April 29, 2015
Service Center Buyers on the Hunt for Willing Sellers
Half the pieces are in place for a new round of mergers and acquisitions in the service center sector, says Eric Klenz, managing director and leader of the metals and mining practice at KeyBanc Capital Markets. “There continues to be strong interest on the part of buyers, the larger companies that view themselves as consolidators in the marketplace. M&A continues to be a significant part of their growth strategy.” The missing half, he says, is a dearth of attractive sellers. “Those small to midsized companies are out there, and of high-quality, but there hasn’t been much interest in selling since the recession ended in 2009.”
Though 2015 has started slowly, Klenz expects more M&A deals to be announced as the year progresses. Some of them may be distressed properties, he says, companies caught in the squeeze of devalued inventory and overcapacity.
While larger service centers remain the most likely acquirers for strategic reasons, he foresees some financial acquisitions, as well. “There will continue to be private equity interest around the service center space for the high-quality names with growth opportunities and strong market positions.” However, like other observers, Klenz believes producers will continue to resist the temptation to move downstream into distribution.
On the production side, the major acquisitions in 2014 will contribute to a slower pace this year, he says. Most of the activity will occur outside of steel, following the lead of the Alcoa-RTI merger and Aleris’ sale of its recycling operations in the aluminum market in the first quarter. “Metals companies with exposure to stronger markets, such as automotive or aerospace, is where you’ll see activity for the remainder of the year,” Klenz says.
Several foreign producers exited the market last year, but that doesn’t mean overseas companies have abandoned North America. There will still be some acquisitions by leading foreign firms seeking a toehold in the strong U.S. market, Klenz says, but they will be strategic and targeted.
Klenz also noted the slow start to the year in terms of new initial public offerings by industrial companies, a trend he expects will continue. Soft metals prices have put a lid on profitability, and growth has been curtailed by uncertainty in some markets. “You need a good growth story to go out and sell an IPO,” he says.