PriceWaterhouseCoopers: Metals M&A Deal Volume Declines, But Megadeals Up

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In the first quarter of 2016, PriceWaterhouseCoopers wrote in its “Forging Ahead: Q1 Metals Mergers and Acquisitions” report that deal volume declined to 14 deals in the metals sector valued at $50 million or more.

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However, total transaction value for these deals increased to $8.7 billion, showing growth in both sequentially and on a year-over-year basis. The increase in deal value was driven by substantial increase in megadeal value compared to Q4 2015. At the same time, average deal size also increased by almost 158% to $624.3 million in Q1 2016.

Q1 2016 saw strong megadeal activity, with two deals in which the value of these deals ($5.8 billion) formed 66% of total deal value. The largest deal was an announcement that China-based CRED Holding plans to acquire the entire share capital of Liaoning Zhongwang Group, a China-based manufacturer and wholesaler of aluminum products, for an estimated price of almost $4.7 billion. The second megadeal, also China-based, was the greater than $1.1 billion acquisition of Shandong Yili Electric Power by Shandong Nanshan Aluminum.

We discussed the report, and many of these deals, on the phone recently with Michael Tomera, U.S. metals leader at PwC, and a co-author of the report.

Tomera said PwC counts itself among those still trying to better understand what’s pushing these large Chinese deals.

“It’s difficult to get more insight into the Chinese industry just because of the nature of the market there,” he said. “We’ve been trying, unsuccessfully largely, to interpret what’s going on with the Chinese market. When you couple what’s going on with U.S. producers trying to pursue trade enforcement, that is potentially driving up production. When you hear that prices are starting to rebound, you almost immediately hear that China is going to turn up capacity to take advantage of those prices.

Tomera said that PwC defines a “megadeal” as anything above $1 billion. While the y-o-y was definitely driven by the two megadeals cited above, prices, he said were the real driver behind many of these couplings.

“The real driver was people trying to take advantage of depressed prices,” Tomera said. “Many of these mergers were strategic combinations so they were not price-driven by some company trying to snap up companies that were on sale. Prices had been depressed for a number of quarters, after all. Now that prices have gone up a bit, oil has had a slight rebound, you would think that given the long time we’ve been in this trough that some good things are coming up. We’re now seeing interest from investors and banks, which hasn’t happened in a long time.”

Tomera also said that, from a standpoint of driving cost out of the picture, many steel and aluminum producers are closing down obsolete technology and focusing on higher value, newer products. They are stripping costs out through capturing the efficiency of new technology.

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“Looking at all costs in the system, companies are looking to drive efficiencies wherever they can,” he said.

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