Low oil and commodity prices continue to make the headlines across the world, yet this has not hit the M&A market as hard as expected, with values at a three-year high.
Falling prices, rising values
The volatility in oil and gas prices shook markets around the world, when Brent crude fell by 47% in 2015 and hit further lows early in 2016. In January, the World Bank adjusted its 2016 forecast for crude oil prices to US$37 per barrel. And low prices have certainly had an impact on M&A in the energy, mining and natural resources industries. Meanwhile, mining commodities have also fared poorly. In its January statement, the World Bank estimated that iron ore prices would decline 25% in 2016.
In terms of cross-border deals, while value was at its highest level since 2012 with US$174.7 billion worth of deals, volume dropped significantly from 479 deals in 2014 to 371 last year (the same as in 2009). Value for cross-border M&A has continued to remain high into 2016. When compared to Q1 2015, volume is up 2% while value has risen from US$14 billion to US$44 billion – an increase of 219%. This is on the back of a number of large cross-border deals out of North America including Canada’s Brookfield Renewables' US$4.6 billion purchase of Colombian company Isagen.
The majority of cross-border deals in the sector were intra-regional rather than global in 2015. European buyers invested US$95 billion within the region out of a total of US$100.9 billion, although much of this came from Shell’s US$81.2 billion purchase of UK energy group BG.
The same is true for Asia-Pacific companies, which spent nearly half of the US$32.4 billion total within their own region – this included Chinese company Guangdong’s US$950 million takeover of Australian-listed mining company PanAust. This trend can also be seen in Latin America.
The only region that bucked this trend was North America, which invested US$13.4 billion in Europe and US$10.9 billion in Asia-Pacific but only US$6.9 billion within its own territory.
The future of dealmaking
The instability in the markets make future predictions particularly uncertain in the energy, mining and natural resources sector. While acquirers may well take a ‘wait and see’ attitude, the slump in commodity prices could mean that corporates may look to, or, indeed, be forced to divest underperforming assets and this potentially could lead to more interest from private equity groups which have raised significant funds to invest in the sector in recent years. An example of this came in August when Anglo American sold two Chilean copper mines to investment group Audley Capital for US$300 million.
Despite the continued threat of falling prices – corporate divestitures, distressed assets and renewed interest from PE could help revive the M&A market in the coming years.
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© Herbert Smith Freehills 2021