Speakers at the Steel Business Briefing’s Steel Markets North America 2012 conference last week were nearly unanimous that service centers will continue to consolidate while mills won’t participate.
We have observed and been extensively involved in the service center industry’s slow march towards consolidation for over 30 years now. The steel cycle has slowed the pace of consolidation in this sector. Capital has to be available to acquire, and capital isn’t available in the down-cycle. Sellers also simply won’t sell when business is bad – they are typically mis-advised (usually by their lawyer who they trust but does not understand market dynamics) that selling in a weak market hurts values – most buyers look past that.
Dan Sullivan, from Houlihan Lokey, said that we are in year two or three in the most recent M&A up-cycle which typically last 5-7 years. Sullivan does not believe that mills will partake in consolidating the service center sector however, saying there would have to be large-scale consolidation in the sector before that would be attractive.
In our view, Sullivan’s comment reflects concern that some mills may have, that should mill XYZ acquire distributor A, distributors B-Z would run from that mill, so that the only way mill XYZ would be able to buy distributor A is if A is big enough to offset the lost business.
We disagree with that analysis – if mill XYZ has “trust” relationships with end-users, and distributor A has “trust” relationships with suppliers, the ownership could be arm’s length – and there is historical precedence in the old Ryerson/Inland model, from decades ago.
Mark Breckheimer, President of the Heavy Carbon Group at Kloeckner Metals, said he expects consolidation of the service center industry to continue in the Americas. He sees private equity as supportive of the effort by creating regional players via M&A.
Lourenco Goncalves, Chairman, President & CEO at Metals USA, says there are “plenty” of M&A opportunities out there as more owners are willing to talk following stronger financial results in 2010 and 2011. Although he said he was once a proponent of mills consolidating the service center sector, today he no longer believes that steel mills will “go after service centers.”
Vicente Wright, President & CEO of California Steel Industries, believes there is room for consolidation in the service center and distributor sector, a view shared by Charles Schmitt, Head of SSAB Americas.
