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Friday | 29 August, 2014 | 11:11 am

Financial investors influence metals M&A

By Gretchen Salois

After slow start, deal environment rebounds, creating potential for greater consolidation

August 2014 - The metals deal environment rebounded during the second quarter of 2014 and shows further promise, according to a study by consultancy PwC. Financial investors remain major influences, Asia and Oceania are driving deal volume and China is considering opening its steel industry to foreign investment—a first since the government established a ban on it in 2005.

During the second quarter, 22 transactions valued at $50 million or more per deal, totaled $9 billion, which was nearly triple the amount of business transacted during the first quarter, which consisted of 13 deals totaling $3.4 billion. 

“Strong balance sheets have benefited metals businesses and provided them with a range of deal opportunities to manage around overcapacity and pricing issues that have challenged the industry, especially in the steel and aluminum sectors,” Sean Hoover, U.S. metals leader at PwC, said in a statement.

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Investments and deals

Two mega-deals played significant roles in the total values. In May, China’s state-owned National Social Security Fund agreed to purchase more than $2.2 billion worth of stock in steel products manufacturer CITIC Pacific of Hong Kong. In June, Alcoa purchased U.K.-based aerospace parts manufacturer Firth Rixon for $3 billion. 

Asia and Oceania led deal volume during the second quarter, accounting for two-thirds of the second quarter’s volume globally, PwC reported. Twelve deals totaled $3.9 billion or 95 percent of the region’s deal value of $4.1 billion.

The possibility that China will open its steel industry to foreign investment is significant because it would create opportunity for increased M&A activity in the nation’s $423 billion steel sector. According to PwC’s Hoover and Jim Forbes, global metals leader and co-author of the report, “China is the world’s largest producer of steel and manufactures more than seven times as much steel as the United States, the second-largest steelmaking nation.”

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Slow start

Analysts were optimistic: Despite a drop in U.S. gross domestic product during the first quarter, largely attributed to severe weather hampering consumer and business activity, GDP jumped 4.2 percent during the second three months of the year. “The economy is expected to rebound, which could drive further industrial demand and merger and acquisition activity as companies look to consolidation as a means to increase economies of scale,” PwC said in its report. 

Chinese GDP growth is expected to remain steady at 7.4 percent and an upswing in urbanization and an expanding middle class are expected to be the main drivers of continued demand for goods and services. “These gains, along with increasing economic activity in the Eurozone, South Korea and Japan, lead us to be cautiously optimistic that the deal market will continue to improve in the near term.”

 

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