Articles in Category: M&A Activity

The surprise announcement that PSA, holding company for the Peugeot, Citroën and DS brands, is in talks with General Motors to acquire GM’s European Opel and Vauxhall brands has set the cat among the pigeons in European capitals.

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One of the first justifications for any major merger or takeover is the opportunity for cost reduction from economies of scale and consolidation. PSA’s interest in the Opel/Vauxhall brands has some logic to it.

Constructeur Automobile Mondial?

Acquiring the brands would catapult PSA into the major league, closer to Volkswagen and Fiat in terms of automobile sales volume. Not surprisingly, the French publication Le Monde was one of the first to cover the story in depth (site est en francais, mes amis). As the newspaper explains, for GM, Opel and Vauxhall make up only 12% of the company’s production of roughly 12 million vehicles a year, but for PSA an additional 1.2 million units on top of the existing 1.9 million should create considerable opportunity for economies of scale, at least in the European market where PSA currently sells 1.9 million vehicles out of a total production of 3.1 million worldwide.

Will a deal selling Opel/Vauxhall to Peugeot mean more 308s? Source: Adobe Stock/mrivserg.

The worry in European capitals, though, is that those economies will be achieved by closing production facilities. With PSA 14% owned by the French government and Opel a major employer in Germany, the telephone lines between Paris and Berlin have no doubt been humming seeking reassurances that if European approval is to be given, no job losses will result in Germany or France. Read more

PricewaterhouseCoopers recently released its Q4 2016 Deal Insights Report. Among the findings,

  •   For Q4 2016, the total deal value of $12.9 billion for deals with disclosed value greater than $50 million was 12% higher than last quarter and 106% higher than Q4 2015.
  • Deal value in 2016 was driven by M&A activity in China, as eight of the 10 largest deals throughout the year were announced by Chinese acquirers.
  • Over the past three years, 77% of deal activity has occurred locally.

I had a chance to discuss the metals m&a market with Michael Tomera, PwC’s metals division leader, based in Pittsburgh.

Jeff Yoders: Deal volume finally took off in Q4. What did the election have to do with it?

Michael Tomera: A key driver in this global report did have to do with Chinese deals. That was the driver, industry consolidation over there, over the last two quarters. There is definitely optimism for what’s going on with the new administration.

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Chinese steel industry consolidation, as much of a glimpse as we have of what’s going on in China — it is quite difficult to get exact details and good information out of China — it does, indeed, look like consolidation over there is happening and maybe even the reduction in capacity that they have said they want to do. It does look like that … from the information that is available.

JY: How so? In some of these large mergers, such as between Baosteel and Wuhan Iron and Steel? Or from some other measures?

MT: Generally, I think what a lot of the industry folks have been looking at is the need to curb excess Chinese capacity. The Chinese have said they are trying to do that, cut the capacity, and even if it’s less than the numbers they’re talking about cutting to… there’s going to be an impact on imports into North America.

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What happens with that, combined with anti-dumping actions, is really going to drive the impact on this market. The anti-dumping regulations are things that people in the North American market are going to continue to look at rather than discussing reductions in Chinese capacity simply because anti-dumping and countervailing duties, and their collection, are things that they can independently verify.

JY: Steel deals took off in Q4, is the steel sector a good place to invest again?

MT: 43 deals in the steel category, 40% of all deals in 2016. It looks like (steel investing is back). There’s been more going in anti-dumping actions in steel than other metals categories. We can’t predict what might happen with steel, aluminum or other individual metals sectors, but it does look like anti-dumping duties will be a factor. It seems like there is a fair amount of capital available among acquirers and private-equities and there is infrastructure planning going on from the Trump administration, so these are the things that have contributed to the increased share values of metals companies, in general, and steel companies in particular since the election.

JY: The mergers and acquisitions market looks healthy, then?

MT: Probably in previous years, we thought deal conditions would be better than they were just yet, particularly at the beginning of ’15. There was a 104% increase in deal value vs. Q1 2015. Now, it really looks like things have turned a corner. There are momentum drivers here. If you look at liquidity, market conditions, infrastructure development in the U.S. with the new infrastructure and trade plans, all of those are good indicators for the metals industries and growth going from 2016 into 2017.

Several of Arconic Inc.’s biggest shareholders are pressing the company to oust Chief Executive Klaus Kleinfeld, less than three months after he separated the aerospace and automotive parts maker from aluminum giant Alcoa, Corp.

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The shareholders are unhappy with the company’s performance and blame Kleinfeld, who served as the Alcoa, Inc.’s for eight years before taking the helm at Arconic, according to people familiar with the matter who talked to the Wall Street Journal. The company’s spending and history of missed forecasts dating back to before the split are among their complaints, the people said. The new Alcoa, Corp., coincidentally — the company Kleinfeld used to lead — is doing just fine.

Hungry for Transportation Access, Caterpillar Moves to Chicago

Caterpillar, Inc. said today it would move its global headquarters to the Chicago area from Peoria, Ill. later this year to move closer to a global transportation hub and make it easier to recruit executives.

The company said a limited number of senior executives will move into leased office space beginning in late 2017.

About 300 workers, including some positions moved from Peoria, will be based at the new location once it becomes fully operational, Caterpillar said in its statement.

The company did not specify the exact location of its new headquarters.

“Locating our headquarters closer to a global transportation hub, such as Chicago, means we can meet with our global customers, dealers and employees more easily and frequently,” Chief Executive Jim Umpleby said.

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Caterpillar is the world’s largest construction and equipment manufacturer. The company said it will not build a previously announced headquarters complex in Peoria.

Indian-born metals tycoon Sanjeev Gupta seems to be snapping up metals fast, whether those investments are aluminum, steel or other producers. Gupta’s investments come as competition is shying away from investing in the U.K. steel and other metals businesses.

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Gupta recently announced that he would be investing $148 million (around £120 million) in Britain’s last standing aluminum smelter. Gupta’s Liberty House along with his father’s SIMEC business will be paying $371 million (£330 million) to buy assets that include the plant at Lochaber in the western Scottish Highlands and two hydroelectric plants that power it.

UK Aluminum

The plan is to upgrade the equipment and turn it into an aluminum wheel manufacturing facility. Gupta’s Liberty and sister company SIMEC are part of the Gupta Family Group Alliance (GFG) , and, according to a report in the London Telegraph, “the move is part of the parent group’s strategy  to build what it describes as ‘a competitive and sustainable metals and engineering sector’ in the U.K.”

The Scottish government has supported the acquisition and has guaranteed the power purchases of the aluminum smelter for the next 25 years.

Liberty supplies parts to the U.K.’s automobile industry with clients including Jaguar Land Rover. Lochaber, with a capacity of 47,000 metric tons, was put on the block by Rio Tinto under its plan to dispose of its non-core assets.

The deal will immediately safeguard the existing 170 jobs, generate another 300 jobs directly and about 2,000 direct and indirect jobs in the overall supply chain.

This deal marks one of the largest single investments made by the GFG Alliance. It also marks a major step in GFG’s plan to forge a sustainable metals and engineering sector in the U.K. by integrating the supply chain.

Other Acquisitions

Liberty has spent at least $618 million (£500 million) in the past year on acquisitions. In November, it had also signaled its intention to buy some of Tata Steel UK’s specialty steel business.

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The Telegraph says the purchase of various steel furnaces is part of Gupta’s larger plan to complete his “green steel” vision, where scrap steel is recycled in the U.K. market.

The fact that X2, the mining vehicle set up by Sir Mick Davis in 2013, is releasing its financial backers from their commitments says quite a lot about the state of the global mining Industry.

X2 was set up by Sir Mick after he successfully merged  —or shall we say sold — the $50 billion mining giant Xstrata to Glencore International in May 2013. His plan was to create a new mining and metals group by acquiring assets that he believed would be sold at knockdown prices as the commodities bust unwound from 2011 onward.

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Even though commodity prices plummeted in late 2011, the expected distress sale of mining companies’ assets did not come to be. Somehow, miners found ways to lower costs and reduce debts without massive divestments or fire sales. Over the last three years, X2 has purchased a grand total of zero assets.

Not that he hasn’t tried, according to a FT the purchase of Rio Tinto’s coal assets valued at some $2 billion, fell foul of North American pension investors dismayed at the prospects for carbon based resources.

Why Can’t X2 Make a Deal?

Assets have been sold by mining firms, sure. Sir Mick’s previous partners Glencore International successfully sold various assets and paid pay down debt as a result, but for whatever reason the valuations didn’t attract X2’s interest. Meanwhile, BHP Billiton demerged its aluminum business South 32 but did so via taking the business to market which would then have forced X2 to pay a premium if they wanted to acquire the assets.

Free Download: The October 2016 MMI Report

X2 didn’t exactly have the $5.6 billion sitting in the bank. Its fund is made up as a number of pledges, six of which were said to be of $500 million each. Noble Group, the commodities trading house, and U.S. private equity firm TPG this summer indicated they will not renew their commitments for next year. This was said to be what prompted Sir Mick’s reassessment of near-term opportunities.

The fund’s other contributors included Abu Dhabi Investment Council, and three Canadian pension funds — PSP Investments, Ontario Teachers’ Pension Plan, and Caisse de Depot et Placement du Quebec —as well as a number of smaller investors, according to the WSJ. One of the problems seems to have been not just a lack of suitable targets, but that investors have the right to veto deals on a case-by-case basis, rather tying X2’s hands.

Sit Down, You’ll Rock the Boat

The lack of fire sale opportunities may also suggest that commodities as a class have not fallen completely out-of-favor. Lenders have remained supportive of the sector and the WSJ says fewer than the expected firms have gone bust as they rode out the downturn by stripping back operations and cutting costs.

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Indeed, X2’s decision to release their backers from commitments may mark recognition the commodities market has bottomed. Commodities like Iron ore, coal, gold, nickel and tin have all picked up from recent lows this year, reflected in a 22% rise in the S&P global natural resources index. X2 may have missed the boat, at least for now

The Philippines shut down 20 more mines recently, further curtailing nickel exports to China. There’s a chance a major Brazilian iron ore miner will divest some of its assets.

More Filipino Nickel Mines Shut Down

The Philippines has suspended 20 more mines for environmental violations, most of them nickel, a government official said on Tuesday, bringing to 30 the number of mines shuttered.

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The suspended mines account for 55.5% of nickel ore output in the Philippines based on last year’s production, Environment and Natural Resources Undersecretary Leo Jasareno told a news briefing.

Brazilian Iron Ore Miner Looks to Sell

Cia Siderúrgica Nacional SA is considering selling part of its stake in Congonhas Minérios SA, Brazil’s No. 2 iron ore producer, to China Brazil Xinnenghuan International Investment Co., two people familiar with the deal told Reuters on Monday.

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According to the people, the Chinese mill known as CBSteel is interested in buying about 25 percent of Congonhas directly from CSN. They said CSN, as Brazil’s No. 2 listed flat steelmaker is known, would remain in control of the unit, adding that talks are advancing slowly and may not necessarily result in a deal.

Jackson Hole: All the Hiking, Skiing and Monetary Policy You Need

Buyers of most commodities began the week by eagerly watching the annual Central Banker get together at Jackson Hole, Wyo., particularly for any clue as to when the Federal Reserve will finally raise interest rates.

But our own Stuart Burns explained that aging populations, slower productivity growth and a reluctance around the world to spend and invest have propelled advanced economies into so-called “secular stagnation” and it might be some time before the fragile U.S. economy can stomach a rate hike.

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A bigger concern for those of us that write about economics for a living is now that “kitchen sinks” and “bazookas” have been exhausted, what metaphors will we use to describe central banking policy tools? Hopefully, the central bankers at least got some good hiking in at Jackson Hole. Read more

Alcoa removed a key obstacle from its plan to split this week and the London Metal Exchange will resume open outcry trading at its new office on Monday.

Alcoa, Alumina Settle Dispute

Alcoa, Inc. and Alumina Ltd. have settled a dispute and agreed to reshape their joint venture, removing an obstacle to Alcoa’s plan to split into two companies and making its Australian partner a more attractive takeover target.

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The two companies agreed to end a court fight that had threatened to delay Alcoa’s plan to spin off its plane and car parts business, which is now set to go ahead by the end of this year.

LME Will Return Monday

The London Metal Exchange (LME) will resume open outcry trading at its offices in London’s financial district on Monday after repair works were completed, it said on Thursday.

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The exchange, the world’s oldest and largest market for industrial metals, moved ring trading to an emergency venue in July after structural problems forced the shutdown of its offices at Finsbury Square.

In the largest foray by a Chinese company into the U.S. aluminum market since the financial crisis, Zhongwang USA LLC said this week that it would buy U.S. aluminum company Aleris in a $2.33 billion deal, expected to close Q1 2017.

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Zhongwang USA is owned by Liu Zhongtian through his Chinese group Zhongwang International Group Ltd. but he is also the founder of Asia’s second-biggest extruder, Hong Kong-listed aluminum products maker China Zhongwang, a firm embroiled in anti-dumping cases in the U.S. Liu has been angling to get a toe in the U.S. market for some time, there was talk of a $120 million aluminum casting plant in Barstow, Calif., as part of an earlier attempt to get into the U.S. but it came to nothing in the end.

Automotive Demand

Zhongwang is making a bet on the growing automotive aluminum sheet market, being a substantial manufacturer of automotive extrusions in China and recently building a rolling mill for automotive sheet to service the Chinese automotive body market. Read more

Mergers and acquisitions in the metals sector were down in Q2 2016, according to PricewaterhouseCoopers‘ Q2 2016 Global Metals M&A Deals Insights report. Total deal value was down a whopping 69% to $2.8 billion from Q2 2015.

PwC’s U.S.Metals Leader, Mike Tomaro said the global economy and unpredictable commodity markets have led to caution from metals firms contemplating major deals.

“It really does seem to exist outside of anything like normalcy,” Tomera said. “We are seeing a pickup in prices. A lot of that is, we think, driven by trade enforcement actions that have come out. The question is, will these prices stick or even maintain the upward trend? There’s speculation that they may not. There’s also speculation that this will drive change.”

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17 Deals were announced during Q2 2016, down 45% from the same quarter. Of the 17 deals, 12 deals were pending (forming 71% share) valued at around $2 billion during the quarter.

Completed deals were valued only at $0.7 billion in Q2 2016, the lowest observed of all quarters in the last two years. The largest deal was JiaoZuo WanFang Aluminum Manufacturing’s acquisition by
Hangzhou Jintou Jinzhong Investment Enterprise LP for $347 million.

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All premium metals categories (steel, aluminum and iron ore) saw weaker deal activity in the second quarter while the “other metals” category surged its share to 38% in total deal value (recording the highest share). Aluminum and steel together constituted more than half of total deal value.

“If you look at the volume of deals that happened this quarter – and the volume of deals in the first quarter – it really can’t get any slower than where we’re at right now from a deal perspective,” Tomera said.”It has got to start to pick up, especially on the steel side. The price pickup should translate into a better market, but whether that translates into more deal volume remains to be seen.”