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Global metals consolidation still compelling despite slowdown says Deloitte

Cash rich companies may seek advantage

14 April 2009 - The pace of consolidation in the global metals industry has significantly slowed down in most geographies as companies revisit their business strategies and investment plans. In the short-term, the volume of merger and acquisition (M&A) deals is expected to be significantly less and smaller in size, according to a new report, Consolidation wave: Global metals outlook, by Deloitte Touche Tohmatsu’s (Deloitte) Global Manufacturing Industry Group.

“There are still deals happening, but potential acquirers are trying to gauge when the industry hits the bottom before they get back in,” explains Dan Schweller, global metals M&A leader for Deloitte’s Global Manufacturing Industry Group. “In the near-term, we will likely see less focus on new deals and more focus on achieving synergies from past deals.”

The numbers reveal a slow start for the year. According to Mergermarket, there were just 14 completed global metals deals worldwide in the first quarter of 2009 compared with 47 deals in 2008 (1).  Despite the 678 deals valued at a total of US$206 billion in the last 4 years (2), the global metals industry remains a relatively fragmented market. In the steel sector, for example, the top 15 players controlled just 36 percent of the global production in 2008, according to Iron and Steel Statistics Bureau (3).

“Companies with strong cash positions stand to win,” says Schweller. “Some may take advantage of the opportunity to position their business for growth by acquiring weaker competitors, customers, or suppliers at lower valuations. With the lower valuations of some assets in today’s economy, locking in a low-cost supply may potentially benefit them through the next business cycle.”

“Within the next few years, M&A activity should return to normal,” adds Schweller, “but not likely during the next year or so.”

The Deloitte report indicates that regardless of timing, two significant enabling actions are required for M&A recovery in the global metals industry. First, service centres and other customers will need to have sufficient trade financing capacity and forecast demand to make meaningful purchases. And second, how steel companies manage production levels to respond to demand and the impact on pricing.

“It will be interesting to see if steel companies ramp up production too quickly and overproduce in an attempt to capture as much volume as possible—perhaps flooding domestic and international recovering markets with imports or if they gradually bring back production as demand dictates, adding upward pressure on pricing,” remarks Schweller.

Other highlights from the Consolidation wave: Global metals outlook report:

  • Smaller deals in US$100 million to US$500 million range expected in the short-term
  • Deals likely to result from sales of non-core steel activities
  • Opportunistic plays for distressed assets may be the first activity level to return
  • More cross-border transactions expected as regional consolidation reaches its limits
  • Continued joint ventures and alliances expected

For a copy of Consolidation wave: Global metals outlook, please visit www.deloitte.co.uk/manufacturing

Notes for the editor:

About the Global Metals Outlook series 

Consolidation wave: Global metals outlook is the final installment in a three-part outlook series released by Deloitte Touche Tohmatsu’s (Deloitte) Global Manufacturing Industry Group during March and April 2009.  It provides a perspective on the state of consolidation in the global metals industry. Regional perspectives: Global metals outlook, the second in the series, offers comments on the various economic stimulus efforts around the world and the potential impact on the global metals industry.  The first in the series, Turning the corner: Global metals outlook, captures comments ¬on a range of topics related to the impact of the global economic downturn for the industry. For copies, please visit www.deloitte.co.uk/manufacturing. A detailed global steel industry consolidation study will be released by Deloitte’s Global Manufacturing Industry Group in late April 2009 at the Far East Steel Conference in Beijing, China.

Daniel (Dan) T. Schweller is the global metals M&A leader with Deloitte’s Global Manufacturing Industry Group . He has extensive experience in M&A, due diligence, structuring, and accounting assistance in the metals industry.

Deloitte Touche Tohmatsu Global Manufacturing Industry Group
The Deloitte Touche Tohmatsu (Deloitte) Global Manufacturing Industry Group comprises more than 750 member firm partners and 12,000 industry professionals in over 45 countries. The group’s deep industry knowledge, service line expertise, and thought leadership allows it to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain the very best professionals and instill a set of shared values centered on integrity, value to clients, commitment to each other, and strength from diversity. Deloitte member firms provide professional services to more than 81 percent of the manufacturing companies in the Fortune Global 500®. For more information about the Deloitte Global Manufacturing Industry Group, please visit < href="http://www.deloitte.com/manufacturing">www.deloitte.com/manufacturing.

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity.  Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.

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Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's 165,000 professionals are committed to becoming the standard of excellence.

Resources:
(1) Mergermarket database.  Completed deals from January to March 2009
(2) Mergermarket database.  Completed deals from 2005 to 2008. Database accessed on 17 March 2009
(3) SBB, World Steel Association, Iron and Steel Statistics Bureau, 23 March 2009

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