During the first quarter of the year, the aggregate value of mergers and acquisitions (M&A) was robust, buoyed by China as a key driver in terms of deal value, says professional services firm EY.
China accounted for just over two-thirds of the $12.8-billion transacted over the quarter, with regional steel and aluminium consolidation in that country driving the bulk of the activity, most significantly the merger of Baosteel with Wuhan Steel to create the country’s largest steel producer.
Global aggregate capital raised in the first quarter fell by 28% to $47-billion, compared with the same period in 2016. The major drop was in China, where proceeds more than halved, from $35-billion raised in the first quarter of 2016 to $14-billion in the corresponding quarter of 2017.
An overall market view is that capital being raised has decreased year-on-year; however, EY states that, if China is excluded as a role-player in terms of capital raised, values show growth year-on-year, with an increase of 10% year-on-year based on a strong rise in transactions in the US.
In general terms, the market is still subdued as participants remain cautious; however, EY expects an “interesting year ahead”, with many different strategies being implemented and a cautious return to deal making and capital raising. In addition, EY reports that economic volatility is yet to end, with potentially more global economic shocks a “certainty”.
Meanwhile, to ensure growth for miners in the future, the firm suggests they retain the “best assets” in their arsenal, thereby allowing for the “right mix of capital and securing optimal financing”.
When one considersmarkets in the US, activity in the coal sector remains strong, largely driven by the divestment activities of the major producers, while consolidation across the gold sector in the region remains a strategic focus for many of the producers to create scale and synergies in a fragmented market.
In terms of noteworthy M&A deals, EY points to only a handful of such activity, such as the announcement of JSE- and NYSE-listed Sibanye’s $2.5-billion acquisition of Stillwater Mining.
EY’s outlook for the remainder of the year points to a continued upward trend in the volume of deals expected to take place throughout the year; however, it notes that the momentum generally remains subdued across the industry, as participants continue to be cautious about global demand growth, with persisting concerns over volatility.
The firm highlights a continued absence of the multibillion-dollar transformational deals that characterised growth strategies during the supercycle.
Generally, EY states, mining companies are in better financial standing than at any time in the past two to three years, with this success attributed to deleveraging strategies. In this regard, capital allocation remains key and, with diverging outlooks, EY expects M&A drivers to continue to differ in terms of commodity and geographical market. In markets where growth is expected, such as copper and gold, EY sees strategic activity rebounding, while consolidation and restructuring activity will continue to drive deals in weaker markets.