Forging ahead: Global Metals mergers and acquisitions analysis

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Welcome to the third quarter 2008 edition of Forging ahead, our analysis of mergers and acquisitions in the metals industry. As we know, we are currently experiencing a severe global financial and credit crisis. The current global economic slowdown and lack of liquidity have resulted in a sell-off and significant decline in market capitalization across the industry. The steel industry witnessed an unprecedented increase in prices from Jan. 1, 2008, to Sept. 30, 2008; the benchmark hot-roll price increased by 65 percent during this period. However, the first signs of softening prices appeared in September, when the hot-roll price dropped 5 percent—the first decline since 2007. Pricing challenges continued with the additional 12 percent decline in October prices. Looking forward, the consensus in the industry and in the market seems to indicate that demand and price will continue to fall but there is no agreement regarding the extent.

For the first half of 2008, aluminium prices experienced a more gradual rise, but still managed an increase of approximately 30 percent. Since July, however, prices have been on a steady decline with the three-month LME falling roughly 20 percent in the third quarter, and a further 16 percent decline in October. At current price levels, it is estimated that a large portion of global aluminium production could now be operating at a loss.

Deal activity for metals targets, as measured by the number of deals announced during the first three quarters of 2008, remained robust though there has been some attenuation of the pace of deal activity as measured by announced deal value. This is primarily attributable to a smaller average deal size for deals announced so far in 2008, as large sector constituents focused on integrating recent acquisitions.

It is uncertain how the decline in prices and weakening global demand, along with the recent strengthening of the US dollar, will affect mergers in the fourth quarter of 2008. Many companies have already announced output reductions or capacity curtailments, which may mitigate some of the recent downward pressure on price. However, as the credit crisis continues, we expect strategic investors will drive most deal activity, even though the sector constituents that have recently engaged in large deals may choose to focus on merger integration, cost containment, and capacity rationalization in the near term.

Our analysis reveals several noteworthy trends. First, the value of deals announced during 2008 for targets from South America has been significant and is the result of several large deals for targets in Brazil, including the transaction that allowed Anglo American to gain control of IronX Mineracao. Second, as expected, cross-border acquisitions of US targets increased because of weakness in the US dollar as well as the relatively strong positions of foreign metals companies. Third, Russian entities continue to be active acquirers for metals targets. Two of the three large deals announced during the third quarter of 2008—Norilsk Nickel and John Maneely Co.—involved acquirers from Russia. Finally, our expectation that the focus of metals M&A activity would shift more toward non-aluminium deals, particularly steel, held true during 2008, compared with the previous year.