Momentum continues into 2024, with 12 service center M&A deals completed in the U.S. and Canada in the first half of 2024, and on track to eclipse the total (22) for 2023.
Despite a year marked by a challenging economic, environment and geopolitical risks, the service center sector has proven to be a resilient hub for downstream growth. Acquisitions in the service center industry, as well as downstream manufacturing and fabrication, are on the rise, with diversification of capabilities emerging as a strategic response to cyclicality and macro factors threatening margins. Consolidation of middle market service centers is expected to continue due to the remaining fragmentation of regional markets and the desire to expand into downstream fabrication to enhance margins.
The Impact of Nearshoring & Government FundingDomestic manufacturers have long identified global supply chains as a risk because of political uncertainty, lack of intellectual property protection, erosion of comparative cost advantages and increasing geopolitical tensions/risks. As tensions with China persist, companies are taking a deeper look at their supply chains, which were already fragile from the aftermath of the COVID-19 pandemic, and finding ways to close any gaps. These factors are leading to the migration of supply chains back to the U.S. and Mexico. American firms’ mentions of nearshoring, reshoring and onshoring – synonyms for moving manufacturing back or closer to a company’s home country – grew by an average of 216 percent year over year since the start of 2022, according to Bloomberg.
The focus on nearshoring efforts is creating a long-term demand for metal service centers that can support domestic manufacturing. In March, Steel Warehouse announced a $27 million investment to open a facility in Hickory, N.C., expanding its presence beyond 15 of its locations across the U.S., Mexico and Brazil.
Another recent example was thyssenkrupp Materials Services’ announcement to open a steel service center in Sinton, Texas. The new service center is expected to support the materials and supply chain management needs of manufacturing companies across multiple markets in the region, including original equipment manufacturers in various markets and neighboring Mexico.
The mill expansion in North America has been tremendous over the last two years, and we expect it to continue to increase over the next two years. The consistent investment in the construction of new mills is creating a demand for additional service centers. In 2022, Steel Dynamics Inc. opened its mill in Sinton. The company invited tubing manufacturers and service centers to be located on the new campus as a way to save on shipping. The concept of having new locations of service centers more appropriately located near mills is driving greenfield expansion of service centers.
The increasing popularity of co-located service centers near/on mill campuses might lead to more M&A activity from larger service centers that want to acquire more local or regional market leaders close to these mills. U.S. Steel, Nucor, Steel Dynamics and CMC all have new mills under construction that are scheduled to be completed between the middle of 2024 and late 2025 – another strong indicator of future demand for accompanying service centers.
In addition to the refocus of nearshoring efforts, the influx of public funding into the U.S. manufacturing sector through three major pieces of legislation – the Infrastructure Investment and Jobs Act in 2021, plus the Creating Helpful Incentives to Produce Semiconductors and Science Act and the Inflation Reduction Act in 2022 – have become a catalyst for increased investment in domestic manufacturing and infrastructure sectors.
Technology – the Hottest Commodity?Service centers across the size spectrum, from public companies to small operators, are looking to add downstream processing capabilities. These capabilities include fabrication, laser and water cutting, machining and blanking.
In addition to adding capabilities, service centers are exploring the advantages of automation to improve efficiency, safety and profitability. Automated material handling and processing has helped service centers address the shortage of workers entering the workforce. According to Deloitte and The Manufacturing Institute’s new report, “Taking charge: Manufacturers support growth with active workforce strategies,” workforce challenges are among the top concern for U.S. manufacturers, and have been since Q4 2017, except during the pandemic.
With a persistent search for efficiency and building resilience across an organization, companies are beginning to explore the possibilities of generative AI to help add value to their operations. Full-scale integration of generative AI into organizations is in early stages; however, service centers can benefit from enterprise-level AI, including predicting customer order patterns, purchasing, planning and increasing efficiency in material planning within operations.
But before jumping the gun and fully integrating AI offerings into their existing platforms, service centers should be cautious about AI’s ability to transform the business. Ian Pickwood, founder of Eferro, a recent entry into the world of service center software, said in a February article in MCN that AI will affect the development and user sides.
“It’s (AI) going to affect the development side and it’s going to affect the user side. What you need to do is temper people’s expectation with reality,” said Pickwood.
While the metal service industry is sometimes known to lag behind in technology adoption, we’re seeing a slow but steady change. Businesses of all sizes across the metals industry –from family-owned service centers to large public companies – are embracing technology.
U.S. Steel, the oldest steel company in North America, is a great example of an “old school” metals company adapting to the times. In August 2023, the company announced a collaboration with Google Cloud to build applications to simplify equipment maintenance by providing optimal solutions for mechanical problems.
Accelerating Value from a Successful M&AAcquisitions can be a powerful tool to increase growth and value for a service center. When it comes to buy-side strategies, acquiring companies with complementary capabilities, materials, different sets of end markets and geographic reach can help service centers gain a larger market presence.
Acquiring similar service centers provides traditional synergies by consolidating back-office functions, including accounting, sales and purchasing. It also increases geographic reach, diversifies the customer base and increases purchasing leverage with mills (more stability with mills relationships, potentially reducing price volatility and increasing access to volume discounts).
The benefits of add-ons for service centers include:
- Satisfy shareholders via diversification.
- Enhance stability via diversification.
- Better ability to navigate the cyclicality and price sensitivity of less value-added products.
- More control of the supply chain.
How Owners of Regional Service Centers Should Approach the Current M&A StrategyShareholders and owners of major service centers look at growth and diversification through the lens of M&A. As mills expand their tonnage capacity and footprint, large players in the industry are acquiring smaller service centers as a way to enter these markets. For owners of regional service centers, consolidation presents a unique opportunity for small and medium-sized businesses to capitalize on current market conditions. Whether you’re seeking to expand or maximize the return through a sale, the decision hinges on key factors, including the state of domestic and international affairs, the M&A market, the lending market, commodity pricing, demand, capital investment requirements and the state of the industry.
Internal stakeholders should consider the following questions when considering a sell-side transaction:
- Is there a clear ownership transition plan?
- What amount is needed to achieve personal financial objectives?
- How would a transaction impact day-to-day responsibilities?
- What is the local competitive dynamic? Does the local market have new larger competitors?
- What are the drivers of business and net working capital?
- Are there any potential buyer concerns?
- Would family members have other opportunities to pursue post-transaction?
Proper preparation is essential to attaining healthy valuations and a seamless process at the time of a sale. Internal stakeholders and owners need to understand the primary factors involved in a buyer’s decision-making process to maximize value.
[Vince Pappalardo is a managing director at Brown Gibbons Lang & Company, where he leads the Metals & Advanced Metals Manufacturing group. Hubert de la Vauvre is a director and senior member of the metals team. Together they have more than 30 years of experience in the metals industry and have closed over 100 M&A deals.]