Global Technology M&A Update – Technology M&A Surges In Difficult Environment
Five disruptive technology megatrends drove the value of global technology mergers and acquisitions (M&A) up 41% in 2011, while volume increased by 13% — even as the value of global M&A in all industries fell slightly amid economic uncertainty, according to Ernst & Young’s Global technology M&A update, October — December 2011 and year in review.
According to the report, the year’s most notable deal drivers were five technology megatrends: smart mobility, cloud computing, social networking, ‘big data’ analytics and a growing sense of blur, as industry sectors blur together and the technology industry itself disrupts other industries — challenging whether certain companies are pure technology companies or have entered the industries they are disrupting.
In addition, an increasing need for information security is being driven by all five megatrends. These disruptive innovations are remaking the technology industry while enabling transformative change in other industries as well.
2011 technology M&A highlights
- Megatrends, mega deals: thirty-four deals rose above $1 billion in 2011 — including two above $10 billion — compared with 26 in 2010 and 19 in 2009.
- The “social-mobile-cloud” phenomenon dominated deal-driving trends in 2011. We call this a phenomenon because the trends reinforced and accelerated each other over the course of the year.
- Business intelligence and analytics emerged as a major deal-driver in 2011, powered in part by the social-mobile-cloud phenomenon.
- Aggregate deal value (for deals with disclosed values) reached $168 billion (up from $119 billion in 2010).
- Private equity (PE) deal values soared 67% to $33 billion.
- Full-year deal volume was up 13% to 3,006 deals.
- Average value per deal (for deals with disclosed value) was $167 million, up 27% over 2010 and the highest annual average deal value in the five-year history of the report.
Fourth quarter 2011 technology M&A highlights
- Deal-making growth slowed in the last quarter, showing that technology is not fully immune to the global macroeconomic uncertainty.
- At 676 deals, deal volume declined for the third consecutive quarter. It’s down 4% YOY, 11% sequentially and 15% since peaking in the first quarter of 2011 at 794 deals.
- Aggregate announced deal value was $32.2 billion in 4Q11, up 7% YOY but down 43% from $56.4 billion in 3Q11.
- Cloud computing, smart mobility and social networking continued to dominate deal-driving trends in 4Q11.
- Business intelligence and analytics increased again across a spectrum of industry-specific uses, though with a strong concentration in online advertising and marketing.
Deal-driving trends, big and small
Established companies made major consolidation plays and placed big bets on the five megatrends in 2011. Software as a service (SaaS) deals rose to prominence in the fourth quarter: two SaaS deals topped $1 billion — the first time any SaaS deal topped that mark.
At the same time, a multitude of smaller deals demonstrated the strategic importance of certain technologies, especially social networking and information security, but also health care information technology (HIT), online and mobile games and advertising and marketing technologies. There were 100 — 150 deals in each of these areas in 2011, including many deals that overlapped several of them.
Consolidation and restructuring
Semiconductor consolidation also drove big-ticket deals. Five of the year’s top 10 M&A transactions, worth a combined $21.2 billion, involved established semiconductor companies as both the buyer and target. Restructuring deals were announced in many other sectors, especially the communications equipment and computers, peripherals and electronics sectors.
Cross-border growth
For the year, cross-border deals grew in aggregate value at about the same rate as in-border deals; they increased faster in deal volume, at 19% compared with 10% for in-border. The year seemed on track for even greater cross-border growth until macroeconomic uncertainty returned in the second half of the year, appearing to damp down deal flow across borders more than in-country. Our report includes region-specific snapshots for the Americas, Asia-Pacific and EMEA (Europe, the Middle East and Africa) regions.
2012 outlook mixed, but strong in the long run
The disruptive megatrends of ‘social-mobile-cloud’ and ‘big data’ analytics have helped fuel a significant rise in global technology M&A activity since 2009, despite a slight pullback due to macroeconomic pressures in late 2011,” says Joe Steger, Global Technology Industry Transaction Advisory Services Leader at Ernst & Young. “The same pressures suggest we might be in for slow growth in 2012 — but the long-term outlook for technology M&A remains strong due to ongoing disruptive technology innovation.
GLOBAL INFRASTRUCTURE REPORT – Setting Strategic Priorities
China
China’s unprecedented infrastructure building spree is stampeding ahead. The country is able to fund projects totaling trillions of dollars because it was largely unaffected by the recent global economic downturn.
Infrastructure growth plans on a large scale
Beijing, Shanghai and Guangzhou have some of the most sophisticated and integrated transport systems in the world.
- World’s largest high speed train network: China is almost finished with a 10,000-mile honeycomb train network linking major cities across an area about the size of the United States.
- National infrastructure plans: Other Chinese infrastructure plans include a nationwide toll highway system, comparable to the US interstate highway system; 1,900 miles of new urban transit systems and streamlined harbor port terminals and new airports.
- International infrastructure plans: China also has ambitions to build high-speed rail lines across Asia and India, ultimately connecting to Europe’s systems. In exchange for constructing the transcontinental lines, China would receive natural resources needed to support its various burgeoning industries. The government has already made deals with Myanmar for lithium and with Russia on a trans-Siberian link.
Infrastructure growing pains
China’s rapid transformation from a largely rural and agrarian country into an urban-oriented industrial giant is causing growing pains that even spending nine percent of GD P on infrastructure annually cannot surmount.
- Traffic congestion: Major cities are struggling to handle traffic congestion as China’s expanding middle class keeps buying cars in volumes the new road systems cannot handle. A 2010 IBM survey ranks Beijing’s “commuter pain” as tied for the world’s worst with Mexico City.
- Pollution: Vehicle emissions also contribute to the familiar opaque, yellow-gray pollution haze that afflicts most urban areas.
- Quality concerns: The recent ouster of the lead official overseeing its high-speed rail development raises questions about the construction quality of the expansive system.
India
Can India possibly build the necessary infrastructure — for power, water, transportation—fast enough to sustain growth and meet its economic potential? Or will the nation hurtle into a rut, unable to support its vast population and business engine with basic services?
Success will help transform India into one of the world’s 21st-century economic powerhouses. Failure condemns the country to further poverty.
Infrastructure challenges
- The World Economic Forum rates India’s infrastructure 89th of 133 survey countries.
- India’s transport minister admits 16,000 of nation’s 70,000 kilometers of highways “aren’t worth driving on.”
- More than 600 million Indians live without electricity, 40 percent of the country’s water is wasted in inefficient farming, and 11 percent of urban residents and 65 percent of rural villagers have no access to toilets.
Solutions for a growing India
The national government recognizes its challenges and is committed to doubling infrastructure spending to $1 trillion between 2010-2017. Officials hope the private sector will raise half the budget.
However, not every infrastructure project remains on track. The government’s “Power for All” mission continues to fall short of its goal: experts estimate that India will need 160,000 megawatts of additional capacity by 2017, alone costing $405 billion.
Foreign companies see opportunities in operating ports, airports and highway toll concessions, but become frustrated dealing with India’s famously inefficient bureaucracy.
Brazil
Brazil’s growth prospects hinge on how fast it can upgrade its infrastructure.
Broad infrastructure challenges
- A 2009–2010 World Economic Forum survey rated the country’s transport /electric/water systems among the world’s worst.
- Only about one-seventh of Brazil’s roads are paved; much of the highway between its two largest cities, Rio de Janeiro and São Paulo, is only two lanes; and a bus trip between Rio and Brasilia, the country’s capital, can take 17 hours.
- Port access remains limited because of poor roads and inadequate freight rail, hobbling the country’s significant export potential, and current power production cannot support its rapid industrialization.
Infrastructure projects kicking into high gear
Winning host rights to the 2014 World Cup and the 2016 Summer Olympic Games is helping kick the country into gear to capitalize on the fast-approaching global sporting events.
- In 2010, the government committed to a $900 billion infrastructure plan. It includes construction of a $19 billion high-speed rail line from Rio de Janeiro to São Paulo, and new power plants, hydroelectric dams and ports.
- Rio plans to upgrade three major highways and create rapid bus transit lines linking game venues, downtown, the suburbs and its International Airport, which will add new runways and terminals.
- Rio also plans to revamp its port district — Porto Maravilha — by selling development rights and using an expected $1.7 billion in proceeds to help overhaul lighting, streets, sewers and water lines.
AUSTRALIAN UPDATE – Australian Regulatory Response to Chinese Investment Opportunities and Challenges
Highlights:
- Chinese state owned enterprise investment into Australia’s resources sector is helping create unprecedented high-levels of M&A activity.
- In recent years, Australia’s Foreign Investment Review Board has taken steps to balance the benefits and risks created by this influx by successive revisions or elaborations of the foreign investment policy, amendments to the regulatory framework and the attachment of conditions to particular investment approvals.
- Feedback from some Chinese SOEs suggest that they view these policy changes and the foreign investment review process as confusing and discriminatory.
- The record, however, suggests that China’s SOEs have adapted to the foreign investment process and policy by changing their approach to investment and being prepared to engage with the Government earlier in the investment process.
- China is likely to continue to be a significant source of investment in Australian energy and resources, and increasingly in other areas, especially agriculture and food.
Article
In the past decade Australia has enjoyed unprecedented high rates of foreign investment. This has been driven by a once-in-a-generation boom in investment in the country’s resources sector. In large part, this boom has been due to the activities of China and Chinese state owned enterprises (SOEs) eager to secure reliable sources of iron ore, coal and other commodities.
This trend has presented both opportunities and challenges for Australia. The influx of foreign capital confers obvious economic benefits. However, for Australia’s Foreign Investment Review Board, the challenge is to balance these obvious benefits against national interest considerations.
Over the last three years, Australia’s foreign investment policy has evolved in response to this trend. This evolution has not been smooth. At times Chinese SOEs have referred to Australian investment policy as discriminatory, citing highly publicised rejections of deals and confusing policy and process. Over the last twelve months, FIRB has made steps to make the process more transparent and Chinese SOEs have changed the way they look to invest to avoid some of the issues.
This dialogue may be about to begin again. Recent media quote the Australian Government Treasurer Wayne Swan on his plans to impose a two-stage foreign approval process for investment in resource exploration and mining.[1] This would require foreign-government-related entity investors to obtain approval from FIRB to acquire an exploration business and, if a viable discovery is made, to re-apply for permission to develop the resource. If introduced, this would create greater uncertainty for SOE investment in new projects to add to the claims that the Australian investment regime already makes things difficult.
At this point, it is important to look back at the history of the recent evolution of Australia’s foreign investment policy to:
- provide an overview of the regime and how it applies to Chinese and other SOEs;
- examine the perception and reality behind the Government’s track record in relation to Chinese investment proposals; and
- outline the strategies that Chinese SOEs have employed to maximise their chances of obtaining foreign investment approval./li>
A closer look provides hope that while the debate rages, there are signs that the dialogue involved in the Australian foreign investment regime policy and process is shaping the structure of investment to serve the demands of investors and regulators.
Overview of Australia’s foreign investment regime
Foreign investment in Australia is regulated by a combination of legislation (the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)) and published government policy (the Policy).
In general terms, the FATA obliges foreign persons to notify the Australian government and obtain prior approval for the following types of proposals:
- any proposal whereby a foreign person will acquire an interest of 15% or more in an Australian business or company that is valued, or has gross assets, above A$231 million[2]; and
- any proposal whereby a foreign person will acquire an interest in certain types of Australian real estate.
In addition to the FATA, the Policy requires foreign governments and their related entities[3] to notify the Australian Government and obtain prior approval for any proposal whereby the foreign government or related entity will acquire:
- an interest of 10% or more in an Australian business or company irrespective of the value or gross assets of that business or company; or
- an interest of less than 10% in an Australian business or company irrespective of the value or gross assets of that business or company, where the foreign government or related entity will obtain special voting rights, the ability to appoint directors or contractual rights.
The aspect of the Policy regarding foreign government investment was first introduced in February 2008.
All proposals must be notified to the Foreign Investment Review Board (FIRB), which is an advisory body that examines proposed foreign investments and makes recommendations to the Australian Treasurer on whether to prohibit or approve proposals. The Australian Treasurer is empowered to prohibit a proposed investment if it is “contrary to the national interest”.
The ‘national interest’ test
The Act does not define the concept of “national interest” nor provide any guidelines on how it is to be assessed. However, the Policy states that FIRB reviews foreign investment proposals on a case-by-case basis with national interest considerations given to a broad range of factors. These considerations include:
- national security – the extent to which foreign investments affect Australia’s ability to protect its strategic and security interests;
- competition – the effect that foreign investment will have on the diversity of ownership within Australian industries and sectors to promote healthy competition;
- other Australian Government policies – including the impact on Australian tax revenues and environmental objectives;
- impact on the economy and the community – including the impact on: plans to restructure the target entity, the nature of investment funding arrangements, the level of Australian participation in the target entity following the transaction and obtaining a fair return for the Australian people; and
- character of the foreign investor – the extent to which the foreign investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision.
The ‘national interest’ test is broadly similar to Canada’s ‘net benefit’ criteria, and both are broader than the US’ focus on security considerations.[4]
Considerations specific to SOEs
In addition to the above, the Policy contains the following considerations for SOEs:
- whether the nature of the investment is commercial and at arm’s length;
- the extent of actual or potential foreign government control, including through lending arrangements embedded in the source of the investor’s funding;
- the nature of any part-privatisation; and
- mitigating factors which may assist the Government in determining that the investment proposal is “not contrary to the national interest”, including:
- existence of external/private partners or shareholders in the investment;
- level of non-associated ownership interests;[5]
- governance arrangements;[6]
- ongoing arrangements to protect Australian interests from non-commercial dealings;[7] and
- whether the target will be listed on the Australian Securities Exchange (ASX).[8]
Observations regarding the Policy
On first read, the Policy appears to make the approval process more onerous for SOEs than for other investors. It imposes more stringent approval thresholds (ie. approval is required irrespective of the size of the target company or business), it expands FIRB’s review power beyond that under the FATA, and applications for approval made solely under the Policy need not be dealt within in a particular time frame (whereas applications under the FATA need to be assessed by the Government within 30 days, unless extended by FIRB by an additional 90 days).
The current Policy (in place since June 2010) does represent, however, a significant improvement for SOEs compared to the previous policy. Under the previous policy, all investments by SOEs were be subject to FIRB review, even if the proposed acquisition amounted to less than 10% of interest in an Australian company. The current policy exempts acquisitions of less than 10% unless the SOE acquirer obtains special voting or other rights.
In addition, it needs to be recognised that most of the ‘additional’ requirements and national interest considerations are not ‘new’ in the sense that they were not previously applied to SOE investors. The national interest considerations which FIRB may take into account are not exhaustive and were never limited to those in the previous Policy. This was again made clear by the Australian Treasurer’s recent decision in rejecting the proposed merger between the ASX and Singapore Exchange (May 2011).
Arguably, the current Policy merely codifies some of the considerations that had already been applied to SOEs, and provides a degree of additional guidance to foreign investors.
Sentiment towards investments from China: perception vs reality
The Australian Government has consistently stated, both in its Policy and on many occasions, that it welcomes foreign investment. This enthusiasm has been reciprocated by Chinese investors: as of July 2011, China has invested a total of A$39 billion in Australia, making it the largest national target of Chinese outbound investment ahead of the US and Brazil.[9] While large SOEs continue to dominate China’s outward investment by volume, the SOE share has dropped from 94% in 2010 to 89% in the first half of 2011.[10]
Given these impressive investment statistics, it can be surprising to learn that some Chinese investors (mostly SOEs) view Australia’s foreign investment approval process and its administration by FIRB to be a major hurdle to the success of their investment.[11] The following points have been raised as ‘evidence’ supporting the perceived discrimination.
- Sensitive cases of Chinese investment – These include the widely publicised collapse of the A$24 billion Chinalco / Rio Tinto deal (2008), China Minmetals’ reduced bid for Oz Minerals (2009) and the withdrawal of China Nonferrous Metal’s offer for Lynas (2009).
- Informal FIRB position – In 2009, a FIRB representative made unofficial comments about FIRB ‘guidelines’ restricting foreign SOEs to minority equity ownership in Australian companies.[12] The context suggested that the statement was directed at Chinese SOEs.
- Change in FIRB Policy – Whilst the current Policy applies equally to all SOE’s, it has been viewed as targeting China rather than state-backed foreign direct investments in general.
- Negative press – Chinese investors and officials have viewed the Australian media as playing a negative role in influencing popular opinion and FIRB decision-making regarding Chinese investment. For instance, recent media attention on China’s food security concerns and its growing investment in Australia’s food and agribusiness sectors preceded the current Senate inquiries into FIRB’s handling of foreign interest in agricultural industries and rural land.
- Delays in approvals – According to policy the review process typically takes a 40 day initial review period, but it is common practice for FIRB, if their review is not completed within that time, to ask Chinese applicants to withdraw and re-submit their proposal. Anecdotally, it is not unusual for FIRB applications for Chinese investment to take longer than the usual 30 day statutory period. FIRB either extends the period of review for an additional 90 days as it is empowered to under FATA or requests that applicants withdraw and resubmit their applications so as to restart the statutory timeframe.
However, such ‘evidence’ of discrimination does not – to put it candidly – stack up against the evidence. What the evidence in fact reveals is that the Australian Government has, for the most part, approved Chinese investment proposals. In 2009-10, 1,766 approvals were granted to Chinese proposals, consistent with the 1,761 approvals in 2007-08 prior to the global financial crisis. Where approvals were granted, FIRB has on occasions imposed conditions to ensure that the investment would comply with the ‘national interest’ test – though it is true that certain FIRB conditions (e.g. ownership caps) have had the effect of altering or blocking the proposed acquisition.[13] The table in the Schedule outlines the FIRB review outcome for major Chinese investment proposals in the last three years.
The evidence also reveals that there has been no noticeable slowdown in Chinese investments proposals since the Policy was first amended in February 2008 to refer specifically to investments from SOEs.
In many instances, the withdrawal or non-approval of Chinese SOE investment proposals have related to commercial reasons (eg. concerns about overpaying, or potentially overpaying, for a target company[14]) or reasons that are not specific to the nature of the investor (eg. two major proposals which did not receive FIRB approval in 2009 sought to acquire assets located in the Woomera Prohibited Area which is reserved for national defence purposes[15]).
Finally, it would be misguided to believe that the Australian Government is more likely to approve, or to approve on an unconditional basis, investment proposals from private enterprise than SOEs. The Government has recently given unconditional approval to COFCO in its 100% acquisition of Tully Sugar (May 2011), and reportedly also to Bright Food’s proposed acquisition of a 75% stake in Manassen foods (August 2011).[16] It may represent the beginning of a trend as Chinese SOEs and other investors increasingly expand their targets beyond the resources sector.
A few strategies for dealing with Australia’s foreign investment regime
FIRB decisions and experience have provided some clues as to how Chinese investors, SOEs in particular, can (if commercially feasible) structure their investment strategically important or potentially sensitive projects to maximise the chances of receiving FIRB approval. These strategies include:
- seek minority rather than controlling interests – aim for smaller, non-controlling stakes (eg. various share placements in ASX-listed companies of less than 20%);
- partner up with a non-Chinese investor – seek JV arrangements between Chinese and non-Australian companies to invest in Australia (eg. the acquisition of Arrow by the PetroChina/Shell JV);
- selling to the public/listing – as in Yanzhou Coal’s undertaking to sell down to 70% by 2012 and list the operating company on the ASX; and
- appropriate governance arrangements to ensure transactions are conducted on arms’ length / commercial terms.
In a recent example, two of China’s largest State-owned renewable energy businesses, China Datang Renewable Power Co and Baoding Tianwei Baobian Electric Co formed a renewable energy joint venture, called AusChina Energy Group, with Australian listed company CBD Energy Limited. Datang Renewable is a major wind farm developer and operator. Baoding Tianwei Baobian is the main operating company of the Baoding Tianwei Group, the largest electrical supplier in China and a producer of wind turbines and other alternative energy technology.
The new AusChina Energy Group is an important opportunity that will enable both Chinese SOEs and their Australian joint-venture counterpart to work towards a development target of approximately $6 billion worth of renewable energy projects over eight years, which would represent one third of Australia’s wind energy market. Obviously, there are a number of commercial reasons for the joint-venture, but it highlights a successful path towards foreign investment for Chinese SOEs.
As well as an opportunity to maximise the chances of FIRB approval, this strategy could have commercial advantage for SOE investment. With the price of acquiring Australian resources businesses at an all-time high, it is likely, going forward, that SOEs will look beyond the acquisition of operating Australian miners towards investment in exploration and development. Joint-venture arrangements often have commercial advantages for exploration companies looking for capital and investors looking to take a more speculative investment. It remains to be seen how the Treasurer’s recent statements about potential FIRB policy changes will impact on this investment strategy in the future.
Schedule – Regulatory Outcome of Chinese Investment Proposals
| Date |
Acquirer |
Target |
Commodity |
Value |
Approval |
Conditions / Reasons for refusal |
| May 2011 |
COFCO (SOE) |
Tully Sugar |
Sugar |
0.136 |
Yes |
Unconditional. |
| Apr 2010 |
PetroChina / Shell (JV) |
Arrow Energy |
Coal seam gas |
3.5 |
Yes |
Unconditional. |
| Nov 2009 |
Hanlong Mining (private) |
Moly Mines |
Molybdenum, Iron ore |
0.2 |
Yes |
Unconditional. |
| Oct 2009 |
China Baosteel (SOE) |
Aquila Resources |
Coal, Iron ore, Manganese |
0.286 |
Yes |
Limited to 19.99% holding. |
| Oct 2009 |
Yanzhou Coal (SOE) |
Felix Resources |
Coal |
3.5 |
Yes |
Sell down to <70% by 2012; operate using an Australian incorporated, headquartered and managed company; list operating company on ASX by 2013; off take arrangements on arms’ length basis. |
| Sept 2009 |
Wuhan Iron & Steel (SOE) |
Western Plains Resources |
Iron ore |
0.45 |
No (Dept of Defence) |
National security concerns associated with the Hawk Nest magnetite site located within the Woomera Prohibited Area. |
| Sept 2009 |
China Nonferrous |
Lynas |
Rare earths |
0.5 |
Yes |
Limited to 49.9% holding. |
| May 2009 |
Ansteel (SOE) |
Gindalbie Metals |
Iron ore |
0.162 |
Yes |
Limited to 36.28% holding; support the development of Oakajee Port and Rail Project; not alter the 50/50 ownership of pellet plant without Government approval. |
| Apr 2009 |
China Minmetals (SOE) |
Oz Minerals |
Copper |
1.2 |
Yes (2nd proposal) |
Sensitive assets excluded; arms’ length off take pricing; operations headquartered and managed in Australia; compliance with Australian industrial relations laws. |
| Mar 2009 |
Hunan Valin Steel (SOE) |
Fortescue |
Iron ore |
0.636 |
Yes |
Compliance with Fortescue Directors’ Code of Conduct and the information segregation arrangements agreed between Fortescue and Hunan Valin. |
| Feb 2009 |
China Minmetals (SOE) |
Oz Minerals |
Copper |
2.6 |
No (1st proposal) |
National security concerns associated with Prominent Hill, which is located within the Woomera Prohibited Area. |
| Sept 2008 |
Sinosteel (SOE) |
Murchison Metals |
Iron ore |
N/a |
Yes |
Limited to 49.9% ownership to maintain diversity of ownership in the Mid-West region. |
| Aug 2008 |
Chinalco (SOE) |
Rio Tinto |
Iron ore |
24 |
Yes |
Limited to 14.99% ownership and not to seek to appoint a director to Rio Tinto without fresh approval. |
| Jan 2008 |
Sinosteel (SOE) |
Midwest Corp |
Iron ore |
1.48 |
Yes |
Unconditional. |
[2] This threshold is subject to indexation each year. A threshold of A$1,005 million applies in respect of US investors, except in certain industries (including media, telecommunications, transport, military and uranium) where the standard A$231 million threshold applies.
[3] Entities in which foreign governments have control or have more than 15% interest are considered to be “related” to the foreign government.
[4] See The Foreign Direct Investment Process in Canada and Other Countries, Parliament of Canada, 19 September 2007.
[5] For example, the approval of the Shell/PetroChina bid for Arrow Energy (April 2010) without conditions.
[6] For example, the approval of Yanzhou Coal’s investment in Felix Resources (October 2009) on conditions that: 1) Yanzhou operate its Australian mines through an Australian company, headquartered and managed in Australia, with its CEO and CFO principally residing in Australia; and 2) the Australian operating company have at least two directors principally residing in Australia, one of whom must be independent.
[7] For example, the approval of Hunan Valin’s investment in Fortescue Metals subject to Hunan Valin undertaking that its nominee directors will comply with: 1) Fortescue’s Directors’ Code of Conduct, and 2) the information segregation arrangements agreed between Fortescue and Hunan Valin.
[8] For example, the approval of Yanzhou Coal’s investment in Felix Resources (October 2009) on conditions that 1) the Australian operating company list on the ASX by the end of 2012, and 2) by that time Yanzhou will have reduced its ownership level to 70%.
[11] See John Larum, ‘Chinese Perspectives on Investing in Australia’, Lowy Institute for International Policy, June 2011.
[12] Speech delivered by then-FIRB director Patrick Colmer to an Australia-China investment forum on 24 September 2009.
[13] FIRB’s cap on majority holdings caused Chinese acquirers to terminate their takeover proposals – China Nonferrous Metal’s plans for Lynas (2009) and Sinosteel’s initial proposal for Murchison (2008).
[14] Minmetals’ bid for Equinox Minerals (April 2011) and Yanzhou Coal’s bid for Whitehaven Coal (May 2011).
[15] Wuhan Iron & Steel’s bid for Western Plains Resources (2009) and China Minmetal’s first proposal for Oz Minerals (2009). Woomera Prohibited Area is the weapons testing range operated by the Royal Australian Air Force.
[16] Reported by China Daily on 29 August 2011.
MINING AND METALS UPDATE – Global M&A and Capital Raising Trends in the Mining and Metals Sectors
Highlights:
- Low gearing, strong earnings and good capital availability supported an ideal environment for mergers & acquisitions (M&A) in the first half of 2011. However, jittery markets and dropping confidence caused activity to slow in the third quarter.
- While deal values in the first nine months of 2011 are up 67% on the same period in 2010, macro economic issues and resource nationalism are making M&A decisions difficult. This is reflected in the fact that volume of deals is actually down on 2010.
- Synergistic, strategic and ‘one chance’ deals are being undertaken, and more speculative deals are being deferred. But with a number of large deals in the pipeline, and companies with access to cash in an environment where targets appear to be undervalued, we could see the year finish strongly.
Uncertainty is Having an Impact on Execution
The current level of political and economic volatility is making it harder to evaluate and execute M&A:
- There is a scarcity of new large scale, quality assets particularly in traditional resource geographies
- This is driving greater interest in frontier markets
- Resource nationalism is spreading globally making valuations more complex and deal execution more uncertain
- Meeting vendor price expectations whilst also delivering shareholder value is increasingly challenging, given increased risks for projects
- Volatile markets are making it more difficult for companies to price risk
Regional Overview
Asia Pacific Regains its Position as Most Active Acquirer
North America has extended its lead as the preferred destination for mining and metals M&A targets, while Asia Pacific regained its title as the most acquisitive region. Australia and China dominated by activity.
Gold and fertilizer consolidation by Russian-based companies saw CIS step into third place as a target destination and acquiring region.
Country Overview
US Takes the Lead
The US has taken the lead ahead of both Australia and Canada as the most active acquirer, supported by intense domestic coal consolidation.
The US has also taken the lead as the preferred destination, although not all deals were for mining targets, e.g., BHP Billiton’s acquisition of Petrohawk Energy Corp ($11.8b) and Chesapeake Energy Corp’s Fayetteville Shale assets ($4.6b)1.
Inflated asset prices in Australia relative to other countries have led acquirers with greater risk appetites to look elsewhere. This has resulted in Australia dropping to fifth rank destination.
Commodities
Coal Dominates M&A Activity
Coal continued to dominate the M&A landscape by a wide margin, accounting for over $30b of deal value. There are strong strategic drivers for coal :
- Majors buying assets to boost production capacity to meet increasing demand from China and India
- Power utilities, steel companies and governments integrating into raw materials
- Economies of scale to manage risk and regulatory compliance
There have been a large number of gold deals but at a relatively low average deal value.
***********
M&A and Capital
Raising Outlook
The first six months saw the ‘first wave’ of M&A: bolt-on, ‘one chance’ and strategically important deals. But Q3 saw even these deals put on ice as economic turbulence found its way into commodity prices.
Companies are well positioned to undertake M&A, and targets appear undervalued, but the global economic backdrop is making M&A decisions more difficult than ever. If these factors stabilize, we may see a resurgence of M&A activity.
Volatility on equity markets will make life difficult for juniors once again, with the need to increase capital raising options and consider preservation of strategies.
Risk aversion may see a tightening of bank credit, an increase in the cost of borrowing, and a flight to ‘safe’ investments in the bond markets, leaving mid-tier and sub-investment grade companies potentially exposed.
Capital management is more important than ever in a rapidly changing and volatile funding environment.
To see the full report, click here.
SOUTH AFRICAN UPDATE – Investing in South Africa’s Mining Industry
Highlights:
- The calls by the Youth League of the African National Congress for the nationalisation of mines has been much talked about but on balance is very unlikely to occur.
- Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels.
- The Minister of Mineral Resources has assured potential Chinese investors that South Africa offers a competitive mining sector open to foreign investors.
1. Introduction
The principal legislation governing the mining industry in South Africa is the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) which came into force on 1 May 2004 and replaced the Minerals Act, 1991. The MPRDA is not a “Mining Code” because it does not codify mining law in South Africa. As such, and although the MPRDA is the starting point, the common law remains applicable. In addition, other pieces of legislation are also pivotal.
2. MPRDA
2.1. The MPRDA changed the system of mineral regulation in South Africa from that of private ownership of mineral rights and licensing to one which is administratively driven and has replaced mineral rights with limited real rights in the form of prospecting and mining rights (for minerals) and exploration and production rights (for petroleum). The objects of the MPRDA include the empowerment of historically disadvantaged South Africans and security of tenure.
2.2. Transfer of prospecting and mining rights as well as the change in controlling interest of companies (that hold rights) requires consent of the Minister of Mineral Resources. Similarly, encumbrances of each right require Ministerial consent (save where the encumbrance is registered in favour of a bank or registered financial institution).
3. Law Applicable to Empowerment
3.1. On 11 October 2002, and as a result of a tripartite process (involving government, labour and the mining industry) the Broad Based Socio Economic Empowerment Charter for the Mining Industry (“the Original Mining Charter”) was signed by the representatives of the participants of the tripartite process. The Original Mining Charter was gazetted as the Charter contemplated in section 100 of the MPRDA on 13 August 2004. The Original Mining Charter became the instrument by which Government was to achieve its target of substantially and meaningfully introducing historically disadvantages South Africans into the mining industry. The Original Mining Charter imposed a 26% empowerment requirement on mining companies. After 5 years of its existence, it was reviewed and by way of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry dated 20 September 2010 (“The Amended Mining Charter”) it was amended.
4. Mining Titles Registration
The primary legislation governing registration of mining titles is the Mining Titles Registration Act, 1967 (MTRA). Under this law, the Mineral and Petroleum Titles Registration Office (MPTRO) is established as a Mining Titles deeds registry. Mining Titles must be registered in the MPTRO. The role of the MPTRO is to register prospecting and mining rights that have been granted to holders.
5. Mine Health and Safety Act 29 of 1996
This Act provides for the protection of the health and safety of employees and other persons at mines and, for that purpose to promote a culture of health and safety; to provide for the enforcement of health and safety measures; to provide for appropriate systems of employee, employer and State participation in health and safety matters; to establish representative tripartite institutions to review legislation, promote health and enhance properly targeted research; to provide for effective monitoring systems and inspections, investigations and inquiries to improve health and safety; to promote training and human resources development; to regulate employers’ and employees’ duties to identify hazards and eliminate, control and minimise the risk to health and safety; to entrench the right to refuse to work in dangerous conditions; and to give effect to the public international law obligations of the Republic relating to mining health and safety; and to provide for matters connected therewith.
6. Precious Metals Act 37 of 2005
This Act provides for the acquisition, possession, smelting, refining, beneficiation, use and disposal of precious metals; and to provide for matters connected therewith. It is the legislation that is dedicated to the precious metals industry.
7. The Diamonds Act 56 of 1986
This Act provides for the establishment of the South African Diamond and Precious Metals Regulator and for the establishment of the State Diamond Trader; for control over the possession, the purchase and sale, the processing, the local beneficiation and the export of diamonds; and for matters connected therewith.
8. Size of the industry
8.1. The mining sector accounts for over seven per cent of the country’s gross domestic product (GDP), it provides employment to close to 500 000 workers and has mineral resources estimated at US$2.5-trillion, the largest in the world.
8.2. The South African mining industry’s total income in 2010 was R424-billion while expenditure was R441-billion. R228.4-billion was spent on purchases and operating costs such as timber, steel, explosives, electricity, transport and uniforms. R78.4-billion was paid on salaries and wages for mine employees, R49-billion on capex, R17.1-billion in tax, R16.2-billion in dividends, R38-billion on depreciation and impairments and R13-billion on interest to the banks. Estimates by the Chamber suggest that only about R34-billion or 8% of the total expenditure is moved offshore. That means that 92% of the value of local mining expenditures are effectively captured in South Africa resulting in the creation of thousands of jobs and significant multiplier effects into the rest of the economy.
9. Main resources (minerals)
9.1. The main minerals are gold, platinum group metals, silver, iron ore, manganese, nickel, coal, chrome and copper. In addition to these, there are mineral deposits of rare earths, andalusite, base minerals and metals.
9.2. South Africa is home to about 80 per cent of the world’s proven platinum and manganese reserves.
9.3. South Africa’s fluorspar (natural calcium fluoride) reserves exceed 30 million tons, it has the third largest reserves in the world and accounts for around 30 per cent of the western world’s and about 10 per cent of all known reserves; iron ore amount to 9 300 Mt, or nine per cent, the sixth largest in the world; 80 per cent of the world’s known manganese ore deposits are located in the Northern Cape and the North West province; 8,5 per cent of the world’s nickel reserves, are located in South Africa’s Bushveld Igneous Complex; with around 15 million tons of zinc reserves, contains about 3,5 per cent of global deposits of the metal; 14,3 Mt, 22,1 per cent of the world’s known zircon reserves are found in South Africa; South Africa’s Bushveld Igneous Complex contains more than 5 million tons of vanadium ore reserves, which represents about half of Western world reserves and one-third of the global total; vermiculite ore reserves at nearly 80 million tons, South Africa has the second largest reserves of the metal, representing about 40 per cent of the world total.
9.4. African production of uranium oxide, currently accounting for more than 20 per cent of world output. South African output is mainly produced as a by-product of gold and copper mining. The Richard’s Bay titanium reserves are the fourth largest in the world, Silver is an important constituent of gold and platinum ores in South Africa and occurs too in the ores of the base metals (zinc, lead, and copper).
10. Main players
The Chamber of Mines of South Africa (Chamber) is a prominent industry employers’ organization which exists to serve its members and promote their interests in the South African mining industry. The members of the Chamber include financial corporations, contractors, associations and mining companies (i.e. Anglo American, Anglogold Ashanti, BHP Billiton, Harmony, De Beers, Gold Fields, and Lonmin etc).
11. Investment climate
11.1. According to the Chamber, in the first half of 2011, steel production stood at an annualised 1.5 billion tons, 8.9% higher than the level recorded in 2010 and is likely to be a record production year.
11.2. Nearly 100% of South Africa’s cement and building aggregates are made locally and 80% of the country’s steel is made locally from locally mined iron ore, chrome, manganese and coking coal using furnaces that are 95% powered by electricity from coal fired power stations (the 20% imported steel is speciality steel products not made locally). Over 30% of the country’s liquid fuels are produced within the country from locally mined coal and 95% of electricity is generated in power plants that use locally mined coal.
11.3. Most domestic chemicals, fertilisers, waxes, polymers and plastics are fabricated using locally mined minerals and coal and 20% of the world’s platinum catalytic converters are made in South Africa. The Chamber estimates that another R200-billion in sales value and 150 000 jobs can be attributed to the local downstream beneficiation sectors. All South Africa’s gold and pgms are refined locally and more than 50% of diamonds by value are sold locally into the downstream diamond cutting and polishing industry.
12. Nationalisation
12.1. The calls by the Youth League of the African National Congress for the nationalisation of mines were arguably the most talked about issue relating to the mining industry during the year. The ANC has directed a team to look into the merits of nationalisation, which is due to report its findings at the party’s policy conference in June 2012. Nationalisation is not government policy and the Chamber is opposed to it, which represents most of the players in the mining industry. The Chamber is committed to working towards finding the best alternatives. On the balance of evidence, nationalisation will not happen.
13. Exciting projects
Some of the recent and exciting projects include the following:
13.1. Gold One
Gold One’s flagship operation is the Modder East mine; the first new mine to be built in South Africa’s gold-rich East Rand region in 28 years. With a currently defined ore reserve of 1.53 million ounces at 4.0 grams per tonne and a 13-year life of mine, Modder East’s target reefs are located no deeper than 500 metres below surface. The mine’s shallow resources allow for trackless mine infrastructure where the underground orebody is accessed via a decline. Dedicated trucks transport rock out of the mine while a vertical shaft provides quick face access for personnel. Modder East’s first 240 ounce gold pour took place in July 2009. The mine’s first tonne of gold was poured in May 2010, only 10 months after its commissioning. At the end of the 2010 financial year, which marked only one year since Modder East had declared continuous and commercial production, the mine recorded a maiden profit of A$ 19.35 million before taxation. The mine’s low 2010 cash costs of US$ 484 per ounce were attributable to mechanised off-reef development and in-stope hydropower drilling. The use of hydropower also enables safer and more efficient working conditions as well as electricity savings. For 2011, Gold One anticipates increasing gold production by 80% and has forecast annual production of 120,000 ounces.
13.2. Kalagadi Manganese
Kalagadi Resources is in the process of establishing a manganese mine, coupled with a sinter plant, near Hotazel in the Northern Cape. The main shaft has holed through the lateral developments to the ventilation shaft at a depth of 281 metres, the production level of the R11-billion project, on which only equity funding has been spent so far. The project includes Kalagadi constructing a high-carbon ferromanganese smelter in Coega’s industrial development zone near Port Elizabeth, which will create the steel-making ingredient ready for consignment to foreign and local factories
The three-million-ton-a-year mine will provide the ore for the production of 2.4-million tons a year of sinter, 700 000 t of which will be sent to the ferromanganese smelter and 1.7-million tons a year of which will be marketed. The smelter will have a capacity to produce 320 000 t/y of high-carbon ferromanganese. Commissioning is scheduled for the third quarter of 2012, with the mine, sinter plant and smelter expected to employ 2 200 people. Mashile-Nkosi is targeting a 50% female employee complement. Kalagadi has secured both rail and port capacity from Transnet Freight Rail and power supply from Eskom. Kalagadi is currently generating its own power for the project from diesel-fuelled generator sets.
13.3. Coal of Africa
Coal of Africa is an emerging developer and producer of high-quality thermal and coking coal. Based in South Africa, it has two operating collieries and two projects in early operations and development, as well as a valuable suite of exploration projects, enabling them to grow well into the future. With good access to rail and port infrastructure, Coal of Africa can effectively service both domestic and international markets, providing a much-needed resource for economic growth and development for the country and the provinces in which we operate.
14. Chinese entrance
The Minister has assured potential Chinese investors that South Africa offers a competitive mining sector. “… my government is committed to creating a favourable and globally competitive mining sector in South Africa,” she told the 2011 Mining Ministers Forum in Tianjin, China”
According to the Chamber, in 2010, global diamond retail sales rose by 2.5% to US$60-billion, global jewellery sales rose by 7% to US$150-billion and polished diamond prices improved by about 6%. The strong price recovery was driven by re-stocking and a rebound in the global diamond market, particularly with the rise in polished demand from China and India.
Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels. China is currently producing 46.5% of global steel, driven by its own substantial industrialisation and urbanisation requirements.