By any yardstick, Partha Bhattacharyya, while he was the helmsman at Coal India Limited (CIL), did an all-inclusive good job. Otherwise, the massive Initial Public Offering (IPO) of CIL would not have been such a runaway success. But, Bhattacharyya must have laid down his office with at least one major regret, which is, in the absence of any unambiguous official guidelines, he could not pull off an acquisition outside the country.
Also, International Coal Venture, a special purpose vehicle of which CIL is one of the five PSU promoters, had nothing to show so far. Globally coal, next only to gold, figured most prominently in mergers and acquisitions among all minerals and metals in 2010.
As New Delhi equivocates on giving a roadmap to CIL for buying assets abroad, consulting firm Ernst & Young says in its annual transaction report that global M&A in minerals and metals will gain steam during 2011. Unlike last year, which saw companies engaging in M&A activity with ‘virtually no access to debt funding’, deal making this time will get a leg-up by recovery in bank lending. Major gains in prices of resources, and as a result of that in metals prices, and strong emerging market demand will be other boosters for M&A.
One will tend to believe that Bhattacharyya’s disappointment is because he was per force a witness to many acquisition opportunities in different parts of the world. He will not, however, accept that the Indian corporate entity as a whole has not performed well in acquiring overseas assets. Some Indian private sector companies, including Tata Steel, JSW, Essar and Hindalco stand out in buying minerals and metals properties abroad and their acquisitions stand well in comparison with the trophies in the Chinese bag.
Many minerals and metals companies, irrespective of their sizes, are so flush with funds, that it is only likely that parts of it will be used in M&A. But will CIL in the meantime be enabled to buy assets abroad? Or will ICVL, which has a few assets in Australia, Indonesia and the US in view, be finally doing a deal or two now?
While there could be endless speculation as to how soon the guidelines will be available to the CIL, the E&Y report says Indian companies climbed to the seventh place in the rank of acquiring countries in 2010 from fourteenth in the previous year. This shows the Indian corporate concern for resource security.
Michael Lynch-Bell, E&Y global chief of mining and metals transactions advisory team, makes the point that “India’s thirst for resources to fuel its rapid economic expansion is as urgent as China’s and in 2010 we saw the value of outbound investment from India surpass that of China for the first time — $4.6 billion compared with $4.5 billion, respectively.”
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It comes out strongly in the report that resource rich countries like Canada, Australia and Brazil have become active enough to unseat China as the leading M&A dealmaker. In the coming days we will see companies from more countries participating in cross border M&As and the more established players venturing into frontier markets in South Africa, Central Asia and Africa.
Lynch-Bell says companies hugely benefiting from rises in raw materials and metals prices are moving into riskier regions like West Africa and countries like Papua New Guinea and Mongolia. He expects this wanderlust to continue in 2011.
According to E&Y, besides the compulsions of securing supply of resources on a sustained basis, the other principal drivers of M&A last year were high commodity prices, underlining the need for vertical integration of companies, and improved cash flow. The same set of drivers will continue to fuel M&A activity this year too, with the benefit of recovery of bank lending giving a push to deals. Deals value last year jumped 89 per cent to $113.7 billion but with virtually no access to debt funding.
One may wonder why the actual 2010 deals value fell short of the forecast by a hefty $61.3 billion. Lynch-Bell explains that this is because companies used cash to cut “debt gearing to create a buffer against a potential global downturn.” Incidentally, mining and metals groups raised a record $329.5 billion from equity-related issues, mostly to extend maturity of debts. At $49.6 billion, developing countries had an impressive share of 43 per cent of the total deal value. No less important is half of the top 20 acquirers were from emerging markets. It could not be otherwise as Brazilian companies, including the world’s largest iron ore producer Vale, figured in six of the top 20 deals last year.
As economies continue to be dogged by uncertainty and gold was moving from one price orbit to another, gold mines acquisitions would be most coveted. The E&Y report says last year gold went past coal by accounting for 27 per cent of the deal value. As for the likely prominent features to mark M&A activity this year, Lynch-Bell says “large companies will continue to perform add-on acquisitions” instead of bigger “transforming deals.” At the same time, players in the lower rungs benefiting from the increasing availability of finance will also be taking interest in M&A.