Articles in Category: M&A Activity

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Before we head into the weekend, let’s take a look back at the week that was and some of the metals storylines here on MetalMiner®:

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According to a recent PwC report, mergers and acquisitions (M&A) activity in the metals sector slowed in Q2 2018, in tandem with an escalation in global trade tensions.

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“Deal activity, particularly crossborder, may remain stagnant until the angst caused by the global trade climate has subsided.” said Brian Kelly, US Metals Deals Leader for PwC.

The value of M&A activity in Q2 ($8.1 billion) fell 51% compared to Q1. Total deal volume (117) in Q2 also dropped, falling 40% compared to the previous quarter. In addition, average deal size ($136 million) was down 30%.

However, in the year to date (i.e. January-June), total deal value was up 72% compared with the same period in 2017. Total deal volume was up slightly (1%), while average deal size was up 4%.

The Asia and Oceania region saw the majority of metals sector M&A activity, according to the report. Among that activity included Baotou Iron & Steel Group, China’s largest steelmaker, announcing the acquisition of Inner Mongolia’s Baotou Steel Union for $1.6 billion.

Source: PwC via Thomson Reuters and other publicly available sources
(1 In Million USD)

“The region accounted for 76% of target value and 84% of acquirer value in the sector this quarter,” the report states of Asia and Oceania. “Similar to the previous quarter, China remains the global leader in steel and aluminum manufacturing. While it is expected that the imposed tariffs on foreign imports will increase local valuations, certain risks remain as economic growth expectations stagnate due to increased trade risks.”

In particular, deals in the steel and aluminum categories suffered. This spring the U.S. imposed tariffs of 25% and 10% on steel and aluminum, respectively, with a select few countries managing to negotiate quotas (South Korea, Argentina and Brazil).

“Deal values in the Steel and Aluminum categories are 38% and 90% lower than last quarter, respectively,” the report stated. “Deal values in the Iron Ore and Other Metals categories were higher from last quarter helping offset this decline. Deal volumes were significantly lower in all categories.”

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For now, a recovery in deal activity waits, in part, on some sort of resolution to the rise in global trade tensions.

“Until the results of these geopolitical trade relations become more clear, cross-border deal activity and overall deal value in the Metals sector may continue at below recent historical average levels; despite steadily increasing global demand and other economic stimulus,” the report explains.

Steel giants Tata Steel and thyssenkrupp have been talking about it since 2016, but now they have finally managed to reach an agreement to merge their European operations into a 50-50 joint-venture, according to the BBC.

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The merged business, to be called thyssenkrupp Tata Steel, will have annual sales of about £13 billion (U.S. $17 billion) and be able to produce 21 million tons of steel per year. The delays in reaching an agreement have in part been due to intense union lobbying to protect the two companies’ 48,000 workers.

The agreement is said to protect jobs with no compulsory redundancies for the next eight years, according to The Telegraph. While no compulsory redundancies have been agreed upon, the tie-up is expected to lead to about 4,000 voluntary redundancies as overlaps are eliminated between the three main hubs of the combined group – IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales — with the head office based in the Netherlands.

It is hoped the merged group will make cost savings of between £350-£440 million a year (approximately U.S. $520 million), although unions have secured an agreement for the first £200 million of operating profits to be reinvested back into the business. thyssenkrupp Tata Steel will be the second-largest steel producer in Europe after ArcelorMittal and it is hoped its size will help it compete against rising competition from Chinese imports (made worse by President Donald Trump’s recent imposition of a 25% import tariff on steel made in the European Union).

Heinrich Hiesinger, thyssenkrupp CEO, is quoted by the BBC as saying even prior to the U.S. import duty the two companies needed to consolidate and become more efficient because of increasing pressure from imports and an overcapacity within the industry. The loss of the two companies’ largest export market just makes matters worse.

The consequences for the combined group’s profitability in the event of Brexit have not, at least publicly, been discussed, probably because no one knows what the impact will be on moving products and people across borders post-Brexit. The only comment from the company came from Tata Steel UK CEO Bimlendra Jha who said it would be a “sorry state of affairs” when asked what a hard Brexit would mean.

Importantly, it gives the two companies an increased scale and opportunity to achieve some economies as a result.

Steel prices have picked up this year. Generally, Europe’s steelmakers are doing better, but they face considerable uncertainty as to the impact and duration of the current U.S.-European trade conflict, the level of increased Chinese imports and the possible impact of Brexit.

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All in all, the merger may prove timely; the challenges ahead are many.

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This morning in metals news, ThyssenKrupp and Tata Steel have come to a final agreement on their joint venture deal, Canada hits the U.S. with tariffs on $13 billion in goods and President Trump says he will not agree to a new deal on the North American Free Trade Agreement (NAFTA) until after the midterm elections.

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Making a Deal

In September 2017, Indian firm Tata Steel and German firm ThyssenKrupp announced they had signed a memorandum of understanding to merge their European steel operations, thus forming the No. 2 steelmaker in Europe (behind ArcelorMittal).

Almost a year later, the two announced they have reached a final deal on the merger, Bloomberg reported.

However, according to the report, some of ThyssenKrupp’s biggest investors are arguing the deal is skewed in Tata’s favor.

Canada Hits U.S. With Tariffs

The trade tensions continued apace, as Canada announced it was placing about $12.5 billion in tariffs on U.S. goods.

According to CNN, more than 40 steel products will be hit with a 25% duty, while over 80 other products will get a 10% duty.

Trump Says No Deal on NAFTA … Until After Midterms

Talks about NAFTA have somewhat fallen under the radar in recent weeks, as heated debate regarding immigration and the Supreme Court Justice Anthony Kennedy’s retirement announcement have dominated headlines.

As for the 24-year-old trilateral trade deal, President Trump indicated that he will not sign a new NAFTA deal until after the midterm elections in November, the Washington Post reported.

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In other NAFTA-related news, Mexico has chosen a new president, as leftist candidate Andrés Manuel López Obrador — typically known simply as “AMLO” — won Sunday’s election by a landslide.

Rio Tinto Iceland Ltd (ISAL). Source: ISAL/Einar Aron Einarsson

Norwegian firm Norsk Hydro announced Monday that it had put in a bid for Rio Tinto‘s aluminum plant in Iceland, according to a company release.

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“We see great potential in exchanging competence and technology elements between our aluminium plants,” said Hilde Merete Aasheim, head of Hydro’s Primary Metal business area, in the release. “We are now running a technology pilot in Norway which aims to be the world’s most energy-efficient and climate friendly aluminium production facility. These innovations will be expanded to other Hydro facilities, and as part of Hydro, ISAL will benefit from such technological spin-offs and competence.”

The bid came in for $345 million, according to a Rio Tinto release. Following the conclusion of a consultation process, Rio expects to ink the deal in the second quarter of this year, according to the Rio announcement. The bid for Rio’s 100% stake in the Iceland Ltd. (ISAL) plant also includes Rio’s stakes in the Dutch anode facility Aluchemie and Swedish aluminium fluoride plant Alufluor.

“The binding offer for the sale of these assets provides further evidence of Rio Tinto’s commitment to strengthen our business and deliver value by streamlining our portfolio,” said Alf Barrios, Rio Tinto Aluminium’s chief executive, in the release. “Hydro has a solid track record in the aluminium industry and is a partner to Rio Tinto in other ventures. ISAL, Aluchemie and Alufluor are a natural fit with Hydro’s portfolio and this transaction should secure the long term future for the sites and continued economic benefit for the wider communities.”

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Hydro cited the acquisition’s reinforcement of the firm’s position as a European supplier of extrusion ingot, and touted the ISAL plant for its production based on renewable energy. According to the announcement, ISAL’s 210,000 mt of aluminum produced with renewable power would increase Hydro’s capacity in primary aluminum production to 2.4 million mt in 2018. In addition, Hydro’s share of production from renewable energy sources would rise to over 70% with the acquisition, according to the release.

Steel is the buzzword in India these days.

In addition to increased uptake, the revival in the steel cycle has also led to an unlikely output – many steel majors are now showing renewed interest in acquiring stressed Indian steel assets that have been put on the block for loan default.

Now, Indian steel is seeing an uptick in sales after almost a decade.

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The renewed interest in steel plants that are in a financial mess and have been put up for suitors is logical, analysts say, since most are going for approximately U.S. $600 per ton, while the rate to set up a new steel plant is almost about U.S. $800 per ton. Not to mention that buying an already up and running steel company means no hassles of taking government and other permissions.

What adds icing to the cake is many of these stressed assets are on the block for nothing else than the fact that most were set up at high costs, and other operational reasons.

Foremost in the race is Tata Steel Ltd., with its highest bid for the insolvent Bhushan Steel Ltd. and Bhushan Power & Steel Ltd. The former has offered to pay up to about U.S. $ 7 billion (Rs 45,000 crore) for Bhushan Steel and about U.S. $3.7 billion (Rs 24,500 crore) for Bhushan Power. Others are Numetal Mauritius, a company having VTB Bank as a majority shareholder and the Ruias as a minority partner, and ArcelorMittal for the stressed Essar Steel. Tata’s last major acquisition was the U.S. $13.5-billion Corus deal in 2007.

Tata Steel currently has 13 million tons per annum (MTPA) capacity; if it managed to grab the two Bhusan plants, it could add about 8.0 MTPA.

Bhushan Steel was sent for debt resolution by its lenders after the company failed to repay its dues worth about U.S. $8.62 billion (Rs 560 billion) under the Insolvency and Bankruptcy Code 2016.

But according to a report in The Hindu Businessline, there is now one hiccup in Tata’s path.

Bhushan’s lenders have invited the U.K.-based Liberty House to also submit its bid for the assets, well after the deadline, which was Feb. 8 this year. Only JSW Steel and Tata Steel had submitted bids by the deadline.

Quoting a Liberty House spokesman, the report said it had been invited by the lenders to bid for both the Bhushan assets, and would be doing so within a fortnight.

When asked why the company had failed to bid before the deadline, the spokesperson said Liberty House had been finalizing its India strategy.

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In mid-February, ArcelorMittal India Pvt Ltd (AMIPL) submitted its offer for Essar Steel, which includes a detailed investment plan to address the operational issues in Essar’s existing asset base. The company has expressed confidence that with its industry expertise and “renowned operating prowess,” it was best equipped to implement a successful turnaround, which would be beneficial to Essar’s stakeholders.

Sanjeev Gupta, the industrial buyer of distressed steel, aluminum and coal assets (to name just a few of the areas he has expanded into in recent years), has so far managed an uncanny knack of good timing.

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Buying steel assets just before the global steel market finally lifted even Europe out of the doldrums, and now aluminum. To be fair, Gupta is not new to aluminum.

Gupta’s Liberty Group bought the Lochaber aluminum smelter and hydro-electric power plant from Rio Tinto in 2016 in a $410 million deal when Rio was desperate to shed “non-core” assets and raise cash.

Since then, the aluminum price has risen some 30%. Now, with aluminum on a roll, Gupta is again picking over the carcass of Rio’s aluminum assets, this time putting in a $500 million offer for Europe’s biggest refinery: the Dunkerque aluminum smelter.

Lochaber was only 47,000 tons capacity, but Dunkerque is on an altogether different scale, producing 280,000 tons a year. That disparity makes it a steal with respect to purchase price per ton of capacity compared to Lochaber, and is said to be profitable at current aluminum prices.

For most aluminum producers — unless they are niche, high-purity players or have integrated downstream activities — tend to have larger concerns leveraging economies of scale and sometimes integrating upstream into alumina, and even bauxite mining, to secure their supply chains. It is rumored Gupta may have something of the same objective. He is apparently in talks with Rio for more of its aluminum assets, according to the Financial Times. Rio is also looking to sell a 205,000-ton-per-year Isal aluminum smelter near Reykjavik, Iceland, and its Pacific Aluminum business, which analysts say could fetch more than $2 billion, with Gupta rumored to be interested.

Quite how he has managed to fund his rapid acquisition spree in recent years is the subject of some speculation. With purchases of generally distressed assets in shipping, recycling, banking, commodities trading and energy, there does not appear to be an obvious theme to his empire building beyond being broadly metals-related and presumably cheap.

Turning distressed assets around, though, is a hugely intensive and time-consuming process — and not without considerable risk, as many fail.

Yet so far, Gupta’s vehicles, Liberty Group and Simec under the GFG Alliance holding company, have apparently done rather well.

The success of Dunkerque will be contingent on the French nuclear generator EDF continuing to supply electricity at viable rates. That is probably, for now, a given, since the French apparently are more concerned about maintaining employment of the 600 workers at the plant.

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This morning in metals, officials from Thyssenkrupp’s home German state indicated they are confident the merger proposed for the German firm and Tata Steel can be pushed through, a mothballed U.K. steel plant is now back up and running, and Great Lakes steel production picked up last week.

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Time to Make a Deal

Tata Steel and Thyssenkrupp recently came to an agreement to merge their European operations — however, there are still some hurdles to clear in order to seal the deal on the move.

On Wednesday, German officials in North Rhine-Westphalia, the state in which Thyssenkrupp is located, indicated they were confident that management of the company would be able to strike a deal with workers, Reuters reported.

Gupta to Revive Shuttered Former Tata U.K. Facility

Sanjeev Gupta, of Liberty Speciality Steels, re-opened a steel facility Wednesday in the U.K. that was closed by former owner Tata Steel, The Economic Times reported.

Gupta revived a small bloom caster at its Aldwarke works facility in Rotherham, the Times reported. The move comes more than a year and a half after the facility was closed by Tata Steel UK.

Great Lakes Steel Production Up

Production of steel in the Great Lakes region recently got a boost, ticking up 2.7% last week, according to The Northwest Indiana Times.

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Last week, 684,000 tons of steel were produced in the region, according to the report citing data from the American Iron and Steel Institute (most coming from the northwest Indiana counties of Lake and Porter).

Thyssenkrupp and Tata Steel have finally made it to the altar.

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After 18 months of mostly behind-the-scenes negotiations to resolve several potentially “deal-off” stumbling blocks, all the major issues have been resolved. The two firms have signed a memorandum of understanding to create a 50:50 joint venture based in Amsterdam, Netherlands, called Thyssenkrupp Tata Steel (TTS).

The behemoth will rank second to ArcelorMittal with 21 million tons of annual steel capacity generating sales of €15 billion ($17.8 billion) and employing 48,000 people, The Telegraph reported.

New Focus

TTS will focus on three main production hubs: Ijmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales, the paper reports, Analysts say improved viability will come from cost savings of between €400 million and €600 million a year arising after 2,000 redundancies and another 2,000 jobs going out of the combined business as overlapping operations are removed.

Not surprisingly, TTS sees the value proposition as the enhanced opportunity for the combined group to move its business up the value chain in cooperation rather than competition with each other.

Hans Fischer, Tata Steel Europe’s chief executive, said “We need to focus on higher value products, China has huge overcapacity and there is a risk they will flood the market. The answer is not to compete with them, but try but find a solution where we have products that cannot be produced easily. We need to be a technology leader.”

Tata wriggling out of the old British Steel Pension fund liabilities was the final major hurdle to overcome — albeit to be fair, at considerable cost to the parent — and the willingness of British workers to agree to an end to the final salary scheme and reduced benefits for existing members underlines their desperation for a deal, matched by compromises made in Germany by workers fearful of the prospects of foreign competition with the European steel industry.

But therein lies the dilemma.

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This morning in metals news, a new European steel giant could be coming on the scene, that giant could result in the loss of thousands of jobs and aluminum hits a five-year high ahead of further Chinese supply cuts.

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Tata Steel, ThyssenKrupp Agree to Merge European Operations

The New York Times reported Wednesday that Tata Steel and ThyssenKrupp had agreed to a deal to merge their European steel operations — a merger that has been in the news for more than a year.

According to the report, while there are still some obstacles to completion of the merger, if it goes through the merged operation would make the second-largest steelmaker in Europe, behind only ArcelorMittal.

Merger Could Yield Loss of 4K Jobs

While the potential merger of the Indian steel giant Tata and German firm ThyssenKrupp’s European operations might be cause for celebration for some, it won’t be for a considerable number of workers, according to one report.

The merger of the two firms’ European operations could lead to the loss of 4,000 jobs, according to CNNMoney.

The merger is expected to cut costs by between €400 million and €600 million ($720 million) a year, according to the report.

Aluminum Soars to Five-Year High

Aluminum continued its strong 2017, hitting a five-year high, Reuters reported.

Not surprisingly, news from China has much to do with the rise, as supply cuts are forthcoming from Chinese producer Chinalco, according to the report.

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LME aluminum traded at $2,191 per ton, its highest since September 2012, according to Reuters.