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M&A strategies to focus on individual commodities in deal uptick, says EY

A steady uptick in M&A deals is expected in the latter half of 2017, but EY forecasts that investors will stray from a one-size-fits-all approach and treat the industry commodity by commodity.

"What we're seeing now as we potentially go through into a new cycle is that investors are a lot more savvy around different commodities, the supply-demand dynamics of each commodity, the end markets for commodities and corporates are equally as savvy on those particular drivers," EY's global mining & metals transactions leader Lee Downham said in an interview with S&P Global Market Intelligence on Aug. 4.

He said that, as a result of this changing dynamic, more commodity-driven strategies are emerging as opposed to sector-driven strategies.

"We expect to see an uptick and a focus on strategies that align to individual commodities or individual opportunities around generating synergies," Downham said.

M&A deals in the second quarter dropped by almost 14% year over year, falling to 105 from 122, while deal value surged by over 70% to reach US$14.83 billion.

Downham said the EY data supports the view that the sector is once again looking at inorganic growth, the replenishment of portfolios and greater shareholder returns. While it is unlikely there will be a hockey stick-like return to activity, there are now more signs of growth-type acquisitions in the sector.

Citing the divergence in the outlook for coal, Downham said changing conditions on the market naturally lend themselves to different strategies, which in turn drive M&A. The environmental impact and the shift toward renewable energy sources have divided the market, he said.

"Where one buyer might see value another might see a need to divest and that's driving a lot of changing ownership of coal assets, particularly in Australia where there has been a significant degree of M&A activity around the coal assets."

EY noted in their data that from the first quarter to the second quarter, the share of Chinese deals dropped from almost 70% of deal value to 15%. Downham said this made sense, as when the sector began to turn, China reacted a bit quicker than the corporates and was able to invest with a slightly different risk profile to secure certain assets.

"Now the rest of the sector is trying to play catch-up," he said, adding that this may serve to dilute the effect of Chinese investment.