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M&A activity reaches $10.7B in 4th qtr.

Keywords: Tags  metals, mergers, aquisitions, PricewaterhouseCoopers, fourth quarter, Precision Castparts, Titanium Metals, Timet Norilsk Nickel

LONDON — Merger and acquisition activity in the metals sector reached a total value of $10.7 billion in the fourth quarter of 2012—a solid increase after three quarters of decline but a decline from year-ago period—while the number of deals valued at $50 million or more increased markedly, according to a report by PricewaterhouseCoopers LLP (PwC).

A total of 26 deals were reported in the fourth quarter of 2012. That’s up from 21 in the third but down from 35 in the fourth quarter of 2011.

Total deal value came to just $4.1 billion in the third quarter, but reached $23.1 billion in the fourth quarter of 2011.

The average deal value more than doubled quarter over quarter to about $409 million, but that was still far below the average value of $700 million recorded the fourth quarter of 2011.

“Mega-deals”—or those worth $1 billion or more —accounted for more than half of the total fourth-quarter deal value, the report showed.

The largest mega-deal, valued at $2.9 billion, involved the merger of Portland, Ore.-based Precision Castparts Corp. and Dallas-based Titanium Metals Corp. (, Nov. 9). That is expected to be completed in the first quarter.

“Improvement in the global economy, investor confidence and increased demand from end-use markets all contributed to the (quarter-on-quarter) uptick in activity,” New York-based PwC said.

And as the global economy improves, liquidity is still strong for many metals producers, according to PwC.

“We’ve seen an increase in cash balances over the past two years, although there was a slight decline over 2011, and debt-to-capital levels continue to decline,” it said. “The liquidity scenario appears to be paying off finally, as (buyers) move forward in making acquisitions.”

Despite the strong finish to 2012, however, metals M&A activity during the year was the lowest since 2009.

Possible reasons for this include slowing growth in several emerging economies such as China and India, as well as sovereign debt woes in the eurozone and weaker growth in the United States.

“Additionally, weak commodity prices and overcapacity issues negatively affect the deal environment,” PwC said.

Local market deals led the way, as 76.9 percent of deals during the quarter involved buyers and the targets based in the same country.

In China, six of the eight deals announced in the fourth quarter were local, the report said, noting that consolidation of smaller companies into larger state-owned entities may be a way to achieve economies of scale.

Mergers and acquisitions in copper, nickel and non-precious metals dominated in the quarter, PwC said. One such example was London-based Millhouse Capital UK Ltd.’s $1.47-billion purchase of a 4.9-percent stake in Moscow-based MMC Norilsk Nickel.

“Given the current environment, we are cautiously optimistic that the resurgence seen this quarter will continue,” the report said. “However, until pricing and capacity turn around, we don’t anticipate the high volumes of deals seen pre-recession, at least in the near term.”

A review of the top 50 publically traded metals companies showed that cash balances stayed more or less flat, while debt-to-equity ratios have fallen. This indicates that potential buyers of metals targets have continued to improve their financial positions over the long term.

“Deals identified as divestitures increased substantially this quarter, growing by more than 36 percent. The majority of them fell into the small to medium category of deals,” the report said. “Given this boost in divestitures, it makes sense that as the economy improves, companies are better able to find buyers as they eliminate non-core and underperforming assets.”

Deals with financial investors rose as a percentage of all fourth-quarter deals to 49.3 percent, compared with an average of 29 percent for 2012 overall and 27 percent for 2011.

“This comes at the same time that deals overall increased, indicating that financial investors may again have a willingness to enter into deals,” PwC said.

However, the proportion of buyers from advanced economies fell to 50 percent of, down from 55 percent in the corresponding period in 2011. Companies may be wary about expanding capacity because of lackluster demand, PwC said.

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