MCN EXTRA: Pappalardo Says Conditions Are Ripe for M&A
By Dan Markham
on Apr 3, 2018
A few weeks before Olympic Steel acquired Berlin Metals and JSW Steel Group bought Acero Junction, Vince Pappalardo said the environment was good for metals merger and acquisition activity. Pappalardo is managing director of Brown Gibbons Lang & Company – an investment bank in Chicago.
“Valuations are up across the board,” Pappalardo said at the Platts Steel Markets North America Conference in Chicago last month. In the middle market, $50-$250 million, the multiples on those deals are all up, above where they were nine months or a year ago. The market is saying to do something. The lower tax rates have helped to drive investment through acquisition, rather than the build strategy.”
Pappalardo said such a strategy is not just good for the company, but the industry. While the production industry was almost forced into consolidation into the early 2000s due to the rash of bankruptcies, the byproduct of those moves was increased sales power over companies on both sides of the supply chain. Scrap dealers and service centers have not enjoyed the same degree of consolidation, and thus have ceded leverage to the mills.
The service center is particularly fragmented, he said, noting that the Top 5 companies represent less than 10 percent of the industry. Most general industries have a 20-30 percent player leading the market. “There’s still a lot of consolidation that needs to happen in the industry,” he said.
Beyond leverage, an M&A strategy is supported by limited organic growth opportunities, the ability to diversify a portfolio to deliver a smoother cash flow and the chance to enter new end markets.
Not all factors are working in favor of deals, he conceded. The swirling changes in the regulatory environment and ongoing trade issues adds some uncertainty to the market. Also, buyers are a little more particular about what they acquire.
“The buyer universe is more narrow per transaction, but they’re willing to pay,” he said.
Egge: Costs, Not Imports, are Key to Better Performance
Explaining that imports aren’t really a significant problem is not always a popular line of thought at a North American steel conference. But Russell Egge, principal of Egge and Alexander Associates, did just that at the Platts event last month.
“We need the steel industry needs to move beyond talking about imports. Yes, there are unfairly traded imports. Yes, there are mechanism in place to deal with those. We don’t believe imports are the real reason the industry is facing challenges today.”
Egge said the production industry continues to focus on issues such as unfairly traded imports, overcapacity and demand levels that are external to the industry. “None of these are actionable by any individual steel company.”
Where the individual steel company can gain an advantage is in its costs. And that’s where the major problem rests, he says. In the current environment, there simply isn’t enough of a gap between the high-cost and low-cost producers.
He said the cost curve has flattened out, reaching a level that hasn’t been seen in the industry in 60 years. Thus, even if there’s a sudden bump in demand, or if supply is limited, it doesn’t move the needle much on profitability.
“That’s why we’ve said publicly we don’t think 232 will have a significant effect. More people can make more tons, more people can be employed, and that’s great. But at the end of the day, on an operating basis, we don’t see the industry is going to significantly improve its financial performance,” he said.