European metal and mining companies are beginning to feel the effects of a
wave of merger and acquisition activity, which has started to take its toll on
balance sheet strength in the sector.
Olivier Beroud, an analyst at credit rating agency Standard and Poor’s, said
an increase in M&A activity over the last quarter of 2005 was impacting
balance sheets and credit quality.
Companies were splashing out extensive amounts on deals and weakening the
strength of their balance sheets. Beroud said that Standard & Poor’s had
placed five of the 20 companies it rated in the sector on
negative outlooks or credit watch, mainly as a result of acquisitions. This
showed a deterioration on the previous quarter when no companies had a negative
‘Focus is shifting away from repairing balance sheets toward acquisition,
capital expenditure, and capital-management initiatives,’ said Beroud.
The major acquisition activity in the sector over the past three months
included German group ThyssenKrupp AG’s interest in Canada’s Dofasco, priced at
around $4.2bn (£2.4bn) and the bidding war between Arcelor and Mittal, which
faced off for stakes in Turkey’s Erdemir and the Ukraine’s Kryvorizhstal.
Arcelor, the world’s second largest steelmaker, eventually paid $1.2bn for a
25% stake in Erdemir at the end of 2005 after Mittal won the fight for
‘Mittal won the day in Ukraine at the eyebrow-raising price of $4.8bn.
Arcelor showed it was ready to bid a similar price for this asset,’ said Beroud.
‘This confirms that the key players will use their deleveraged balance sheets to
pursue aggressive acquisition strategies.’
Despite the risks that come with deals, the rate of M&A is unlikely to
slow according to Pricewaterhouse-Coopers. In a report on M&A activity in
the global metals industry, the firm predicted that the wave of consolidation
was set to keep running despite record levels of deal activity
PwC’s global metals industry leader Mark Okes-Voysey said that the steel
sector was particularly ripe for more deals. ‘Greater market concentration will
give individual steelmakers more opportunities, such as increased bargaining
power with suppliers and customers and increased operating flexibility,’ he
The report found that the top five steelmakers controlled less than 20% of
the market, and that the sector was fragmented at both ends of the supply chain
and needed to consolidate.
PwC also found that valuations in the steel sector continued to remain low,
although earnings were high. With several steel groups holding large cash
balances, the temptation was there to make acquisitions at bargain prices.
In the aluminium sector, deal activity could be driven by higher energy
costs. Aluminium companies will have to consider switching from smelting to
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