July 23, 2014
Lichtenstein: Mill Megadeals a Thing of the Past?
Consolidation of the steel industry is undergoing a strategic shift. Out is the idea of establishing a global footprint; in is a more focused geographic approach, said Accenture Managing Director of Metals John Lichtenstein, who sat down with Metal Center News for an interview last month.
Supporting that assessment is the just-announced sale by Russian steelmaker Severstal of its North American assets to steel companies headquartered on the continent, Steel Dynamics Inc. and AK Steel (see details below).
Steel producers now have the wherewithal to do deals, having slowly restored their balance sheets to more positive levels. But more CEOs are beginning to rethink the idea of expanding their companies to all corners of the globe.
Even before the Severstal deal, this type of retrenchment was evident in ThyssenKrupp’s exit from the North American market and some rumblings from the new head of Korea’s POSCO questioning the returns on that company’s substantial global investments. At the same time, major deals within countries, such as the Nippon-Sumitomo deal in 2012, or regional mergers such as Ruukki and SSAB in Scandinavia, are more appealing, Lichtenstein said. "We're not seeing the megadeals. It’s tough to find the synergies to justify the premiums," he added.
Some of the assets acquired in these global deals came with unrealistic expectations on returns. In other cases, the problem wasn’t the strategy, but poor execution, he said. "People are finding it's much more difficult to generate returns either because of cultural issues or local working issues. And there’s shareholder pressure to stop pouring money into losing overseas operations."
On the service center side, Lichtenstein said consolidation has been proceeding steadily but quietly. Citing MCN's Top 50 figures, he noted the average size of a Top 50 company has grown from $770 million in 2010 to $1.1 billion in 2013, while the Top 5 share of the Top 50 climbed from 37 to 44 percent.
In the distribution segment, there are two impediments to consolidation, Lichtenstein said. For privately held companies, where four or five family members may be on the payroll, the EBIDTA margin on which the company would be valued may be much lower than the company’s value to the family itself. In addition, due to the nature of the business, much of its value may be dependent on the owner's personal relationships with his customers--an asset that is not easily transferable to a new owner. Both factors tend to discourage acquisitions of small service centers.