Deal value on the increase – E&Y study

Takeover activity in the resources sector has boomed over the past two years, a new study by Ernst & Young has found. It said the value of takeovers increased by 70 per cent in 2004 and by the same amount in 2005 to nearly $12 billion. The study noted that BHP Billiton’s acquisition of WMC Resources boosted the 2005 figures but said the value of takeovers would have risen even if the ‘mega’ deals were excluded. The average deal value in 2005 was $479 million and after excluding the WMC acquisition would have been $104 million, which was still significantly higher than the average deal value of $60 million in the industrial sector. Ernst & Young said the increase in deal values reflected the steep increases in most underlying commodity prices and Australia’s geographic proximity to key growth markets such as China and India. Martin Alciaturi, head of Ernst & Young’s Mining and Energy Transaction Advisory practice said the market could expect activity from mid-cap resource companies to increase in the future. "As successful junior companies emerge as a result of exploration success, an increased number of acquisition opportunities will present themselves to mid-cap companies," Mr Alciaturi said. "2006 is an ideal time for mid-sized companies to fill the investment gap between the global majors and the more speculative junior explorers, and grow through the M&A activity." He noted that major resource companies were well placed to make cash acquisitions while mid cap companies have a bias toward scrip takeovers. While takeovers have resulted in substantial rationalisation, this has been offset to some degree by the increased number of new floats.