I am sort of surprised to see that nobody seems to be talking about a pretty major acquisition that took place yesterday. No. 1 metal service center Reliance Steel & Aluminum Co., announced they intend to acquire No. 10 service center PNA Group from Platinum Equity, a private equity firm. In a deal valued at $1.1b, it is significant to metals buyers throughout the US. Given the rapid ascent of steel prices (PNA’s primary products), the timing of this sale worked in Platinum Equity’s favor.
So what is driving the deal? The first is market entree to Mexico, where PNA has joint ventures established. That is a pretty smart move given some of the re-sourcing activities going on between China and Mexico . It’s hard to believe that the market leader, Reliance did not have a Mexican operation already but there you have it. The second reason behind the deal is the quest to continue Reliance’s spectacular stock market climb. Since the beginning of this year, Reliance stock prices have increased by 56% according to this recent research report. The acquisition of PNA is immediately “accretive” to earnings. This means it will likely lead to increased earnings per share immediately.
According to that same research report, published just one day prior to the acquisition, the news is not all positive. Sellers are starting to short the stock, anticipating a fall and investors are not convinced of the stock’s strength. From an operational perspective, “April carbon steel inventories, as reported by Metal Service Center Institute, were higher as flat rolled shipments by the service centers fell, offsetting increases in plate, beams, bars, and pipe and tube,” according to Purchasing.com. Furthermore, July steel hikes are much less than April, May’s or June’s so maybe there is reason for investors to start becoming a bit pessimistic about steel producers and service centers.
As Reliance digests their most recent acquisition perhaps the rest of us might catch our breath.