Capital Confidence Barometer

Transcription

1 April th edition Capital Confidence Barometer Mining and metals 63 respondents Page 1

2 About the Barometer EY s Capital Confidence Barometer is a regular survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). The respondent community is comprised of an independent EIU panel of senior executives and select EY clients and contacts. Our 12 th Barometer provides a snapshot of our findings, gauges corporate confidence in the economic outlook, and identifies boardroom trends and practices in the way companies manage their Capital Agenda. EIU panel of more than 1,600 executives surveyed in February and March executives from Mining and metals Companies from 54 countries Respondents from 18 industry sectors 855 CEO, CFO and other C-level executives Page 2

3 Key highlights mining and metals Growth slips down the agenda, but M&A remains important to strategy for many Mining and metals executives demonstrated greater confidence in the global economy, but prevailing headwinds predominantly commodity price volatility - have dented confidence in the outlook for earnings and other key market indicators. As a result, growth has once again slipped down the agenda, with cost reduction and margin improvement remaining the core focus. The majority of respondents expect the global M&A market to either improve on, or remain at, 2014 levels. However, a sustained valuation gap is expected to weigh on the pace of deal-making, while access to capital and increased buyer competition are seen as key obstacles. 77% believe the global economy is improving 62% have confidence in corporate earnings, compared with 90% in October % are focused on growth, while 54% are focused on cost reduction and operational efficiency 49% intend to actively pursue an acquisition in the next 12 months 69% expect the valuation gap to stay at current levels 55% say transactions in their immediate region will be the main focus of their M&A strategy 35% cite capital availability and buyer competition as the main obstacles to their M&A strategy Page 3 11th Capital Confidence Barometer

4 Page 4 Macroeconomic environment

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6 However, confidence in the outlook for corporate earnings and other leading indicators has deteriorated Please indicate your level of confidence in the following at the global level: Corporate earnings Equity valuations/stock market outlook Credit availability Short-term market stability Short-term market stability Corporate earnings Apr-15 Oct-14 Apr-14 Equity valuations/stock market outlook Credit availability While the US and Europe saw a strong earnings season in 2015, the earnings of mining and metals companies were impacted by lower commodity prices, with the near-term outlook for commodities remaining weak. Credit availability continues to be boosted by QE in Eurozone and Japan, and low interest rates elsewhere, but is constrained by negative sentiment and risk aversion toward sub-sectors of the industry. Page 6

7 Geopolitical concerns persist, commodity and currency volatility rises What do you believe to be the greatest economic risk to your business over the next 6 12 months? Increased global and regional political instability Increased volatility in commodities and currencies Economic situation in the Eurozone Regulatory environment Slowing growth in key emerging markets Deflation Increased volatility in commodities and currencies Increased global and regional political instability Regulatory environment Economic situation in the Eurozone Slowing growth in key emerging markets Deflation Increased volatility in commodities and currencies Increased global and regional political instability Regulatory environment Economic situation in the Eurozone Slowing growth in key emerging markets Deflation The sharp fall in commodity prices and increasing volatility of currencies make it more difficult to plan ahead. Continuing geopolitical issues in Eastern Europe and the Middle East cause most concern around economic risk. Divergent monetary policies may impact currency fluctuations. Page 7

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9 Globalization, technology and rising entrepreneurship creating smaller business ecosystem Which of the following will impact your core business and your acquisition strategy most in the next 12 months? Core business Acquisition strategy The continuing growth and economic power of China, India and the wider Asian economy is expected to have the greatest impact on core business and acquisition strategies in the near term. The rise of entrepreneurship in many markets and sectors will play a key role in core business strategy, as the pace of innovation and the number of new market entrants increase. Page 9

10 Page 10 Corporate strategy

11 Growth slips down the agenda Which statement best describes your organization s focus over the next 12 months? Growth Cost reduction and operational efficiency Maintain stability Survival A smaller proportion of companies are focused on growth compared with a year ago, reflecting the prolonged downturn in commodity prices Page 11

12 Intense cost scrutiny is now an everyday feature of corporate strategy, while price volatility is also a concern Which of the following has been elevated on your boardroom agenda? Reducing costs/improving margins Changing commodity prices Acquisition Returning cash to shareholders Shareholder activism Strategic divestment (Spinoff/IPO) Reducing costs/improving margins Changing commodity prices Acquisition Returning cash to shareholders Strategic divestment (Spin-off/IPO) Shareholder activism Reducing costs/improving margins Changing commodity prices Acquisition Returning cash to shareholders Strategic divestment (Spinoff/IPO) Shareholder activism The focus on lean operations has become part of the corporate DNA in the five years since the Global Financial Crisis. Page 12

13 Executives are looking to innovative organic strategies to boost their potential market footprint What is the primary focus of your company s organic growth over the next 12 months? Innovative Exploiting technology to develop new markets/products Innovative Exploiting technology to develop new markets/products Increase R&D/product introductions Increase R&D/product introductions Changing mix of existing products and services Investing in new geographies/markets Changing mix of existing products and services Investing in new geographies/markets Conventional More rigorous focus on core products/existing markets More rigorous focus on core products/existing markets Conventional Apr-15 Apr-14 New sales channels New sales channels Apr-13 Increased R&D and innovative use of technology are seen as key routes to organic growth. The focus on core operations is still a key driver, but after several years of emphasis, companies may find it can no longer deliver growth just support earnings. remain focused on the core, with none looking to expand into new geographies or markets Page 13

14 Page 14 M&A outlook

15 The majority expect the M&A market to improve on, or remain at, 2014 levels What is your expectation for the M&A market in the next 12 months? At global level Improving Improving Stable Stable Apr-15 Apr-14 Apr-13 Declining Declining The vast majority of executives see the global M&A market improving or remaining at current levels in 2015, from a low base in There is negligible expectation that the deal market will contract in the near term Page 15

16 lag in their M&A intentions for the next 12 months Do you expect your company to actively pursue acquisitions in the next 12 months? Expectations to pursue an acquisition Likelihood of closing acquisitions Quality of acquisition opportunities Apr-15 Oct-14 Apr Number of acquisition opportunities Confidence in the likelihood of closing deals remains subdued pointing to a disciplined approach to M&A. There was a significant increase in appetite to pursue deals compared to responses a year ago Page 16

17 Global M&A relative performance by sector (LTM to January 2015) Many deals, low value HIGH VOLUME Many deals, moderate value Diversified industrial products Consumer products and retail Media and entertainment LOW VALUE Wealth and asset management Banking and capital markets HIGH VALUE Aerospace and defense Few deals, low value LOW VOLUME Few deals, high value Page 17

18 Upper middle market to accelerate What is your largest planned deal size in the next 12 months? Apr-15 Oct-14 81% Apr-15 Oct-14 5% 0% 3% 97% 14% US$0 US$250m US$251m US$1b Greater than US$1b+ The majority of investments are expected in the lower middle market, continuing the upward trend seen in 2H14. Over a third expect deals in upper middle market, with none focused on megadeals. Page 18

19 Deal pipelines remain fairly healthy How many deals of all sizes do you have in your pipeline today? >=5 >= Apr-15 Oct-14 Apr For the majority of respondents, the number of deals in the pipeline has remained largely unchanged over the past 12 months at 1-2 deals Page 19

20 But a significant increase in the share of respondents seeing a decrease in their pipeline as the year unfolds How do you expect your deal pipeline to change over the next 12 months? Increase No change Decrease For mining and metals companies, this may reflect an expectation that the window of opportunity to buy may be short-lived, if the cycle begins to turn in 2015/2016 Page 20

21 The valuation gap continues to weigh on the pace of dealmaking How do you think that buyers expectations currently compare to sellers (valuation gap)? 53% 54% 6% 2% 5% 3% 39% 38% Significantly higher (25% or more) Somewhat higher (10-25% gap) The gap is small (<10%) No gap Lack of consensus exists as to whether the bottom of the commodity cycle has been, or is soon to be, reached Share-based deals will be encouraged as regional differences in valuations bring opportunities to the table. Page 21

22 With few expecting it to contract in the next 12 months Do you expect the valuation gap between buyers and sellers in the next 12 months to: 4% 78% 10% 69% 18% 21% Contract Stay the same Widen The majority of respondents expect the gap to widen or stay the same, reflecting the widespread lack visibility over the nearterm outlook for commodities Page 22

23 Companies are looking across immediate borders for M&A targets, but most intend to transact close to home Where is the main focus of your M&A strategy over the next year? 54% 55% 16% Immediate region (countries close to home) Outside domestic market/immediate region Domestic market (home country) 16% 29% 30% Domestic M&A intentions are unusually low only 16% as companies seek divergent economic performance from crossborder dealmaking Nevertheless, more than half of respondents are focused on their immediate region for cross-border transactions, driven by the relative ease of acquiring in common economic trading areas. Page 23

24 The majority of acquisition capital will be allocated to developed markets What percentage of your acquisition capital are you going to allocate to the emerging markets in the next 12 months? Above 50% Above 50% 25-50% 25-50% 10-25% 10-25% Less than 10% Less than 10% None None Companies are planning to invest the majority of acquisition capital to developed markets, but emerging markets will still be targeted. Slowing growth across many emerging markets, driven by lower commodity prices, is impacting M&A decisions, along with concerns surround geopolitical instability. Page 24

25 Investment destinations span developed and top-tier emerging markets Which are the top destinations your company is most likely to invest in the next 12 months? Please rank your top 5 countries. UK US China Top destinations Global Mining and metals UK China US Germany Australia China UK US Australia Brazil Brazil Australia Top 5 destination countries The US, UK and Australia are set to lead developed market growth through China and Brazil remain emerging markets of choice for many executives, driven by relatively strong growth and market potential. Page 25

26 Regulatory and legislative opportunities impacting M&A decisions; market share growth still a key consideration What are the main drivers impacting your M&A strategy over the next 12 months? Select up to two. Leverage regulatory/legislative opportunities Gain market share in existing geographical markets Improve structural tax efficiencies Move into new geographical markets Acquire talent Move into new product/services areas Access new technology/intellectual property Reduce costs, improve margins Leverage regulatory/legislativ Improve structural tax efficiencies Gain market share in existing Move into new geographical markets Acquire talent Move into new product/services Reduce costs, improve margins Access new technology/intellect Leverage regulatory/legislative opportunities Improve structural tax efficiencies Gain market share in existing geographical markets Move into new geographical markets Acquire talent Companies continue to take advantage of changes to the regulatory or legislative environment. M&A decisions are heavily impacted by tax implications. Consolidation is expected to continue in many domestic markets. Page 26

27 Access to capital is the main obstacle to dealmaking, but competition has also become a key concern What are the main challenges to your M&A strategy over the next 12 months? Select two. Deal execution and integration capabilities Funding availability Insufficient opportunities/suitable targets Buyer competition Lack of internal resources or managerial focus Adverse political environment Regulatory environment Adverse economic environment Valuation gap between buyers and sellers Uncertain tax environment Funding availability Buyer competition Insufficient opportunities/suitab Deal execution and integration Adverse political environment Regulatory environment Lack of internal resources or Adverse economic environment Uncertain tax environment Valuation gap between buyers Funding availability Buyer competition Insufficient opportunities/suitable targets Deal execution and integration capabilities Adverse political environment Regulatory environment Funding availability has jumped up the list, compared with six months ago (only 12% of respondents) Internal M&A and integration resources also remain key challenges to companies M&A strategy. Page 27

28 Commodity and currency fluctuations driving poor operating cost assumptions For acquisitions completed recently, what was the most significant issue that contributed to deals not meeting expectations? Poor operating cost assumptions Product/sales price and margin deterioration Failure to achieve synergies Sales volume declines/loss of customers Poor execution of integration Strategic value overestimated/purchase price multiple too high Unforeseen liabilities (tax, HR, pension etc) Poor operating cost assumptions Product/sales price and margin deterioration Failure to achieve synergies Sales volume declines/loss of Strategic value overestimated/purchas Poor execution of integration Unforeseen liabilities (tax, HR, pension etc) Poor operating cost assumptions Product/sales price and margin deterioration Failure to achieve synergies Sales volume declines/loss of customers Strategic value overestimated/purchase price multiple too high Poor execution of integration Page 28

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30 Page 30 Survey demographics

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33 Proportion of top industries represented Diversified industrial products Consumer products and retail Automotive and transportation Technology Financial services Life sciences Oil and gas Telecommunications Hospitality and leisure Power and utilities Page 33

34 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com Page 34