Wasan Tita
By Gianmarco Migliavacca
Although event risk is rising, the biggest deals look creditor-friendly, preserving credit quality and ratings.
After a long hiatus, mergers and acquisitions have resumed in the Basic Materials sector, with large deals announced in Mining and Paper & Packaging. After our earlier blog on rising M&A momentum among investment grade issuers, Anglo American (OTCQX:AAUKF), a major mining company, received an unsolicited combination proposal from BHP (BHP) for an all-share deal worth £31 billion, which would be the largest in the sector since the Glencore-Xstrata (OTCPK:GLCNF) merger in 2013.
We believe that a BHP-Anglo tie-up, whether it closes or not (Anglo has so far rejected even an improved offer), is likely to send shockwaves across the sector, prompting peers to become more aggressive on their inorganic growth strategies.
Glencore and RIO both admitted they are looking at Anglo, but may also be interested in assets that it could sell due to the BHP deal or via an alternative stand-alone break-up plan.
Why all the interest? Copper, of course, as Anglo is one of the world’s largest miners of the commodity. All the mining majors want to increase their copper exposure given rising demand due to electrification.
M&A is a faster and easier way to expand into copper, since digging new mines has become more difficult, expensive and time-consuming. This year’s 33% rise in copper prices (now above their prior 2022 peak) suggests that the market already anticipates supply deficits, and has encouraged potential acquirers to act.
In Paper & Packaging, the combination of WestRock (WRK) and Smurfit Kappa (OTCPK:SMFKY), leaders in the U.S. and Europe, respectively, has triggered a new wave of consolidation, with International Paper (IP) recently agreeing to acquire U.K.-based DS Smith (OTCPK:DITHF) in an all-share deal worth $9.9 billion, overcoming a rival bid from Mondi (OTCPK:MNODF).
Both transactions, expected to close later this year, are motivated by the need for scale and synergies to restore earnings growth in mature businesses that reported a cyclical bottom in 2023. If those transactions prove successful, others could follow.
We see the recent major transactions in Mining and Packaging as creditor-friendly in their use of equity, reflecting discipline and a willingness to preserve balance sheets and ratings in an uncertain environment.
This contrasts with the chemical sector earlier this decade, when IFF (IFF) and Celanese (CE) levered up to close big acquisitions, prompting multiple rating downgrades.
Together with depressed market valuations, this may explain the recent lack of large chemical deals. However, the latter could be back soon as the sector emerges from recessionary conditions, with financially stronger companies looking for acquisitions to accelerate growth after a lackluster 2023.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2024 Neuberger Berman Group LLC. All rights reserved.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.