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.
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