011 with a 57 percent increase in volume of deals compared to the same period in 2010, according to Forging ahead, a quarterly analysis of M&A activity in the global metals sector by PwC US. When compared to the first quarter of 2011, the metals M&A market remained active with 11 more deals announced in the second quarter.

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However, second quarter 2011 values dropped significantly. In the second quarter of 2011, there were 36 large deals worth $50 million or more, accounting for $6.9 billion in total deal value – a decrease from the $17.5 billion in the second quarter of 2010. During the first half of 2011, there were 61 total deals with a total value of $19.9 billion, in contrast to the first half of 2010, which had 47 deals contributing $23.8 billion.

Compared to the first quarter of 2011, total deal value during the second quarter declined from $13 billion. Average deal value during the second quarter also declined to $191 million from $500 million during the first quarter of 2011. The decrease in total deal value and average deal value is attributed to a lack of mega deals in the second quarter of 2011, or deals valued at $1 billion or more, according to PwC. Despite the dip in value of deals, PwC believes that the recovery in the metals market is expected to continue.

"As the second quarter of 2011 proved, the metals industry has stayed on the path of recovery – and the trend in financial liquidity and profitability shows that the sector continues to position itself for increased growth," said Bob McCutcheon, U.S. Industrial Products and Metals Industry leader at PwC. "In fact, a recent survey we conducted of the top 50 publicly traded global metals companies reveals that these companies have, on average, significantly higher cash balances than just a year ago. This cash on hand, combined with low interest rates, makes opportunities for growth through acquisitions increasingly attractive. Not withstanding the recent uncertainty in the financial markets, we continue to believe that the outlook for M&A throughout the rest of 2011 is positive."

The majority of activity during the second quarter of 2011 for deals worth $50 million or more resulted from M&A targets classified as steel manufacturers, contributing almost 41 percent of the deals. For the first half of 2011, steel was also the key driver at approximately 36 percent, although iron ore, the primary driver for the first quarter of 2011, was close behind at about 35 percent. PwC believes that the interest involving steel manufacturers is in line with expectations as companies seek to integrate reliable steel supplies into their organizational structures.

For deals worth $50 million or more, the Asia and Oceania and North America regions led overall deal value in the first half of 2011, contributing $11.8 billion and $7.1 billion, respectively. There were 29 domestic deals in Asia and Oceania totaling $5.3 billion during the first half of 2011, and six in North America totaling $5.8 billion, with a combined value of $11.1 billion of the worldwide total of $12.6 billion in regional domestic deals. According to PwC, Asia and Oceania will continue to see the highest value total for regional domestic deals through 2011 as smaller Chinese companies look to combine and achieve economies of scale.

Europe, according to PwC, was the primary driver for outbound deals during the first half of 2011, with five deals totaling $2.8 billion, and South America had two outbound deals combining for $2 billion. Asia and Oceania dominated inbound deals with seven deals contributing $5.2 billion of the $6.6 billion total.

"The activity in Asia and South America fueled a reversal of a trend seen since 2009 as acquirers from advanced economies, due to the focus on smaller deals this quarter, captured a smaller proportion of overall activity, while activity picked up from emerging and developing markets," added Jim Forbes, Global Metals Leader at PwC. "We expect that Asia and Oceania will see large inbound activity as companies in other regions seek a foothold in emerging nations and look for ways to reduce operating costs; however, companies doing deals in these emerging regions need to be cautious in countries with higher instances of corruption."

Financial investors were absent from the deal environment during the second quarter of 2011. However, the number of deals financed through stock swaps, which allow a company to exchange its equity for an ownership interest in another company, increased from nearly five percent in 2010 as a whole to approximately 11 percent. "We believe that financial sponsors will return to the deal environment, although their focus will likely stay on downstream targets, with upstream assets remaining a focus for strategic acquirers, primarily because of inherent volatility, political risk, and potentially longer holding periods required for upstream acquisitions," continued McCutcheon.

As the deal recovery continues, PwC expects emerging and developing markets to remain attractive for metals companies looking to do deals. However, in the wake of the "conflict minerals" provision of the Dodd-Frank Act and the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) stepping up enforcement actions mandated by the Foreign Corrupt Practices Act (FCPA), PwC believes that metals companies need to proceed with caution.

Special report: Does your company's M&A strategy mitigate corruption-related risks and costs?

Multinationals continue to expand globally with mergers and acquisitions, pursuing deal activity at an ever-increasing pace, to fuel faster growth and hone competitive advantage. Yet organizations face intensified risks in regions where corruption is pervasive and corrupt practices are long-standing — at times, even accepted as status quo. Globally, calls for increased anti-corruption initiatives are intensifying, as governmental bodies in the U.S., the U.K., India, Japan, and elsewhere ask their regulatory agencies to take a stronger stance.

"Metals companies often face high risk for economic crime as a result of their continuing expansion in emerging markets such as the BRIC countries (Brazil, Russia, India, and China) and, more recently, the VISTA countries (Vietnam, Indonesia, South Africa, Turkey, and Argentina). Companies that don't take these higher risks into consideration before closing a deal face the potential of great financial loss and reputational risk. However, companies that embrace these new compliances may find that these various markets can unlock lots of value for all stakeholders involved," concluded McCutcheon.

According to PwC, factors that companies need to consider when pursuing deals out of their home markets include vetting third parties, determining the appropriate level of due diligence, and navigating disclosure requirements for certain resources like conflict minerals. In the latest Forging ahead, PwC provides insights into leading practices to mitigate corruption risks, including how companies achieve success in anticorruption efforts.

For a copy of Forging ahead, PwC's quarterly analysis of M&A activity in the global metals sector, please visit: 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.

About PwC's Industrial Products practice

PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC's IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues. For more information please visit: www.pwc.com/us/en/industrial-products

About the PwC Network

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms 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" refer 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 legal entity.

SOURCE PwC