Boom in mining M&A widely expected
It’s been difficult to ignore the news of Glencore’s $90 billion merger with Xstrata this week, and analysts across the globe are citing the deal as a possible jumping off point for some major activity in the mining and commodities sector in terms of M&A.
Commodities giant Glencore and mining business Xstrata, in which Glencore already has a 34 per cent stake, have announced they are in talks regarding a merger that would value Xstrata’s stock at a 15.2 per cent premium. Together the firms would become the fourth largest natural resources company in the world and would be much better placed to compete with larger rivals, namely, Rio Tinto and BHP Billiton.
The deal doesn’t look bad for Xstrata shareholders, but some major investors are warning that they would like to see yet more favourable terms before giving their ‘yes’ vote to the deal.
If the deal does go through however, it is expected to be great news for the industry as a whole as investors are may begin to plough their cash into stocks off the back of analysts’ claims that the resulting powerhouse of a company will go on a mergers and acquisitions spree, hoovering up smaller commodities firms. John Robinson, of Australia’s Global Mining Investment told Deal Journal Australia: “Once you’ve formed an entity the size of the combined Xstrata-Glencore, the next step would be M&A.”
Meanwhile, Oriel Securities in the UK, told Reuters: “A combination of the two companies is likely to provide a boost to the mining sector overall and a bullish signal to the market.”
If this all wasn’t enough, wider economic factors are also pointing towards growth in mining M&A. Ernst & Young’s (E&Y) global mining and metals transaction report claims that it is mining firms’ strong balance sheets that will really drive the deals in 2012. Despite the continuing volatility of the economy - particularly in Europe - mining firms will still want to find growth through M&A activity, according to E&Y’s Lee Downham.
His report said, “The global uncertainty and volatility is likely to continue through 202, but mining and metals companies have an appetite for growth and are increasingly unwilling to stall their growth plans, so it is likely that there would be a return to deal-making this year.”
Low stock valuations, which have come about as a result of the uncertainty in Europe and the lower prices for certain commodities, such as coal, iron ore and tin, are also likely to spur merger attempts.
In terms of where the deals will be done, there are several schools of thought, with many expecting a repeat of 2011 with the majority of deals taking place between mining firms in developed countries such as the US, Canada and Australia. Much of the activity from last year involved consolidation in the gold and coal sectors, which is a trend analysts expect to continue into 2012.
However, China is undoubtedly hungry for commodities and, like last year, will be looking once more to emerging economies for its growth opportunities, according to E&Y. Mr Downham explained, “This shift [towards mining M&A in emerging markets] was primarily due to the diminishing availability of quality mineral deposits in developed mining countries at a reasonable price.”
Although mining firms in Asia, Africa and South America could become the hottest property in 2012, the global industry in general seems set for a busy year.
