Steel-Aluminum Distributor Irons Out Acquisition

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Steel-Aluminum Distributor Irons Out Acquisition
Karla Lewis

Reliance Steel & Aluminum Co.’s announced $1.2 billion acquisition of rival Metals USA Holdings Corp. last week shows that the metal distribution giant is continuing its push for a bigger share of the $204 billion industry.

The downtown L.A. company has been growing through acquisitions for the past decade, slowing during the recession but picking up speed over the last year. This is its biggest buyout ever.

Reliance, the largest metals service center company in North America, currently has 4 percent to 5 percent market share. With this purchase, it will have as much as 7 percent, and it’s clear it will keep buying other companies in a market that presents plenty of opportunity.

“They’re nowhere near critical mass,” said Michelle Applebaum, founder of Steel Market Intelligence, a steel industry consulting firm in Chicago. She has a “buy” rating on Reliance stock. “This is a company that is in the business of acquiring steel distributors, and they do that very effectively.”

Reliance, which has more than 10,000 employees worldwide and with headquarters in a Bunker Hill skyscraper, now runs 220 centers that distribute steel, alloys and specialty metals in 38 states and 10 countries. It provides materials to companies in industries such as construction and aerospace.

Reliance agreed to acquire Metals USA in Fort Lauderdale, Fla., for about $766 million in cash plus assumption of debt. Reliance will pay $20.65 a share for Metals USA, the companies said in a joint statement Feb. 6, a 13 percent premium to Metals USA’s stock price at the time. The deal will add 48 distribution centers for Reliance in the United States, and raise the company’s total centers to 268.

New York private-equity firm Apollo Global Management LLC currently owns about 53 percent of Metals USA.

This deal follows a long run of acquisitions for Reliance. It bought six privately held companies last year, after largely holding back from deals during the postrecession years of 2009 through 2011.

“We’re very confident in the long-term U.S. economy and the continued need for metals,” Karla Lewis, Reliance’s chief financial officer, told the Business Journal last week. “Reliance is always actively evaluating acquisition opportunities. Metals USA is rather large in the space and we’ve been following it for some time.”

It’s likely the company will continue buying up competitors, an analyst said.

“We expect Reliance to acquire more service centers, as the company is the consolidator in the industry,” Tim Hayes, an analyst at Davenport & Co. LLC in Richmond, Va., who covers Reliance, said in a note to clients. Hayes has a “buy” rating on Reliance’s stock and raised his target price to $85 from $72 after the companies made the announcement.

Reliance was one of the biggest gainers on the LABJ Stock Index, rising 9.5 percent to $70.25 on Feb. 6. (See page 32.) The company’s stock has risen 28 percent in the last 12 months.

The deal is expected to close in the second quarter; Metals USA shareholders still have to approve the transaction. Metals USA has 30 days to seek a competing bid from another company, though it is unlikely to get one.

“It’s a very short list of service center companies that have the financial size to trump Reliance’s offer,” Hayes said.

Metals USA Chief Executive Lourenco Goncalves will retire, but the rest of the management team will stay on. Reliance said that Metals USA service centers will continue to operate under that brand. The companies did not say how many employees would be laid off because of the deal, but there would be redundancies in the staff of the two publicly traded firms.

Goncalves said in a statement that the deal is in the best interest of Metals USA’s stockholders. Representatives for Metals USA did not respond to requests for comment.

Reliance will finance the deal by accessing its $1.5 billion credit line, along with money from the credit and debt markets.

Lewis said the company will continue to pursue acquisitions, including large buyouts if opportunities arise. There are few companies in the industry as large as Metals USA, which reported sales of almost $2 billion for 2012.

“In due time, we would anticipate doing more large deals along with some smaller deals,” Lewis said.

In the past Reliance has made mostly smaller acquisitions. The only other deal valued at more than $1 billion was its 2008 purchase of PNA Group Holding Corp.

“There’s still plenty of opportunity here,” David Hannah, Reliance chief executive, said on a conference call after the acquisition was announced. “If that means we have to do 10 acquisitions of companies that are $200 million in revenue each, we can do that.”

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