Private equity takes shine to metals, mining

By Eleanor Wason

LONDON (Reuters) - Buyout firms are circling takeover target Alcan Inc. AL.TO AL.N, signaling private equity interest in metals and mining, an area they previously shunned because of cyclicality and commodity price volatility.

"Just in London I can think of four or five (private equity firms) who have a clear interest in the (steel) sector," Laurent Charbonnier, UBS's European head of steel, paper and packaging, told the Reuters Global Mining and Steel Summit in London.

The consolidating industry offers relatively low debt and cheap stock market valuations, but also poses the kind of political and operational risks private equity typically avoids.

Canada's Alcan has rejected U.S. rival Alcoa's (AA.N) $28.4 billion offer and is talking to third parties, fuelling talk of a counter-bid.

Alcoa Chief Financial Officer Charles McClane told the Reuters summit financial sponsors were interested in downstream assets, or processed products, that could be spun off for anti-trust reasons in the event of a takeover.

Opinions are split, though, on how far upstream private equity might go and how big an acquisition it could stomach.

"Private equity would be interested in the downstream assets of North American players," United Company RUSAL's strategy and corporate development director Artem Volynets told the summit.

"They have stable cash flows that you can leverage ... Upstream assets are a different story. It's not their natural playground because of the volatilities of the cycle."

Bankers say the growth in commodity market liquidity and increasingly sophisticated financial engineering gives private equity more opportunity to hedge risk.

"There is interest in (metals companies') valuations," said JP Morgan's European head of financial sponsors Larry Slaughter. "Multiples are relatively low now, so if you get comfortable with the commodities risk they can be quite attractive."

Lehman Brothers sees growth of $25 billion this year in the value of commodity index constituents, which analysts value at up to $200 billion.

CYCLICAL PLAYS

"Private equity is getting increasingly comfortable with cyclical activities with indirect commodity exposure, but there is beginning to be evidence that it will get more comfortable with direct exposure," said Mark Aedy, Merrill Lynch's head of multi-industries for Europe, Middle East and Africa.

Consolidation potential and the recent appetite for London listings of emerging market firms such as steel pipe maker TMK (TRMKq.L) also provide a reassuring array of exit routes for private equity, which typically invest for three to five years.

To date, private equity's forays into commodities have focused on more specialized parts of the industry, such as CVC Capital's CVC.UL failed bid for steelmaker Boehler-Uddeholm BHLR.VI and Apollo Management's $1.15 billion purchase of Xstrata Plc's (XTA.L) aluminum unit.