Next Stop For Metals Industry Consolidation: Distribution and Processing

At a recent metal industry forum hosted by Grant Thornton and Winston & Strawn LLP in their Chicago office, executives from Ryerson, Inc. GE and others spoke about the current condition of today’s metals markets and offered insightful commentary regarding the M&A landscape. The group presented a comparison of M&A activity between 2009 and 2010 and concluded that 2010 saw an increase in deals from 5906 to 7301, according to Mergerstat. The panel of speakers, including Brian Deck, vice president of finance and treasurer of Ryerson, Greg Eck, senior vice president of metals and mining for GE Capital in the Americas, Lars Luedeman, a director at Grant Thornton and Marc O’Neill, senior appraiser at Hilco Appraisal Services, made several interesting points which we have summarized here:

  1. The steel producers and scrap processors have largely consolidated and today we see more details around the coal side of the steel supply chain
  2. The area in which they predict further consolidation will occur involves the steel processor and distribution segments of the market
  3. Volatility will disproportionately impact middle-market companies that have inventory and receivables and lack cash flow to weather the full business cycles

Finally, and perhaps most telling, the panel concluded, “the risk is that industry capacity utilization rates are not high enough to ensure steady profits for all competitors. Smaller Mom-and-Pop operations that often rely on private financing may face more risk than their larger peers.

The panelists walked the audience through the raw material end-use OEM supply chain and described where the M&A activity will occur.   The steel producers as well as the white goods space “are relatively consolidated, and as we have commented on previously, the producers have high industry concentration: “80% of steel volume is controlled by seven players. However, the panelists noted some risk exists on the production side, particularly around new capacity coming on stream without some of the older, less efficient capacity coming off-stream. Despite the capacity issues, the panel still concluded the market will see quarter-to-quarter improvements and better growth rates in terms of earnings and end-market growth.

Though companies in the metals supply chain will need to adjust their “2007 valuation expectations, the IPO markets appear stronger along with public debt markets as well as PE money resulting in greater competition for deals. The current low interest rate environment will continue to push momentum toward getting deals done. Brian Deck of Ryerson mentioned that in 2010 most companies took a lot of costs out and valuations appeared in the 5-6x EBITDA range at current run rate numbers. Bigger companies with better capital and banks will have access to all of the deals. Deck pointed to Reliance, Ryerson, and Metals USA as examples, along with Klockner’s recent purchase of Macsteel and Namasco, showing that more international players have come into the market, in turn continuing to drive consolidation.

The panelists also concluded that “debt is back, with ABL (asset-based lending) the most popular form of financing. We’ll explore ABL in the metals industry in the next couple of weeks.

–Lisa Reisman


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