M&A Then and Now
Thursday | 22 January, 2015 | 1:25 pm
By Corinna Petry
Above: Severstal Dearborn was acquired by AK Steel Inc. in 2014. Shown: The slab caster.
2014 deals dominated by strategic acquirers
January 2015 - For those who can remember the 1990s, the landscape for mergers and acquisitions in the metals industry was quite different from that seen in 2014. (Go to our January issue for a broad recap discussion of 2014 M&A activity.) Although the quantity, quality and value of deals globally have easily surpassed those of 15 and 20 years ago, the sheer scale does not necessarily compare.
Back then, Wilbur Ross’ International Steel Group was buying properties out of bankruptcy, trimming the fat and reselling the lot to ArcelorMittal. Reliance Steel & Aluminum Co. and Metals USA Inc. were sucking up service centers like a giant vacuum cleaner.
But investment banks and private equity funds also became involved, and they weren’t in it just to secure financing for deals, take a fee and move on. They were owners, plotting the “synergies” that would gather them a profit while holding the assets and a potential windfall when they sold them three to five years later. Some achieved that goal; others did not as they faced scant investor interest in a new share issue.
Since 2008, “private equity people are very risk averse to most things related to metals and mining,” says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pennsylvania. “Within the last 18 months, the fear or dislike is even more pronounced due to low returns.”
Some companies, like Alcoa, Nucor Corp. and Steel Dynamics Inc., remain very attractive among investors, says Plummer. But those aren’t likely for sale.
There are financial players within the mining sector, and some “smaller firms getting involved in niche plays like service centers or energy supply companies like McJunkin Red Man—Goldman Sachs owns 50 percent of that. You’re not looking at [private ownership in] big mills but in niche areas, especially energy, aerospace, automotive and you are seeing financial-sector investments there.”
As the cost spread of production of integrated versus mini-mill steel producers has narrowed, “there is more of a monolithic cost structure,” and therefore “little opportunity for an equity buyer looking for a company to clean up. The ideal [return on investment] cannot be reached because of where the market is,” says Plummer. Unlike back in 1995-2000, “it’s impossible for someone else to get into a place that Nucor has. You cannot usurp that dominance.”
Over at consulting giant PwC, Jim Forbes, global leader of the metals practice, believes the “problem for private equity is we [metals] have become more global, especially with customers that are, at least, multi-regional and producers must mirror what their customers are doing” by expanding in to new geographies, which makes it difficult to wrap one’s hands around what’s going on in all these locations.
“The deals are more strategic. There are some financial investors but looking at the deals in 2014, those stakeholders represented about 27 percent of the transactions,” Forbes says. “Other industries offer higher returns so the metals industry is now largely driven by strategic investors.” MMSource: Modern Metals