Metal Deals Forging Ahead: 2012 Outlook & 2011 Review


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Metal Deals Forging Ahead: 2012 Outlook & 2011 Review

  1. 1. Metals Deals Forging Ahead 2012 outlook and 2011 reviewMergers and acquisitionsactivity in the metalsindustry
  2. 2. ContentsIntroduction3Report highlights 42012 deal outlook: caution will be the watchword 62011 deal review: a year of deal bounce-back 10 Deal makers 12 Deal places 14 North America 16 Asia Pacific 18 Europe (including the Russian Federation) 20 Central and South America 22Contacts23 Methodology Metals Deals 2011-12 is based on published transactions from the SDC Platinum (Thomson Reuters) database, January 2012. The report includes data from prior years and is the latest in an annual series of metals deals reports. Comparative data for prior years may differ to that appearing in previous editions of our annual analysis. This can arise, for example, as a result of updated information or methodological refinements and consequent restatement of the input database. Analysis encompasses only those deals which are completed in the calendar year, except for figure 5 which is based on pending deals. Deal values are the consideration value announced or reported including any assumption of debt and liabilities. Figures relate to actual stake purchased and are not extrapolated to 100%. The geographical split of the deals refers to the location of the target company or assets. Deals located in the territory of the Russian Federation are included in the totals for central and eastern Europe. The analysis relates to target companies in the supply chain for metals and basic metal products, including recycling. The sector and subsectors analysed includes deals for targets with primary SIC codes that fall into one of the following industry groups: iron ores; ferroalloy ores, except vanadium; steel works, blast furnaces, rolling mills, and finishing mills; iron and steel foundries; primary smelting and refining/ nonferrous; secondary smelting and refining/nonferrous; rolling, drawing, and extruding/nonferrous; nonferrous foundries; miscellaneous primary metals products; and metals service centres and offices..2  Metals Deals 
  3. 3. IntroductionWelcome to Metals Deals, PwC’s annual analysisof deal activity in the metals industry and ouroutlook on the prospects for dealmaking in theyear ahead. We also take a regional look at whatis happening in the main markets around theworld. This year, for the first time, we open The report is the latest annual review our report with our discussion of the edition in our Forging Ahead series on outlook for the year ahead and dealmaking in the sector. It sits identify some of the main themes we alongside our quarterly Forging Ahead expect to be at work. In our last reports and is one of a range of deals report, we correctly forecasted the publications from PwC, covering breakout of deal activity which has sectors including mining, translated into a 56% year on year aerospace  defence, renewable increase in total metals deal value and energy, power, and oil  gas. Together a continuing high number of deals in the family of deals reports provides a the sector. comprehensive analysis of MA activity across industries worldwide. Looking ahead, signals on US growth, the Chinese real estate and Jim Forbes construction sector and developments Global Metals Leader in the eurozone will determine the momentum of future deal flow. If they are positive, we expect momentum to be maintained with a number of themes underpinning buyer and seller decisions. On balance, we anticipate moderate deal growth in 2012 with caution being the watchword. More robust growth is likely to come only when metal prices and other fundamentals – including margins – show continuous sustained improvement. Forging Ahead 2012 outlook and 2011 review  3 
  4. 4. Report highlightsMomentum stayingbehind metals dealbounce-back Supply chain securityThe current run-rate of over 500 spurring new alliancesmetals deals a year puts deal flowat near historic high levels. Total The critical importance of resourcecompleted deal value rose from supply is producing a mix ofUS$26.1bn in 2010 to US$40.7bn in vertical integration and horizontal2011, up 56% year on year and up alliance moves as metals companies170% on its US$15.1bn 2009 trough. continue to seek greater certaintyPending deal flow indicates deal value over raw materials. We are seeingis continuing an upward trend. All the emergence of manufacturereyes will be on the eurozone crisis, the alliances, enabling companies to poolpace of recovery in North America, investment in order to secure resourceand the real estate and construction stakes. Four Chinese steelmakersmarkets in China. Any worries on the formed a consortium to secure alast of these two, in particular, could stake in a South American rare metaldampen deal flow but, if confidence supplier. This followed a similar movebuilds, we expect deal momentum be by a group of Japanese and Southmaintained in 2012. Korean companies. 2012 began with the announcement that a consortium of German manufacturers has been formed to pursue a strategy to secure future raw material supplies. Vertical integration through minority stakes in miners continues to be a major theme behind metals MA.4  Metals Deals 
  5. 5. Steel consolidation setto accelerate in 2012Signals are pointing to a long overduewave of steel industry consolidation.The Sumitomo-Nippon merger hasgained key regulatory clearance andlooks set to complete in 2012. Theeurozone crisis and market conditionsare putting extra pressure onEuropean steelmakers to find answersto the capacity and scale challengesthey face. In China, governmentpolicy is encouraging the emergenceof a small number of steel giants in Iron ore producers lookthe next few years and the closure beyond current ironor consolidation of smaller and less ore pricesefficient steelmakers. Iron ore producers are seeking deals that strengthen their options whatever the direction of future price trends. The merger of Cliffs Natural Resources and Consolidated Thompson was a major consolidation move in North America which, at the same time, strengthened vertical relationships into the Chinese steel end-market. In South America, Vale and Norsk Hydro’s aluminium deal, although a sale of assets by Vale, also represents a diversification play away from iron ore, with the Brazilian company becoming Norsk Hydro’s second largest shareholder. Forging Ahead 2012 outlook and 2011 review  5 
  6. 6. 2012 deal outlook: caution willbe the watchwordUneven and uncertain world demand forms the backdrop for The US and China will be keymetals dealmaking in 2012. Encouraging economic signals The current upturn in the US will playin the US are contrasting with the recession in Europe. The an important role. The latestcross-Atlantic differences have been reflected in a striking split International Monetary Fund (IMF)between US and European steel prices. US/German prices were expectation is for US growth to betypically about US$20/tonne apart over the last decade but maintained at 1.8% in 20122. Anyended 2011 with a US$128/tonne divergence1. China remains strengthening of momentum willone of the most important demand drivers. It purchases more reinforce domestic confidence and that of China. But a faltering in the USthan half of global iron ore trade. recovery is likely to have the opposite effect and, in turn, dampen the outlook All eyes will be on developments in the for China. Given this background, eurozone crisis, the pace of recovery in dealmakers will be keeping a careful North America, and the real estate and eye on signals from both these major construction markets in China. markets. Until sufficient signals come to Significant negative news on one of deliver confidence in a sustained period these fronts could tilt the balance of growth, caution is likely to be the between optimism and pessimism. Any watchword for dealmakers in 2012. major weakening of either US or Asian Chinese demand remains demand is likely to have a negative considerable impact on dealmaking. Similarly, positive signals will encourage deal There are signs of cooling in China’s flow. In Europe, the continuing real estate sector, which is responsible eurozone crisis is a worry. But, if it is for nearly half of total steel demand in combined with continued growth in the China. At the same time, the other major markets, it may not dampen government’s drive against inflation is overall deal flow. Instead it could curbing funding for infrastructure hasten long-awaited European steel projects. But some policy easing is consolidation and perhaps prompt possible as the government seeks to outside buyers to take advantage of low avoid too sharp an impact on growth. European valuations. Any policy easing will, in turn, feed into steel demand. And the big picture is that, while Chinese growth will be slower, it will still be substantial. The The eurozone crisis may not dampen IMF January 2012 forecast, sharply revised down in the light of the Europe overall deal flow if there is continued debt crisis, still anticipates Chinese growth in the other major markets. growth at 8.2% in 20123. Coming on top Indeed, recession in Europe is likely to of previous 9-10% per annum growth, this means that absolute growth will spur consolidation moves. remain very high as it will be from an overall economic base that is about a third larger than just three years ago.1 Financial Times, US and Europe steel prices diverge sharply, 3 January 2012.2 IMF, World Economic Update, 24 January 2012.3 Ibid.6  Metals Deals 
  7. 7. The aerospace, automotive and energy infrastructure markets are providing end-market growth hotspots for metals companies.Eurozone crisis could spur in Asia and South America. Such will prove to be. The Indian metalsconsolidation growth is coming on top of a healthy sector is also ripe for consolidation and rebound in the automotive sector and a 2011 saw the completion of a landmarkEurozone worries did not prevent a burgeoning civil aerospace order book deal between JSW Steel and Ispatsignificant upturn in European as well that is having a positive impact on Industries. Consolidation has been rareas worldwide metals deal value in 2011. aircraft metals suppliers. An important among Indian companies but the JSW/But, worries about a further recession, missing piece of the jigsaw in North Ispat move may spur other companies toconstraints on financing and fears of a America and Europe is recovery in the consider deals.worst case eurozone collapse will residential construction sector.inevitably cause dealmakers to Raw materials self sufficiencycontinually reassess their options over China consolidation to gain remains a main themethe coming months. Some form of momentumeurozone realignment remains a very The quest for security of supply andreal possibility. A climate of ‘rolling Consolidation in the Chinese steel reduced dependence on the contractuncertainty’ looks set to continue sector has been on the cards for some pricing strategies of the large miningthrough 2012 in the absence of time and is now ripe to gather companies remains a main deal driversustained growth signals or strong momentum. The industry has long been that will continue into 2012. Southleadership from policy makers. If characterised by overcapacity and Korea’s Posco, the world’s third largesteconomic growth signals turn positive, fragmentation with government policy steelmaker, expects its investments inthen ‘rolling uncertainty’ could turn seeking to create a smaller number of Australia, Brazil, Canada and Africainto ‘growing confidence’. However, steel giants. In Hebei province, home to will lift the company’s self-sufficiencyfurther adverse events would be likely a significant portion of the country’s in raw materials from the current 20%to cause a strain on manufacturers. The steelmakers, the provincial government to 50%6. Beijing is also pursuing aeffect will be to constrain some but, is reportedly planning to reduce the strategy of seeking ownership of halfalso, possibly to accelerate long-awaited number of its steel mills from 88 to 10 the supply requirement with theconsolidation of the sector in Europe. during the 2011-15 period4. The latest Chinese government declaring that central government five year plan sets Chinese companies should step upEnergy among a number of targets for reduced energy intensity, overseas investments in iron ore, a keybright spots water usage and CO2 emissions that steelmaking ingredient, with the goal of will put further pressure on smaller and having half of China’s iron-ore importsInfrastructure renewal and expansion inefficient steel plants to close or come from Chinese-invested mines7. Thein the energy sector is proving to be a consolidate5. A slowdown in steel quest to secure raw materials does notbright spot for steelmakers. In North demand will add further momentum to stop at iron ore – as we discuss in the nextAmerica, new sources of shale gas and such consolidation. But it is yet to be paragraph, Indian companies and othersoil from tar sands are requiring new seen how strong the consolidation push are facing coking coal shortages.pipeline connections and fuellingdemand for tubular drilling products. Amajor expansion of onshore andoffshore windpower in Europe is Consolidation, long-awaited in Europecreating demand for turbine steel whileworld solar growth is keeping silicon and also in the highly fragmented Chinesemanufacturers busy. Similar generation metals industry, is set to be a strong themeand infrastructure growth is a feature in the period ahead.of the major growth economy markets4 China Daily, Steel industry plan forged, 27 January 2011.5 Government of China, 12th Five-Year Plan, March 2011.6 Financial Times, Posco to invest in Australian mining venture, 17 January 2012.7 China steel consortium takes Brazil stake, Financial Times, 2 September 2011. Forging Ahead 2012 outlook and 2011 review  7 
  8. 8. New alliances and new deal structures are emerging as companies look to gain greater muscle and scale in the bid to secure natural resources and capitalise on growth markets.Supply chain security concerns Divestitures deal flow likely to finance from their respective bankingwiden continue sectors, compared to European players in particular. But currency trends areThe search to secure raw materials Companies in North America and now having a mixed effect with thesupply is a now well established M   A particularly in Europe continue to weakness in the Indian rupeetrend in the sector. The main focus has maintain a focus on costs and dealing contrasting with the Chinese renminbibeen on iron ore but, increasingly, the with underperforming assets. Demand strength. Chinese investments are alsorare earth minerals that are used in a constraints are being given an added widening out to include more frontierrange of high technology applications twist by financing constraints as a territories in Mongolia and parts ofare part of the story. There have been result of the European debt crisis. Africa.increased concerns about Chinese Divestitures are proving a strong driverpolicies that can have the effect of of deals. Around a quarter of metals Deal structures likely tolimiting the export of its own rare M    deals in 2011 were divestitures A innovate and evolveearths. This was the subject of a World and it is likely that this deal flow willTrade Organisation ruling at the end of remain strong as more assets come to Newer structures will evolve for deals,January 2012. Earlier in the same the table (see p17 for a discussion of the particularly those involvingmonth, it was announced that German issues companies need to consider when international investment in rawsteelmakers Georgsmarienhütte considering divestitures or spinoffs). materials resources. In Brazil, jointHolding, Stahl-Holding-Saar and ventures are a preferred option forThyssenKrupp, as well as copper Asia Pacific ‘go global’ strategies inbound investors seeking to gain theproducer Aurubis, had joined a widen out best value in the context of local12-strong commodities alliance of regulatory and environmentalleading German industrial companies, We expect the trend of Chinese frameworks. In Canada, inboundcoordinated by the Federation of outbound purchases, which has been a investors are working with entities –German Industry. One of the stated key part of recent metals M    by the A such as the First Nations Trusts – as agoals of the alliance is to take top tier Chinese steel companies, to means of partnering with indigenousshareholdings in commodity projects to extend downwards to include more communities. In China and Korea, thereachieve a long-term improvement in the companies from the second layer of is a trend to minority stakes withsupply of raw materials to industry. state owned enterprises at the financing for capex and offtake. InNatural disasters, such as the Japan provincial level. Vertical integration Europe, the current environment meansearthquake and Thailand floods, have will be an important strategy for these many companies need to look atalso added to concerns about supply companies and deals may also involve alternatives to bank finance. Wellchain fragility. Concerns about security Chinese financial investors and private financed companies can look toof supply are not restricted to metals companies. Indian conglomerates are traditional markets, such as theraw materials. Chinese and Indian also likely to be active acquirers if the investment grade bond market. Butsteelmakers, for example, are facing right opportunities arise. Both Chinese others need to look for alternatives.shortages in coal for energy and in and Indian companies have thecoking coal due to high prices and advantage of less constrained access toinefficiency in the domestic coal sector,leading them to consider internationalsupply and M    options. A Expect an extension of ‘go global’ moves by Chinese companies as more buyers come to the table from the second layer of state owned enterprises at the provincial level.8  Metals Deals 
  9. 9. Modelling metals M  A flow againstwider commodities and macroeconomictrendsPwC has conducted an analysis testing the historical relationship of metals sectorM  A with a variety of macroeconomic variables and metal commodities indicators.The analysis encompasses factors including nominal GDP, direct investment levels,trade volumes and commodity prices. In particular, global GDP and aluminiumprices were often good predictors of deal activity.We found strong correlations between trends in metals deal activity and the set of wider metals andmacroeconomic measures in the analysis, especially in terms of flows in metals deal announcements.The models produce coefficient of determination (R2) values of 0.928 and 0.952 for announced deals.We’ve taken the analysis back over two decades with the following results:1990-2011 Looking aheadWhat the analysis predicted: What the models predicts for the year • 6.0% compound annual growth rate ahead: (CAGR) in announced deal numbers. • 11.1% CAGR in announced deal • 8.1% CAGR in announced deal numbers. value. • 7.6% CAGR in announced deal value.What the actual outturn was: • 6.6% CAGR in announced deal The model supports our overall view numbers. that the year ahead will be one of moderate deal growth in metals M    .A • 11.8% CAGR in announced deal The growth assumption holds whether value. the analysis is conducted against dealThe fit between actual and predicted volume or value, announced ordeal flow is strongest for deal volume. completed. We publish the outcomeDeal value is more volatile –   hile it has w only for announced deals here becausestatistically significant relationships the historical analysis indicates that thiswith economic and metal commodity provides the most robust and strongvariables, it can be slightly less certain predict because of this highervariability compared to the trend indeal volume. Announced deal value projections 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 Prediction Actual Forging Ahead 2012 outlook and 2011 review  9 
  10. 10. 2011 deal review: a year of dealbounce-backThe strong bounce-back in metals M  A activity from its post The steel totals would have looked verycredit crunch low continued in 2011 with a 56% year on year different if the US$16.8bn of steel deal value, represented by four of the largestrise in total deal value. Total completed deal value was up from five deals that remained pending at theUS$26.1bn in 2010 to US$40.7bn in 2011, 170% above its end of 2011 (figure 5), had got over theUS$15.1bn 2009 trough. The sector continues to witness very busy line. Some of these deals, notably thedeal activity with the number of deals continuing at very high US$9.4bn Sumitomo-Nippon merger,levels. Indeed, deal numbers in the last three years are more than a together with a number of the deals thatthird higher than the total reached in the three peak years of M  A were completed in 2011, are indicative of the consolidation that is gettingtotal deal value before the credit crunch (figures 1 and 2). underway among steel manufacturers. Consolidation momentum is being seen The continuing upturn in deal value upstream in iron ore as well as in was in large part due to a number of big manufacturing. Together with moves to aluminium deals and the quest by secure raw material resources, this is steelmakers and others to secure raw translating into a continued increase in materials resources. Steel M    was up A international deals. In the immediate 15% from US$9.8bn to US$11.3bn year aftermath of the credit crunch, on year. The number of aluminium companies had largely focused on deals deals rose by a third and their total close to home. But in 2011, international value of US$8.7bn was up more than deal totals maintained the bounce-back tenfold from a very low base the that had started in 2010. Total previous year (figure 3). The value of crossborder deal value rose 82%, from deals in the ‘other metals’ category, US$13.4bn to US$24.4bn, continuing its many of which are purchases of iron ore steep climb from its US$4.4bn low in resources, were up by a third, from 2009. Nonetheless, this remains well US$15.5bn to US$20.7bn. below the total crossborder deal value recorded in the three M    boom years A of 2006-2008 when annual totals Figure 1: Total metals deals, 2003-2011 reached US$63bn, US$98bn and US$38bn respectively. Number Cross border Value (US$bn) Cross border value number as % of as % of total value total number 2011 533 33% 40.7 60% 2010 547 34% 26.1 51% 2009 521 25% 15.1 29% 2008 397 38% 60.6 62% 2007 411 35% 144.7 68% 2006 385 29% 86.4 73% 2005 250 40% 34.8 49% 2004 166 40% 37.0 31% 2003 164 30% 16.1 60%10  Metals Deals 
  11. 11. Figure 2: Crossborder and domestic metals deals, 2010-2011 2010 2011 Change in 2011 Number Value Number Value % Number % Value Metals 547 US$26.1bn 533 US$40.7bn -2.5% +55.9% Cross border 187 US$13.4bn 177 US$24.4bn -5.3% +82.0% Domestic 360 US$12.7bn 356 US$16.3bn -1.1% +28.3% Figure 3: Deal making by industry sector (by target) 2010 2011 Change in 2011 Number Value Number Value % Number % Value Steel 159 US$9.8bn 145 US$11.3bn -8.8% +15.3% Cross border 46 US$1.6bn 47 US$3.9bn +2.1% +143.7% Domestic 113 US$8.2bn 98 US$7.4bn -13.2% -9.7% 2010 2011 Change in 2011 Number Value Number Value % Number % Value Aluminium 33 US$0.8bn 43 US$8.7bn +30.3% +987.5% Cross border 13 US$0.6bn 17 US$8.3bn +30.7% +1283.3% Domestic 20 US$0.1bn 26 US$0.4bn +30.0% +300.0% 2010 2011 Change in 2011 Number Value Number Value % Number % Value Other Metals 355 US$15.5bn 345 US$20.7bn -2.8% +33.5% Cross border 128 US$11.1bn 113 US$12.2bn -11.7% -9.9% Domestic 227 US$4.4bn 232 US$8.5bn +2.2% +93.1%*Sums may not total because of rounding Figure 3: Deal making by industry sector (by target) 2011 2010 Steel Steel 28% 38%Other metals (US$11.3bn) Other metals (US$9.8bn) 51% 59%(US$20.7bn) (US$15.5bn) Aluminium Aluminium 21% 3% (US$8.7bn) (US$0.8bn) Forging Ahead 2012 outlook and 2011 review  11 
  12. 12. Deal makersDeal size is on the rise in the metals sector with five of the largest added to the need to squeeze out coststen deals topping the US$2bn mark compared with only two to keep home-based manufacturing competitive.the year before. Billion plus deals dominate the top ten tablewith the deals by the biggest deal makers reflecting a range of The largest completed 2011 deal sawthemes – diversification, resource acquisition, manufacturing Norsk Hydro complete its US$4.9bnrepositioning, divestment of underperforming assets and purchase of Brazilian aluminium assets from Vale. It included full control andconsolidation in both raw materials and manufacturing ownership of Paragominas, one of the(figure 4). largest bauxite mines in the world, 91% of the world’s largest alumina refinery Alunorte, 51% of the Albras aluminium A landmark US$9.4bn Japanese merger plant and 81% of the CAP alumina between Nippon Steel and Sumitomo refinery project. The transaction also remained pending at the end of 2011 included additional bauxite licenses and (figure 5). The Japanese authorities a volume off-take agreement for Vale’s have given the deal the green light so it 40% stake in the MRN bauxite mine. looks on course to achieve completion Prior to the combination, Norsk Hydro as expected in 2012. The combination already had a 34% stake in Alunorte will put the company at number two in and 20% in CAP. As well as giving world crude steel output with the Norsk Hydro security of supply over declared ambition to expand in growth valuable alumina and bauxite supplies, markets overseas. The logic of the deal the deal represented a diversification becomes even more compelling in the play for Vale, extending its footprint face of a strong yen. This has put away from iron ore. The deal made Vale Japanese companies in a strong bid the second-largest shareholder in Hydro position for overseas M    assets but A after the Norwegian government. Figure 4: Top ten metals deals 2011 Rank Completion Target Sector Bidder Target nation Bidder nation Value month ($m) 1 Feb 2011 Vale SA-Aluminum Operations Aluminum Norsk Hydro ASA Brazil Norway 4,948 2 May 2011 Consolidated Thompson Iron Mines Ltd Other Metal Cliffs Natural Resources Inc Canada United States 4,356 3 Jan 2011 Arcelor Mittal NV-Stainless Division Steel Shareholders Luxembourg Luxembourg 3,181 4 Jan 2011 CommScope Inc Other Metal The Carlyle Group LLC United States United States 3,020 5 April 2011 Elkem AS Aluminum China National Bluestar Co Ltd Norway China 2,179 Cia Brasileira de Metalurgia e Mineraco 6 Sep 2011 Other Metal China Niobium Inv Holding Co Brazil China 1,950 (CBMM) Cia Brasileira de Metalurgia e Mineraco 7 Apr 2011 Other Metal Investor Group Brazil Japan 1,950 (CBMM) 8 Feb 2011 Draka Holding NV Other Metal Prysmian SpA Netherlands Italy 1,259 Severstal North America Inc- 9 Mar 2011 Operations, Warren, Wheeling, Steel The Renco Group Inc United States United States 1,192 Sparrows Pt. United 10* Sep 2011 Delachaux SA Steel Investor Group France 969 Kingdom*The deal has been included as coded to the SIC code: steel works, blast furnaces and rolling mills12  Metals Deals 
  13. 13. Figure 5: Top five deals still pending at year-end 2011 Rank Month Target Sector Bidder Target nation Bidder nation Value announced ($m) 1 Feb 2011 Sumitomo Metal Industries Ltd Steel Nippon Steel Corp Japan Japan 9,433 Hebei Shouganag Qianan Iron Steel 2 Nov 2011 Steel Beijing Shougang Co Ltd China China 2,920 Co Ltd Usinas Siderurgicas de Minas Gerais 3 Nov 2011 Steel Investor Group Brazil Argentina 2,879 SA(Usiminas) 4* Nov 2011 Commerical Metals Co Steel Icahn Enterprises LP United States United States 1,560 Hanlong Mining Investment 5 Jul 2011 Sundance Resources Ltd Other Metal Australia Australia 1,274 Pty Ltd * Withdrawn 11 January 2012.Iron ore sector consolidation as well as Chinese buyers featured in two of the growth in the energy cable market wasaccess to valuable Chinese end markets top ten deals – the US$2.2bn purchase a factor in the interest shown byunderpinned the second largest deal, of Norwegian maker of solar-grade Chinese investment fund Xinmao inUS company Cliffs Natural Resources’ silicon Elkem by chemicals company Dutch cable maker Draka Holdings. ButUS$4.4bn takeover of Canada’s China National Bluestar’s and a their interest could not compete withConsolidated Thompson Iron Mines. It US$1.9bn China-Brazil niobium the agreed US$1.3bn merger of therepresents a significant consolidation in resource tie-up. The latter saw a company with Italian cable makerthe North American iron ore sector. consortium of Chinese companies form Prysmian. The companies say theCliffs expects the deal to enable it to a special purpose vehicle called China combined group creates the world’sbecome a producer of up to 30 million Niobium Investment Holding Company largest global energy and telecom cablemetric tons of iron ore pellets, up to 16 to take a 15% stake in the privately held company with 98 plants in more thanmillion metric tons of iron ore niobium miner, Companhia Brasileira 50 countries. Elsewhere, an investorconcentrate and up to 11 million metric de Metalurgia e Mineracao (CBMM). group comprised of CVC Capitaltons of lump and fines iron ore. The consortium included steelmakers Partners Ltd of the UK and AndeCrucially, it will enable the company to Anshan, Shougang, Baosteel, and Investissements SA of Luxembourgbuild scale by owning expandable and Taiyuan Iron Steel. CBMM is the world’s acquired a 63.67% interest inexportable steelmaking raw material largest producer of niobium, which is an Delachaux SA, a Gennevilliers-basedassets serving international markets. element used for strengthening steel for manufacturer and wholesaler of steelImportantly, it is also providing Cliffs uses such as gas pipelines. The deal and metal products. We discuss thean expanded relationship with Wuhan followed a similar deal between CBMM other leading deals in the regionalIron and Steel (Group) Corporation, and a Japanese-South Korean sections that follow.China’s third largest steel producer. consortium earlier in 2011, which included Japanese steelmakers JFESome of the most significant Holdings and Nippon Steel and Southrepositioning and consolidation moves Korea’s Posco.came in Europe. These includedArcelorMittal’s decision to spinoff of its The profile of private equity (PE)stainless steel business to a separately- investors in 2011 metals deals is fairlyfocused company known as Aperam. low with most such deals beingThis US$3.2bn deal was concluded at relatively low value purchase by US PEthe beginning of 2011 and was followed firms. The major exception to this wasa year later by the January 2012 the completion of Carlyle Group’sannouncement that Germany’s US$3bn acquisition ofThyssenKrupp and Finland’s telecommunication steel wire and cableOutokumpu are to combine their maker CommScope. Elsewhere, thestainless steel operations. The goal ofsuch consolidation is to create acompany with the scale to compete onthe world stage with the likes of Poscoand Tisco. Forging Ahead 2012 outlook and 2011 review  13 
  14. 14. Deal placesThe number of deals for targets in North America and western The strong upturn in North AmericanEurope rose year on year to the end of 2011. Deal numbers were and European deal value shifted the worldwide geographical centre ofeither down or level in other regions but total deal value rose gravity for metals deals away from thesignificantly in all parts of the world except the Asia Pacific Asia Pacific region. The Asia Pacificregion (figure 6). The largest increases came in western Europe share of worldwide metals deal value bywhere metals deal value rose more than sixfold (up 518% year target had multiplied some ten-foldon year) and in North America with a nearly fourfold increase between 2007 and 2009. It fell back(up 294%). somewhat in 2010 yet still accounted for easily the largest share – 51% of total metals deals value worldwide. But in These same two regions accounted for 2011 its share fell to 18%, leaving it in the greatest share of worldwide deal fourth place, behind North America, value – North American targets western Europe and central and South comprised 30% of total value and America. Nonetheless deal activity in western European targets 26%. Central the region was intense and it still had and South American targets, buoyed by the largest share of deal numbers. some big deals for Brazilian assets, took The majority of deals are between a 24% share with the remainder coming buyers and sellers in the same region mainly from targets in the Asia Pacific (figure 7). Regional deals, as opposed to region (18% share), led by deals for cross-continental deals, accounted for Australian iron ore resources. 79% of all metals deals by number and 59% of total deal value. This is little changed from the previous year and Figure 6: MA activity by target continent contrasts with the earlier years of 2007 and 2008 when pre-credit crunch cross-continental dealmaking pushed North America 2010 2011 % change regional deal value share down to 39% Number of deals 90 118 +31.1% and 45%. A notable year on year change is a fall in the number and value of % of all world deals 17% 22% cross-continental ‘other metals’ deals. Value of deals The total value of such deals, mainly for iron ore targets, fell from US$10.3bn in Total value (US$bn) 3.1 12.2 +293.5% 2010 to US$6.2bn in 2011. In contrast, % of total value 14% 30% regional ‘other metals’ deal value nearly tripled, from 2010’s US$5.1bn to US$14.6bn in 2011. Asia Pacific 2010 2011 % change Number of deals 239 206 -13.8% % of all world deals 45% 39% Value of deals Total value (US$bn) 11.5 7.3 -36.5% % of total value 51% 18%14  Metals Deals 
  15. 15. Central South America 2010 2011 % changeNumber of deals 33 33 -% of all world deals 6% 6%Value of dealsTotal value (US$bn) 5.8 9.8 +68.9%% of total value 26% 24%Western Europe 2010 2011 % changeNumber of deals 87 104 +19.5%% of all world deals 16% 20%Value of dealsTotal value (US$bn) 1.7 10.5 +517.6%% of total value 8% 26%Central and eastern 2010 2011 % changeEuropeNumber of deals 85 72 -15.2%% of all world deals 16% 14%Value of dealsTotal value (US$bn) 0.4 0.9 +125%% of total value 2% 2%Figure 7: Regional vs cross-continental metals deals, 2010 2011 Steel Aluminium Other metals All Sectors2011 % share of total steel % share of total aluminium % share of total other metals % share of all dealsRegionalNumber 122 84.1% 28 65.1% 271 78.5% 421 78.9%Value (US$bn) 9.1 80.5% 0.4 4.5% 14.6 70.1% 24.1 59.0%Cross-ContinentalNumber 23 15.9% 15 34.9% 74 21.5% 112 21.1%Value (US$bn) 2.2 19.5% 8.3 95.5% 6.2 29.9% 16.7 41.0% Steel Aluminium Other metals All Sectors2010 % share of total steel % share of total aluminium % share of total other metals % share of all dealsRegionalNumber 137 86.1% 25 75.7% 264 74.3% 426 77.8%Value (US$bn) 9.4 95.9% 0.6 85.7% 5.1 33.1% 15.1 58.3%Cross-ContinentalNumber 22 13.9% 8 24.3% 91 25.7% 121 22.2%Value (US$bn) 0.4 4.1% 0.1 14.3% 10.3 66.8% 10.8 41.7% Forging Ahead 2012 outlook and 2011 review  15 
  16. 16. Deal places:North AmericaDeal numbers rose by nearly a third and deal value almost Vertical relationships between iron orequadrupled to give North America the largest regional share of producers and steelmakers are a strong M    as well as contractual theme. Aworldwide metal deals value. The region’s US$12.2bn total was There has been a continuation ofup by US$9.1bn year on year. The lion’s share of this came from backward integration by steelmakersa big increase in ‘other metals’ M  A, including iron ore, from through direct iron ore acquisitions.US$1.0bn in 2010 to US$8.6bn in 2011, most of which came The start of 2011 saw an intensefrom iron ore deals. bidding contest for junior mining company Baffinland. The company’s substantial iron ore deposit in Canada The US$4.4bn merger of Cliffs Natural was acquired when ArcelorMittal and Resource and Consolidated Thompson Iron Ore Holdings agreed a joint bid Iron Mines (see the earlier dealmakers giving them 70% and 30% ownership section) provided the main boost to iron respectively. The US$514m purchase ore deal value. This combination of two was completed in March 2011. important iron ore producers gives Baffinland’s Mary River Project is one of them scale in an industry where the largest mining developments leverage and access to buyers in growth currently planned in Canada and by far markets is important. In this case, Cliffs the most significant development ever gained from Consolidated’s existing planned above the Arctic Circle with its relationship with Chinese company attendant environmental challenges. Wuhan Iron and Steel. Figure 8: MA activity in North America (by target) North America Steel Aluminium Other metals 2011 Number Value Number Value Number Value Domestic 14 US$1.9bn 5 US$0.1bn 71 US$3.6bn Cross border 5 US$0.9bn 7 US$0.7bn 16 US$5.0bn All deals 19 US$2.8bn 12 US$0.8bn 87 US$8.6bn 2010 Domestic 19 US$2.0bn 6 US$0.1bn 45 US$0.5bn Cross border 1 US$0.0bn 2 US$0.0bn 17 US$0.5bn All deals 20 US$2.0bn 8 US$0.1bn 62 US$1.0bn *deal values not disclosed16  Metals Deals 
  17. 17. The third largest US deal, and the a rebound in steel demand in the US, The year finished with a battle aroundlargest steel deal outside Europe in Severstal has decided to focus on its steel and other metal producer2011, saw Severstal spinoff its Warren, Dearborn and Columbus facilities. Commercial Metals with an attempt byWheeling and Sparrows Point facilities These are among the most modern and activist investor Carl Icahn to winin a US$1.2bn sale to private holding efficient in North America as a result of control of the company in a deal thatcompany The Renco Group. The plants the company’s considerable capex could have been worth up to US$1.6bnhad been bought by the Russian investment in various expansions and (figure 8). But his attempts to increasecompany in the early part of 2008 just improvements, including the launch of his 10% holding to a controlling levelahead of the credit crunch. At a time of new hot dip galvanising and push pull did not gain sufficient support from his pickle lines. fellow shareholders and the bid was withdrawn in January 2012.PwC deal dialogue:Using divestitures and spin-offs to position anorganisation for growthDivestitures and spin-offs accounted for 38.5% of metals deal activityduring 2011. Many companies see such moves as effective strategiesfor shedding noncore businesses, rightsizing their organisations, andproviding a platform for growth.There are a number of factors behind better opportunities from its • Determining separation issuesspin-offs and divestitures in the metals business and product portfolio. early during the process – In thesector. Portfolio rationalisation is Forward-thinking companies case of a plant-level carve-out,occurring alongside reviews of identify appropriate divestiture which is common in the metalsgeographic footprints. There is interest candidates based on a wide range of industry, every divestiture mayfrom strategic buyers with more financial, operating, and commercial result in the division of a plant. Theintegrated operations or from financial parameters. seller typically will keep part of thebuyers seeking to make their businesses plant viewed as core to its mission,more attractive to future strategic • Evaluating operations for possible with the other part of the plantbuyers. Shifts in the value chain are correction – in today’s environment, transferred to the unit beingtaking place, with upward pricing concerns that buyers might have divested. As a result, a series ofpressure in raw materials and overlooked in previous years may complex ownership issues arise forcommodities creating challenges for damage or even derail a deal. To resolution which are best resolved asconverters compared with the prepare for a divestiture, sellers early as possible during the process.companies that are vertically should conduct an assessment ofintegrated. A key question of the operations and, where possible, • Presenting the business in a moreindustry is what will future profit identify and correct significant favourable light – historicalmargins look like if the industry shifts issues. Even if sellers cannot correct financial results may need to betoward commodity producers? issues prior to closing, buyers are revised to accurately reflect the unit keen to gain an understanding of the as a stand-alone operation andBut, for most companies, divestitures target’s costs and benefits. exclusive of nonrecurring items. Forare far less common than acquisitions. the most challenging divestitures toConsequently, there are great • Walking in the buyer’s shoes – adopt be successful, the vendor maychallenges when it comes to effectively a buyer’s perspective by performing develop a detailed business plan tomanaging the process and drawing on due diligence of the business before present to prospective purchasers.their team’s experiences. A seller involving potential buyers. A The plan could include a detailedlooking for success in any given thorough review of the unit slated analysis of the recurring historicaldivestiture or spin-off will prepare on a for sale may be essential when the figures and describe the forecastsnumber of fronts, such as: seller’s and buyer’s pricing and actions to consider for expectations vary significantly. implementation. A vendor may make • Repositioning to seize Advance diligence may also help the a divestiture more attractive to opportunities – by employing a seller identify and promote the unit’s potential purchasers by using well-defined and regular portfolio strengths and evaluate alternative strategies such as providing them process, a company can achieve transactions and structures from an with contracts for a predetermined informed perspective. time. Sellers also could consider the various tax and accounting structures available to them and choose the one that works from a deal perspective. Forging Ahead 2012 outlook and 2011 review  17 
  18. 18. Deal places:Asia PacificAsian steel production rose by 7.9% in 2011 with its share of representing a weighty US$2.9bn worthworld steel production edging up from 64% in 2010 to 64.7% of buyer activity for Asia Pacific targets. This was nearly two and half times theirin 2011. The Japanese earthquake and tsunami hit output with US$1.2bn total in the previous year.the country’s crude steel production down by 1.8%. In contrast,South Korean production rose 16.2% and Chinese production The other significant share came fromwas up by 8.9%, giving China a 45.5% share of world steel Indian buyers with US$734m worth of purchases accounting for a 10% share ofproduction8. Deals value for targets within the region was down metals M    in the region – a big leap A37% year on year, from US$11.5bn in 2010 to US$7.3bn in from the US$93m of Indian buyer2011. activity a year earlier. India is projected Metals M    for targets in the Asia A to become the world’s third biggest Pacific region was dominated by buyers consumer of steel, after China and the from within the region. 82% of total US, US$474m of the US$734m came 2011 regional metals deal value came from the completion of a major from in-region buyers. Buyers from consolidation move in the Indian steel China and Hong Kong accounted for industry with the integration of Ispat US$1.5bn or 21% of the US$7.3bn total, Industries into JSW Steel. Elswhere, down from their 35% share in the Japanese and South Korean buyers took previous year. It was Australian buyers a 4% and 3% share of regional metals who were behind the largest share of deal value respectively. 2011 deals, with their 40% share Figure 9: MA activity in Asia Pacific (by target)1 Asia-Pacific Steel Aluminium Other metals 2011 Number Value Number Value Number Value Domestic 44 US$1.3bn 12 US$0.3bn 90 US$3.9bn Cross border 17 US$0.3bn 3 US$0.1bn 40 US$1.3bn All deals 61 US$1.6bn 15 US$0.4bn 130 US$5.2bn 2010 Domestic 47 US$5.8bn 3 US$0.0bn2 113 US$2.9bn Cross border 19 US$1.5bn 10 US$0.6bn 47 US$0.7bn All deals 66 US$7.3bn 13 US$0.6bn 160 US$3.6bn *1 Sums may not total because of rounding *2 Deal values not disclosed8 World Steel Association, World Crude Steel Production, 23 January 2012.18  Metals Deals 
  19. 19. But it was on the worldwide front that in Canada. Japanese buyers accounted The biggest Asia Pacific purchaseAsia Pacific buyers really got involved. for US$2.9bn (7%) of worldwide metals outside the region, not already coveredThey accounted for US$14.5bn worth of deal value. in the earlier sections of this report, wasglobal metals M    in 2011, a 36% A the US$680m purchase of USshare. Over a third of this came from The biggest 2011 deal within the region aluminium sheet maker Arcobuyers in China and Hong Kong, who was BHP Billiton’s US$732m acquisition Aluminium by a Japanese consortium,were responsible for US$5.7bn of of HWE Mining Subsidiaries from comprised of Sumitomo Light Metalworldwide metals M    value, led by a A Leighton Holdings. The deal covers Industries Furukawa Sky Aluminum,number of US$1bn plus deals in Europe contract mining services that Sumitomo Corporation, Itochuand South America (see dealmakers). collectively account for almost 70% of Corporation and Itochu MetalsAustralian buyers were the other main total material movement of iron ore in Corporation. The purchase gives theplayers worldwide with US$4bn worth Western Australia. The deal is part of consortium added capacity for servingof deals, boosted by OneSteel’ US$932m BHP Billiton’s plan to directly operate US and Latin American markets.purchase of Anglo American’s AltaSteel rather than contract out its Western Australia iron ore business.PwC deal dialogue:Gaining an M    talent advantage AFinancial and business logic may be the starting point for M  A but itis people issues that often determine whether deals lead to success ornot. A staggering 70% of deals fail to deliver their intended benefits,often because cultural and people issues were underestimated ormismanaged 9.Companies are becoming increasingly be critical because they are responsible Skills shortages and retaining talent,aware that M    value creation, A for day-to-day operations. associated with M    activity, have a Astrategic growth, and sustainable direct effect on the bottom line. Morebusiness success hinge on effective When defining these needs, it is useful than a third of metals CEOs say talentmanagement of the human capital side to examine three levels of criticality: constraints have already affected theirof the equation. But how is this best company’s performance in overseas • Strategically critical – employeesapproached during a merger? markets and impaired its ability to most essential to the ongoing innovate. The situation could be evenMajor changes in the workplace, such as operations of the newly combined worse in the future as only a quarter ofa merger, can cause fear and organisation. Typically, these are top metals CEOs are confident of theiruncertainty among employees. executives, key business unit companies’ talent pipelines, accordingIdentifying, retaining and motivating leaders, and key individual to the 40 metals CEOs in countries who“pivotal talent’ – people in the bidder contributors. responded to the PwC’s 15th Annualand target companies whose Global CEO Survey. Finding, keeping • Integration critical – employeesperformance can make or break the and motivating employees who have the essential to the integration entity’s success – is an important right skillsets has become a top priority.part of making sure there is no • Knowledge-transfer critical – Recruitment and retention areunwanted talent drain during an M    A employees with specialised particularly challenging in China,process. knowledge essential to the transfer of where turnover can be double, triple, or ongoing information and know-how. even quadruple the rate in the UnitedThe acquiring company must define States or Europe. To address thoseeach employee’s importance to the Categorising key employees in this way concerns metals CEOs reported plans tobusiness relative to the transition and helps an organisation assess employees use non-financial incentives, includingbeyond. The company must make an individually and determine whether training and mentoring programmes asassessment regarding which employees managers at different levels or locations well as improved living and workingit needs for short-term transition and will require different retention conditions.long-term value creation. Some packages. The process also allows foremployees may be essential to the more efficient deployment of strongprocess of transitioning the target’s performers to other positions within thecustomer base to the acquirer, while new company, particularly in situationsothers may be integral to managing or where two talented employees performotherwise maintaining the target’s duplicate roles.ongoing operations. Another group may9 “When two become one,” Hourglass, PwC, December 2010 Forging Ahead 2012 outlook and 2011 review  19 
  20. 20. Deal places:Europe (including the Russian Federation)While dealmaking for targets in central and eastern Europe and European metals companies continue toRussia was quiet, western Europe proved a busy deal arena in face higher raw materials and energy costs which they have struggled to pass2011. The number of deals was up by a fifth (20%) and total on in the absence of a clear recovery incompleted deal value shot up from a very low base to top the all their end markets. EU steelUS$10bn mark by the year end. US$7.6bn of the US$10.5bn production as a whole increased 2.8%total western European deal value came from the four largest year on year in 2011 compared with adeals, headed by ArecelorMittal’s US$3.2bn Aperam spinoff (see 6.8% increase in world steel production.dealmakers). Among the larger producing countries, production in Russia rose by 2.7%, German output rose by 1% but there were declines of 4.6% and 2.4% in The majority of western European Spain and the UK respectively. Polish targets were purchased by buyers production rose 10% and, among the within the region. Western European smaller producing nations, there were buyers accounted for 80 of the 104 big rises in the Czech Republic (up deals and US$6.6bn, or 62%, of total 7.8%) and Kazakhstan (up 11.4%)10. western Europe target value. The ArcelorMittal Aperam spinoff was one Consolidation in the European steel of two US$1bn plus deals involving industry seems inevitable and the buyers and sellers within the region. recessionary and difficult financial The other was the US$1.3bn friendly environment caused by the European takeover of Dutch cable maker Draka sovereign debt crisis could spur a flow Holdings by Italy’s Prysmian. The target of deals. 2012 kicked off with the had attracted interest from China’s announcement that Germany’s Xinmao but it did not pursue its bid in ThyssenKrupp and Finland’s the light of the agreement between Outokumpu are to combine their Draka and Prysmian (see dealmakers stainless steel operations. The newly for more). combined stainless steel businesses will operate under the name of Outokumpu More than half of the remaining deal and the two companies envisage that value that was not accounted for by the opportunities for synergies and western European buyers came from scale will give them more effective China Bluestar’s US$2.2bn purchase of growth opportunities by joining forces, Norway’s Elkem (see dealmakers). The especially in the Americas and Asia. next largest deal involving a buyer from ThyssenKrupp has also sold its non-core outside the western European region shipbuilding operations to UK private was Russian steelmaker NLMK’s equity fund Star Capital as part of its US$600m purchase of the remaining divestment strategy. 50% interest in Steel Invest and Finance (SIF) that it did not already own from joint venture partner Duferco Group. NLMK receives rolling assets from the deal with some non-core long product and Belgian steelmaking operations transferring to Duferco.10 Ibid.20  Metals Deals 
  21. 21. Figure 10: MA activity in western Europe (by target)1 Western Europe Steel Aluminium Other metals 2011 Number Value Number Value Number Value Domestic 19 US$4.1bn 7 US$0.0bn2 33 US$0.2bn Cross border 13 US$2.0bn 4 US$2.5bn 28 US$1.7bn All deals 32 US$6.1bn 11 US$2.5bn 61 US$1.9bn 2010 Domestic 18 US$0.2bn 8 US$0.1bn2 27 US$0.6bn Cross border 13 US$0.0bn2 1 US$0.0bn2 20 US$0.8bn All deals 31 US$0.2bn 9 US$0.1bn 47 US$1.4bn*1 Sums may not total because of rounding*2 Deal values not disclosed Figure 11: MA activity in central and eastern Europe (by target)1 Central eastern Europe Steel Aluminium Other metals 2011 Number Value Number Value Number Value Domestic 18 US$0.1bn 2 US$0.0bn2 27 US$0.2bn Cross border 9 US$0.6bn 2 US$0.0bn2 14 US$0.0bn2 All deals 27 US$0.7bn 4 US$0.0bn 41 US$0.2bn 2010 Domestic 24 US$0.1bn 3 US$0.0bn2 35 US$0.3bn Cross border 10 US$0.0bn2 0 US$0.0bn2 13 US$0.0bn2 All deals 34 US$0.1bn 3 US$0.0bn 48 US$0.3bn*1 Sums may not total because of rounding*2 Deal values not disclosed Forging Ahead 2012 outlook and 2011 review  21