Is Aleris Headed for Chapter 11?

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M&A Activity, Non-ferrous Metals

The scrap cans to aerospace metals group Aleris based out of Beachwood, Ohio could be headed for Chapter 11 according to the Financial Times. The recycling, rolling and extruding group comprising some 40 operations in North America, South America and Europe was formed in 2004 by Texas Pacific the private equity firm when they purchased IMCO recycling. In 2006, the group purchased Corus’ downstream aluminium facilities at a combined cost of some $3.5bn. At the time, TPG bet Aleris’ scrap-to-finished metals model would outperform the traditional bauxite-to-finished metal vertically integrated production method as energy prices increased (scrap-to-finished metal uses 95% less power per finished ton). And for a while, it looked like they may be right. But TPG paid a high price for Aleris, 23 times earnings and was left with a debt pile in excess of $1.5bn. As meager earnings in 2007 has turned into significant losses in 2008, servicing those debts has proved increasingingly difficult and so the firm has appointed Gotshal and Alvarez & Marsal to prepare for Chapter 11.

Aleris comprises the rolling facilities previously known as Commonwealth Aluminum, extrusions plants and scrap recycling facilities in the USA, Central/South America and Europe. The firm employs some 8400 employees and commands somewhere between a quarter and a third of specialty alloy output in the USA. There is always a place for an efficient recycling business in a mature metals market and Chapter 11 should allow Aleris the time and space to re-organize itself and protect it from its creditors. But with demand in Aleris’ key automotive, construction, consumer durables and increasingly aerospace markets all expected to be depressed for a year or more to come, it is unlikely the firm will be able to stand on its own feet until well into the next decade.

–Stuart Burns

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