For those who expected that Canada’s reporting season would give its subdued mergers-and-acquisitions market a good push, consultants from Ernst & Young have a clear message: a merging frenzy this way comes.
According to the latest report published Tuesday by the research firm, escalating capital costs and softening prices are causing Canadian mining and metals companies to rethink investment decisions, particularly when it comes to deals.
“Global economic uncertainty and market volatility subdued deal value and volume in 1H 2012 in Canada and abroad,” says Richard Crosson, partner in Ernst & Young’s Transaction Advisory Services practice. “In the first six months of 2012 deal value and volume in Canada fell by 41% and 26% year over year.”
The number and value of mergers declined globally as well, according to the Ernst & Young report Mergers, Acquisitions and Capital Raising in the Mining and Metals Sector. There were 470 global deals with a total value of $55.7 billion between January and June, down 38% in volume and 19% in value from the same period of 2011.
Increased activity in June points to a mining and metals M&A momentum comeback, with deals totalling more than $10 billion completed and an increase in 1H 2012 volumes over 2H 2011. Strong balance sheets among producing companies, favourable long-term fundamentals and lower valuations are creating an attractive environment for opportunistic M&A.
“We’re already seeing mining and metals companies take advantage of recent changes in market conditions with synergistic deals,” says Crosson. “So far this year we’ve seen 20 megadeals – of $1 billion in value or greater – completed, up from 15 in the same period last year.”
Crosson says we should expect to see an increase in mining and metals deal activity around the world in the coming months. M&A opportunities available to well-capitalized buyers may spark a shift in capital allocation strategies from build to buy. But prudent buyers will have to invest significant time and resources in deal qualification, due diligence and negotiation to find, access and close on quality opportunities.
Beyond market volatility and geo-political uncertainty, buyers will also need to pay particular attention to key business risks, including resource nationalism and skills shortages, the top two risks identified in Ernst & Young’s latest business risks facing mining and metals report.