Two major financial analysts working in various domestic metal sectors have predicted that merger and acquisition (M&A) activity will decline this year.
Sean Hoover, metals leader for PricewaterhouseCoopers LLPs U.S. industrial products practice, and Greg Eck, managing director of GE Capitals metals and mining unit, each told AMM that the M&A climate is not shaping up as a strong one in 2013.
M&A activity in the global metals and mining industry slowed dramatically last year, and the analysts said the trend is unlikely to change in 2013 as companies throughout the supply chain maintain cautious outlooks. Additionally, companies are looking to invest capital and expand, but potential sellers of existing firms expect prices that are too high for todays metal markets, the analysts said.
From talking with our metals clients, and more specifically our steel clients, the biggest concern is the general economy, Hoover said. I think ... theyre cautiously optimistic about what 2013 has in store.
Total M&A deal value in the metals sector was on track to fall 50 percent in 2012, according to a report by New York-based PricewaterhouseCoopers.
And according to Hoover, that reluctance to close on major M&A opportunities likely will persist well into 2013. I cant say weve seen any real change in M&A activity yet. I think the general trend is an uncertainty in 2013 around M&A activity, he said, identifying the recession and the sovereign debt issues in Europe and the general kind of uncertainty in the economy domestically as two main factors keeping would-be buyers at bay.
Hoover said that most PricewaterhouseCoopers metal clients in the United States--including major aluminum and steel companies--arent planning any mega-deals in 2013. I think its hesitation all around, he said.
Nonetheless, most metal executives are keeping their eyes open because they could be encouraged to make a move if the right opportunity presents itself, Hoover said. Talking to some of the executives, I think everyone is looking to be opportunistic. A lot of these metal companies are building up substantial cash balances. There are definitely companies that are financially in a better position to take advantage of an M&A opportunity, but the message were getting is, No specific plans. Well be opportunistic if we can be--here and there--(and) we might be able to get some cheap assets if it makes some sense.
Deals that might attract even a cautious companys eye are primarily vertical integration opportunities, particularly steel manufacturers, given the commodity volatility weve experienced the last couple of years, Hoover said. Weve also heard about (companies) looking for opportunities to get access to new markets (and) add capacity where it makes sense, (but) I cant say weve really heard a consistent theme other than theres a lot of uncertainty and if the right assets come at the right price wed be opportunistic.
With most metal companies sitting out of M&A activity for the time being, more companies are honing in on research and development opportunities. Theyre taking this as an opportunity to focus on innovation, Hoover said, citing low-cost energy as a particularly hot topic on many metal companies minds. It makes sense. If M&A activity is on the sidelines, youve got excess cash to deploy in a way that makes sense.
The metals industry is ripe for consolidation, but 2013 will not likely be the breakthrough year for M&A activity, according to Eck, an executive in Norwalk, Conn.-based GE Capitals corporate finance division.
A major problem is that sellers expect prices that are too high, Eck said. The failure of businesses valuations to reach pre-recession levels is one of the major headwinds facing M&A activity among metal companies.
There is a definite gap between the expectations of the (sellers) and the expectations of the buyers as it relates to the value of business, Eck told AMM.
The problem is pervasive throughout industry, although medium-sized and small businesses in particular have not yet adjusted to the reality of todays valuations. It will take an acceptance of lower valuations to bring more consolidation to the metals industry, Eck said, and he expects to see more of that in 2014 rather than this year.
Companies have made significant investments in their businesses in the past year, but they have been focused on efficiencies rather than horizontal or downstream expansion, he said, noting that steel producers have made moves to integrate upstream to lower their costs of raw materials, including natural gas.
Furthermore, some companies divested noncore assets during the downcycle, leaving them more streamlined.
Everybody is sitting with a lot of cash on the balance sheet, a very streamlined business, feeling good about where they are sitting now, Eck said. Now its, Lets see demand start to recover.
The capital markets are poised for reinvestment in industries such as steel, but companies need more macroeconomic certainty and stronger demand before they start investing in expansions, Eck said. That will require the United States to resolve its financial problems and Europe to address the crisis of confidence facing banks there.
However, it remains to be seen when--and under what circumstances--those problems will be resolved. Weve certainly improved a little bit, but weve got an awfully long way to go until the businesses we deal with start really opening up their purse strings, Eck said. Unfortunately, uncertainty continues to be the new certainty.