Private Equity Moves To Metals

Usually private equity firms need to do tremendous amounts of work to identify targets. But, in the metals business, the industry may be doing it for them. The M&A dance now includes, at least, Rio Tinto (RTP), BHP Billiton (BHP), Alcoa (AA), and Alcan (AL). The latter two have market caps under $40 million, clearly in the range of what large private equity firms can afford.

Reuters recently reviewed an Ernst & Young study which say that "Mining companies’ balance sheets, flush with cash thanks to soaring prices for industrial metals, fit well with the low cashflow-to-debt ratio favored by private equity, which tends to rely on high leverage."

So, it would appear that in that Alcoa could face bidders from private equity as it tries to take over Alcan, and BHP Billiton may face the same interests in its potential bid for Alcoa.

Perhaps if a large private equity firm buys one of the miners it can pay another some money for all of its excellent research on the industry.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.