From The Editor

The Past Year Not a Good One For Service Center Sellers

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MCN Editor Dan Markham The deluge of events and conditions of the last few years would have tested the resolve of any service center operator, perhaps pushing him or her to think this was time to get out of the business for good. 

However, according to Capstone Partners, unless things have changed dramatically in the last four months, now is decidedly not the time to cash in on years of toil in the metals business. 

The investment banking firm released its repetitively titled but informative Industrials Industry Middle Market Deal Activity and Outlook, examining the conditions facing many manufacturing sectors, particularly as they relate to mergers and acquisitions. The outlook paints a bleak picture for the metals processing space, at least throughout the course of 2022. 

While the past year was a down one overall for industrial M&A, with year-over-year deal volume declining 14.7 percent to $62.8 billion in value, the metals distribution space was particularly hard hit. Back in December 2020, metals and metals processing companies were getting 10 times EBITDA on transactions, even with packaging at the low end of Capstone’s collection of industries, but somewhat in line with HVACR, chemicals and others.
By the end of 2022, the EBITDA multiple had fallen to just four times, well behind all of the rest. Packaging was the closest at 6.4 times EBITDA, while precision manufacturing companies had retained most of their value over the preceding 24 months, checking in at 14.7 times. The Dow Jones Industrial Average was 13.9 times, or more than three times greater than the figure for metals and metals processing.

To the analysts at Capstone, the reason why metals processing and packaging dropped harder in 2022 was they were more affected by rising interest rates, lower consumer spending and volatility in commodity prices. 

Looking ahead, the environment for all mergers and acquisitions has dampened, with increased interest rates, fears of an impending recession and the eye-opening collapses Silicon Valley Bank and Signature Bank all inserting more caution into the investment community. Those worries were reflected in first quarter M&A activity, which was down 20.5 percent year over year. 

On the other hand, more stabilized commodity pricing and improved supply chains will undoubtedly help the industrial space. And a trio of acronymed acts out of the Beltway – the Infrastructure Investment and Jobs (IIJA), the Inflation Reduction (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) bills – will only serve to boost the industrial economy even further.  

“Though buyers are likely to become increasingly selective of M&A targets in 2023, the industrials industry has already proven to be recession-resilient with many subsectors seeing elevated M&A activity due to COVID-19 tailwinds,” the report from Capstone Partners concluded.