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October 2010 Business Topics
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Lewis: Service Center M&A Soon to Resume

By Dan Markham, Senior Editor

Reliance Steel and Aluminum Co. has been the metals industry’s most aggressive acquirer of fellow service center companies since going public in the mid-1990s. Los Angeles-based Reliance, No. 1 in the Metal Center News ranking of the Top 50 largest service centers in North America, has made 45 acquisitions to date.

But the last two years have left Reliance and other acquirers unfulfilled. Since the downturn in the economy in late 2008, industry consolidation has slowed to a crawl.

But Karla Lewis believes that condition will soon change. Chief financial officer of Reliance throughout its expansion, Lewis expects her company, and others, to soon resume their growth through acquisition strategy. Lewis spoke last month at the Chicago Chapter of the Association of Women in the Metal Industries’ annual industry dinner on the topic of service centers and consolidation.  

History is the first guide to understanding how long it will take until merger and acquisition activity heats up again, said Lewis. From the mid 1990s until the early 2000s, M&A activity was proceeding at a rapid clip. That came to a halt in 2001, the time of the previous economic downturn.  

“What the owners told us was that because their earnings were down during that cycle, they assumed they’d get a lower value for their company. When we came out of that, service centers were much more profitable, and companies wanted to sell,” said Lewis. “From a buyer’s standpoint, we had to wait until we were comfortable that those profit levels could be sustained.”

The first half of that pattern played out again in the recent recession. When the economy went into a tailspin in late 2008 and into 2009, the number of prospects looking to sell dried up. Other than companies in distress, which Reliance avoids, there just weren’t any deals available.

“The sellers were concerned. The buyers were concerned,” Lewis said. “What is normal? We don’t think we’re going to get back to the 2004-08 profit levels soon, but we really don’t know where the market will end up.”

Although it will be awhile before both buyers and sellers are comfortable with the direction of the market and M&A can resume in full, some limited deal making has already begun. Through the first half of 2010, transactions in metals distribution totaled an estimated $361 billion in deal value, up about 60 percent from the first half of 2009. And the second quarter saw more activity than the first, suggesting that the trend is up, Lewis said.

Moreover, other trends also suggest companies will soon begin changing letterheads. For the past two years, private equity companies, a driving force behind much of the 2005-08 activity, have pulled back due to a lack of financing. But those groups have begun building war chests again, about $500 billion, and are ready to resume investing, Lewis said.

Additionally, while the credit markets are still tighter than before the 2008 market crash, they have begun to ease. Tax considerations also may prompt service center owners to sell this year rather than 2011, even if their earnings haven’t fully rebounded. “With that, along with some stable commodity prices and a little bit of improvement in demand, you’re starting to see some deals get done in the metals world,” Lewis said.

As for Reliance, while the company is eager to resume its growth through acquisition, it won’t deviate from the strategy it has found so effective, Lewis said. Reliance will continue to look for companies with good financial records and quality people. “We look at what the company is made up of today, its reputation, and how the potential target would fit once we got comfortable with the people.”

Reliance will not buy companies for capacity’s sake. “We try to focus on bottom-line growth as opposed to top-line growth. We’re not out to have market share statistics,” Lewis said.

A key element to any of the company’s acquisitions is balance, both geographically and from a product perspective. She noted that the PNA Group first became available in 2005, but Reliance passed on the deal because it would have “weighted us too much in certain products.”

After acquiring Earle M. Jorgensen in 2006, however, the PNA Group became a better fit, and Reliance scooped it up when it was put on the market by its private equity owners in 2008. “From a risk perspective, it met our needs at that point,” she said.

Though Lewis offers no firm timetable for Reliance to
resume its buying campaign, the industry offers considerable opportunity to do so. “We believe it’s still a very fragmented industry, and there’s still a lot of consolidation that can occur.” n

  
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