Mining M&A resurgence to accelerate in 2011
London, 14 March 2011 — The resurgence in mergers and acquisitions in the global mining and metals sector seen in 2010 is set to accelerate in 2011, according to Ernst & Young’s Global Mining & Metals Transactions Advisory Leader, Michael Lynch-Bell.
Commenting on Ernst & Young’s annual global mining & metals sector transaction report, Ungeared for growth, released today, Lynch-Bell says in 2011 there will be more deals, more diverse buyer competition and a continued appetite for projects in frontier markets in South America and Central Asia, and increasingly in Africa.
The Ernst & Young report shows that while the number of deals in 2010 was up only 7% on 2009, the total deal value rocketed up 89% to US$113.7 billion.
“As de-leveraged companies compete for shrinking resources, we expect merger and acquisition activity to continue to pick up, characterized by larger deals and bolt-on acquisitions,” says Lynch-Bell.
“The same factors that drove the uptick in deals in 2010 will continue to fuel the market in 2011 – resource security, higher commodity prices, improved cash flow and availability of capital, ongoing industry rationalization and the desire for greater vertical integration.”
“The 2010 resurgence in M&A activity in the sector occurred with virtually no access to debt funding. With early indications bank lending may recover this year, this will only further accelerate the level of deals being done.”
Canada, Australia and Brazil led deal activity in 2010, with China unseated as the top deal-maker in 2009 to number four in 2010 – not because China’s activity slowed, but because activity in other countries outpaced it.
Deals in 2010 were characterized by a big increase in cross-border deals in emerging markets, increased domestic consolidation in China and North America, record levels of financing, the revival of IPOs and the return of share buybacks and dividends.
Deal destination set to diversify
Where in 2009 buyer attention was focused on the perceived less risky markets of Canada and Australia, higher returns saw a suite of Latin America countries become deal destination hot spots in 2010. The number of deals in Latin America grew 94% in 2010.
“Over the past six months we also have seen more ‘new frontier’ markets emerge as investment destinations,” says Lynch-Bell.
“As companies began reaping higher returns from stronger prices, they started taking on greater political risk – as a result, more companies ventured back into riskier regions such as West Africa and the Asia Pacific, specifically Papua New Guinea and Mongolia. We expect this trend to continue in 2011.”
Resource security continues to fuel emerging market competition
India, in particular, shot up the rank of acquiring countries from 14th place in 2009 to 7th place in 2010, accounting for 5% of global deal value.
Lynch Bell comments: “Competition from emerging markets to secure raw materials continues to be the key driver of mining and metals deals. Acquisitions from developing economies accounted for 43% of total deal value in 2010 and over half of the top 20 acquirers for the year were emerging countries.”
“India’s thirst for resources to fuel its rapid economic expansion is as urgent as China’s and in 2010 we saw the value of outbound investment from India surpass that of China for the first time – US$4.6 billion compared to US$4.5 billion respectively.”
Capital raising and financing
Backed by restored confidence, access to capital and investor appetite, 2010 saw record levels of financing, the revival of IPOs and the return of share buybacks and dividends.
The mining and metals sector had the highest market share of IPO and equity-related issues by volume of all industries. Total proceeds raised by the sector in 2010 reached a record US$329.5 billion – 54% up on 2009 levels.
Lynch-Bell says there will be a flurry of IPOs in the first half of 2011across all the major mining capital markets. “There is a long list of postponed offerings, strong investor confidence and state privatization programs in many economies – so we expect an even stronger recovery in IPOs in 2011.”
Large-scale bank lending is likely to remain open only to the big diversified miners for at least the first half of 2011.
“While the debt market remains tight we anticipate a phase of consolidation among the small to mid-caps, with active capital management and protectionism driving activity. As the debt market returns for the mid and junior players, acquisitive growth is likely to increase in this area of the market.”
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