In the past, we reported on PwC’s ongoing analysis on M&A activity in the global metals industry. PwC released its most recent report in the series, entitled “Forging Ahead: First-quarter 2016 global metals industry mergers and acquisitions analysis” which breaks down the latest trends in the global metals industry, and provides insights into what the industry may expect going forward.
The major news coming out of the report is that deal volume declined to 14 deals valued at $50 million or more in the first quarter of 2016; however, deal value increased to $8.7 billion. The report concludes that the primary cause of this trend is the increase in megadeals, which are deals valued at $1 billion or more. Specifically, two Chinese based transactions made up 66% of the total deal value: CRED Holdings’ plans to acquire the share capital of Liaoning Zhongwang Group, a manufacturer and wholesaler of aluminum products for $4.7 billion; and the acquisition of Shandong Yili Electric Power by Shandong Nanshan Aluminum for $1.1 billion.
The deals in Q1 of 2016 were driven mainly by the steel and aluminum segments of the metals industry. Aluminum deals increased, and accounted for 36% of the quarter’s deal volume, compared to just 12% in the last quarter of 2015. Additionally, both of the megadeals mentioned above were in the aluminum segment of the industry. The report provides that producers are using consolidation to increase efficiencies, which in turn lower average costs, in order to compete more effectively on the basis of cost, an advantage the report cites as being traditionally needed by commodity producers.
In terms of the geography of the deals, the report found that Asia and Oceania were the two leading acquirer regions with 86% of the deals being located there. In particular China was a strong driver of deals, with it making up 8 of the 12 deals in the region. The 8 deals in China were local-market based, as producers are trying to increase scale and decrease pollution by closing inefficient plants.
The authors of the report see room to be optimistic about the industry going forward. The report states that continued growth in the United States’ economy, coupled with improvements for the automotive and construction industries should lead to an increase in demand for metals. Additionally, the report believes that commodity prices will see an increase in 2016, and that there will be an increase in demand from the Chinese and Indian economies for metals such as steel and aluminum. As a result, the report concludes that there will likely be a modest increase in deal activity in the short term.
The author would like to thank Scott Pollock, articling student, for his assistance in preparing this legal update.
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