Global Financial Crisis Sends Deal Value Down

The value of mergers and acquisitions in the metals industry this year will fall far short of last year’s total and the outlook for the first half of 2009 doesn’t look very promising, PricewaterhouseCoopers (PWC) says.

Last year, deal values reached US$298.2 billion. In the first nine months of this year, the figure was just US$72.2 billion.

Overall, there was a significant drop in the average value of each deal and there were no deals valued at over US$10 billion, the international accounting and business consulting partnership reported.

Nevertheless, the pace of deal activity remained “robust” in the first three quarters. PWC believes that the total number of deals this year (105 at the end of the third quarter) should exceed the 115 deals of 2006 and “approximate” the 142 deals of 2007.

What’s more, the number of deals announced in the first three quarters of 2008 with values of between US$500 million and US$1 billion “remains ahead of the pace” of deals that fell into this range during all of 2006 (16 deals) and 2007 (19 deals). If nothing else, this demonstrates that “the broad trends affecting the metals M&A environment are moving more deal activity under the US$1-billion threshold,” the study found.

The majority of deals in the US$500-million to US$1-billion category involved steel targets, PWC added.

There were 16 large deals (defined as having a value of at least US$1 billion) announced in the first nine months of the year — well behind the 31 large deals in the year-earlier period.

Weakening global demand, depressed pricing and the ongoing liquidity crisis will continue to conspire to cause a “dramatic shift” in the level of merger activity in the fourth quarter of this year and in the early part of 2009, according to Jim Forbes, PWC’s global metals leader.

The PWC study called Forging Ahead: Global metals mergers and acquisitions analysis for the third quarter 2008 also highlighted several trends. The first was that deal value in South America has gone up — largely the result of several large deals for targets in Brazil.

A second trend that has emerged is that, given the weakness of the U. S. dollar and the relatively strong financial positions of foreign metals companies, cross-border acquisitions of U. S. targets has also increased. (Twenty-four deals for U. S. targets were recorded during the first nine months of the year, ahead of the pace set in 2006 and 2007.)

Finally, Russia emerged as a key acquirer during the period — with two of the three largest deals announced during the first three quar- ters involving buyers from Russia. Russia also emerged as one of the biggest buyers of assets in the U. S., making up seven of the 17 cross-border deals for U. S. targets during the first three quarters of the year.

These deals included Vladimir Potanin’s US$9.65-billion acquisition of a minority stake in Norilsk Nickel (NILSY-O, MNOD-l) and Novolipetsk Steel’s acquisition in August of Ohio-based steel pipe and tube manufacturer John Maneely Co. (Novolipetsk picked up John Maneely from a shareholder group including private equity firm Carlyle Group for US$3.5 billion.)

Among the other large deals concluded so far in 2008 were Anglo American’s (AAUK-Q , AAL-l) US$2- billion acquisition of Brazilian iron ore assets from MMX Mineracao e Metalicos in January and the friendly merger between copper and gold miner Oxiana and zinc miner Zinifex to form OZ Minerals (OZL-a).

When deal activity is broken down by region, nearly half or 44%, of the 16 large announcements involved targets in Brazil, Russia, India and China (BRIC). Russia led the pack with 32% of the total deal value for the BRIC nations.