13.12.08

Thanks to tough borrowing conditions, depressed stock values and the slumping global economy, the value of M&A transactions canceled since the beginning of October nearly equals that of deals that have actually closed.

The total value of withdrawn deals thus far in the fourth quarter was $322 billion as of Nov. 27, compared with the $362 billion in completed transactions during the same time, according to data compiled by Thomson Reuters.

Of course, Australian mining giant BHP Billiton’s failed all-stock offer for Anglo-Brazilian rival Rio Tinto—the largest-ever canceled deal, valued at $188.2 billion when it was announced in November 2007—accounts for 58% of that figure. The actual value of the bid was significantly lower by the time it was withdrawn, thanks to a sharp decline in BHP Billiton’s share price.

The figures, however, don’t include at least 80 withdrawn deals for which values were never publicly disclosed.

The value of M&A deals globally has fallen 27% so far this year, with the United States (down 32%) and Japan (down 45%) particularly hard-hit.

A few large private equity-backed deals have also collapsed in recent months, including the proposed $10.3 billion buyout of TransAlta, a Canadian electric generation and marketing company, by an investor group including a joint venture between Credit Suisse and a division of General Electric. And an even bigger buyout is teetering on the edge. Though not yet withdrawn, the $41.5 billion buyout of BCE Inc., a Canadian telecom, by the Ontario Teachers’ Pension Plan and a trio of private equity groups was set to close this week but has been teetering on the edge of collapse after an accounting firm declined to sign off on the deal.

Private equity buyers have found the cost of deals rising sharply this year, as lenders have demanded bigger equity contributions and interest rates on debt used to finance deals has skyrocketed. That has depressed dealmaking by financial sponsors, which has trended down since mid-2007.

BHP Billiton’s bid for Rio Tinto was just one of 67 deals involving companies in the basic materials sector to fall apart since Oct. 1. Fears that manufacturers will slash output and new construction projects will stall in the face of a global economic slowdown have roiled commodities markets and hurt profits across the industry. In total, some $225 billion worth of deals in the basic materials industry have been shelved in the quarter thus far.

“The market is simply moving against this kind of transaction,” said Robert Miller, managing director of Miller Mathis, a boutique investment bank specializing in the metals and mining industries, of the BHP Billiton-Rio Tinto deal. “There’s been a wholesale shift in the iron ore market worldwide, with usage and demand coming down significantly because of overall weakness in the global market.”

Swiss mining company Xstrata’s withdrawn $9.6 billion hostile offer to acquire the U.K.’s Lonmin was the sector’s second-biggest canceled transaction, according to Thomson Reuters.

Such companies will likely try to grow through smaller, less complicated deals that are more likely to be completed, rather than in one big blockbuster acquisition, said Peter Gray, a managing director focused on energy and natural resources M&A at KPMG Corporate Finance.

“There was an irrational exuberance surrounding commodity prices and an expectation they would always continue to go up,” said Mr. Gray. “The premiums people were prepared to pay were materially higher than what the fundamentals supported, and that was predicated on assuming debt and repaying it over a short-term time horizon based on commodity demand.”

Other notable deals withdrawn to date in the fourth quarter include Citigroup’s acquisition of Wachovia, arranged with the help of the Federal Deposit Insurance Corp. At $2.2 billion, it was the largest of 30 canceled financial industry deals worldwide.

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Source: "Financial Week"