Metals deal-making goes from steep to deep according to report

Toronto — After forging ahead in previous years, metals industry deal-making fell away sharply in 2008 as world demand fell and prices plummeted according to Metals Deals* 2008, PricewaterhouseCoopers’ (PwC) annual review of the metals industry. Average deal value in the first half of 2008 was US$301 million compared to US$318 million in first half of 2007. In the second half of the year, average deal value plummeted to US$125 million and total deal value fell from a high of US$51.1bn in Q3 2007 to a tenth of this level a year later.

The report is the latest edition of a range of deals publications from PwC, covering sectors including mining, aerospace & defence, renewable energy, power and oil and gas. Together the mix of deals reports provides a comprehensive analysis of M&A activity across industries worldwide.

“The year in metals M&A deal-making saw a dramatic and sudden about-turn,” says Jim Forbes, global metals leader at PwC. “Optimism that China would continue to compensate for downturns elsewhere was replaced by increasing concern about a weakening in global demand, including China. A steep rise in commodity prices in the first half of the year was followed by a deep slump.”

The big deals worth over US$10bn plus were nowhere to be seen despite dominating metals deal activity in 2006 and 2007. This led to total deal value plunging from the record US$144.7bn in 2007 to US$60.6bn in 2008.

North America metal M&A activity fell sharply with the number of steel and aluminum deals being halved and the total value of deals dropped steeply from US$76.7bn in 2007 to US$15.8bn in 2008. Three quarters of North American metals deal value came from cross-border transactions, 83% of it for steel targets. The largest North American deal was Russian steelmaker Evraz’s US$4bn purchase of the North American tubular operations arm of IPSCO from Swedish steel producer SSAB.

Similar record increases were recorded in South America, spurred by a flurry of deals for Brazilian iron ore assets. Although only accounting for 8% of all deals, they contributed to 24% of worldwide metals deal value. Total deal value in the region reached US$14.8bn up 54% on 2007’s US$9.7bn.

Chinese and Russian companies played a central role in world M&A activity. Asia Pacific deals reached record highs with total value more than doubling to US$16.4bn in 2008 from US$7.2bn in 2007.

Deal activity slowed considerably in Western Europe with deal numbers down from 104 in 2007 to 65 in 2008 with the deal list headed by three US$1bn plus deals. The largest was the completion of the US$3.7bn all-Austrian merger of steelmaker Böhler-Uddeholm and Voestalpine, Austria’s biggest steel group. The other two both featured London-listed targets with production and mining assets in Russia and Kazakhstan.

There is no doubt that the balance sheet landscape of the metals sector is varied. Some companies face distress with weak share prices and problems in refinancing and in contrast, others have relatively healthy balance sheets having achieved record results.

According to Forbes, “Consolidation has left the larger metals players in the industry in a more flexible position to shut down production and manage capacity across the globe. The pressure to restructure will intensify the longer the downturn continues and the outlook for demand is uncertain.”