Two major financial analysts
working in various domestic metal sectors have predicted that
merger and acquisition (M&A) activity will decline this
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
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
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
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
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
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
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
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