Energy, resources seen dealmaker favorites in 2011

By Soyoung Kim and Michael Erman

NEW YORK (BestGrowthStock) – Natural resource deals have accounted for nearly one-third of all deals so far in 2010, and those sectors are expected to remain hot in 2011, spurred by growth in Asian markets.

The comeback of Western consumers coupled with roaring demand in emerging economies could also buoy appetite for a broad range of consumer-focused companies, which have made up more than a tenth of deals worldwide in 2010.

“Commodities are just the real focus right now with the growth in Asia and the lumpiness of growth around the world … Whether that’s oil, gas, coal, metals, mining, you name it,” said Bob Profusek, global head of M&A at law firm Jones Day.

Announced mergers and acquisitions targeting the energy and power sector have totaled $482 billion so far this year, up 38 percent from 2009, and accounted for 22 percent of total M&A activity globally, according to Thomson Reuters data as of December 14.

Deals in metals and mining and other materials have accounted for 10 percent of global M&A with $226 billion worth of deals announced so far this year, up 58 percent from last year.

The volume in these sectors has been driven in part by Chinese hunger for oil and commodities, which has led to deals like CNOOC’s $3.1 billion acquisition of a stake in Argentina’s Bridas Holdings and Sinopec Group’s more than $7 billion purchase of deepwater oil assets in Brazil.

“For emerging markets — the BRIC nations — particularly Brazil, remain a huge focus. China continues to be an important market — not explosive in M&A but very relevant,” said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Merrill Lynch (BAC.N: ). “The expectations for China are high and the potential has yet to be uncapped.”

The unsuccessful $39 billion bid for Potash Corp by miner BHP Billiton, which would have been the biggest takeover this year had it been consummated, also underscores huge appetite for resources at a time of booming demand from China and other emerging markets.

Financials, consumers and industrials rounded out the top five industry sectors for M&A.

“Sector-wise, I think you’re going to see broad participation. Some of the sectors that we’ve seen a lot of volume in — healthcare, natural resources, consumer — will continue to be active,” said Jeffrey Raich, managing director and founder of Moelis & Co.

Consumer staples, products and services and other retail companies accounted for $253 billion of deals this year through December 14, up about one-third from the same period last year. That represents 11 percent of overall deal activity.

In a recent example, a group led by Kohlberg Kravis Roberts & Co agreed to buy Del Monte Foods Co in November in a deal worth about $4 billion excluding debt.

Deep cash piles could also prompt industrial conglomerates like General Electric to buy growth with acquisitions.

GE, 3M, Honeywell and Danaher returned to the takeover track this year after cost-cutting during the recession, and dealmakers expect the trend to continue.

“What’s really driving them is they’ve got limited growth in their core business and they’ve got a lot of cash,” said Andy Lipsky, head of M&A for the Americas at Credit Suisse. “I do think (deals in the diversified industrials space) will continue to accelerate globally — that will be one of the strong areas of the market over the course of next year.”

FINANCIAL ‘SUPERMARKETS’ THINK SMALL

Announced deals targeting the financial sector are down 11 percent to $347 billion so far in 2010, Thomson Reuters data shows. But it has still been this year’s second-busiest sector with a 15 percent share, just behind energy and power.

Divestitures, rather than combinations and mega-mergers, could be the story as Wall Street banks look to streamline their far-flung organizations in response to the Volcker concept — which restricts the amount of ownership banks can have in buyout or hedge funds.

“The Volcker concept is are out there and a lot of senior managements and directors are acting on them. The underlying premise that financial supermarkets have got to get more streamlined and more core-focused, I think that’s going to play out,” Profusek said.

Citigroup (C.N: ) agreed to sell its private equity business in July, and sold its real estate investment management group, City Property Investors, to Apollo Global Management in November.

Increased regulations and the desire for financial institutions to better manage their risk could lead more companies to divest proprietary trading and consumer credit businesses.

(Additional reporting by Nadia Damouni, Megan Davies and Jessica Hall; Editing by Steve Orlofsky)

Energy, resources seen dealmaker favorites in 2011