Consolidation Changes the Face of the Industry

Economies of scale. It is a term consistently used by consolidation strategists as a justification for the creation of national and international corporations formed by the combination of many smaller businesses.

For consolidation to produce long-term fiscal returns, the sum of the combined parts should—in many categories—equal less than they did separately: Less overhead, fewer layers of management, centralized billing and receivables operations creating less overall paper work. That, anyway, is the theory.

Scrap processing is now joining a list of many other industry sectors where the theory behind consolidation is being put to the test.

NEW VARIATION ON AN OLD THEME

Buyouts and mergers are by no means strictly a ‘90s phenomenon in the scrap industry. Industry giants with familiar names such as David J. Joseph, Cozzi, and Schnitzer have been buying out family-owned businesses for some time. David J. Joseph’s presence in over 30 North American markets and its status as a $1.5 billion company attests to the fact that national scrap operations preceded the 1990s.

What has made the last two years different, however, is the sheer number of buyouts taking place and the attractiveness of the offers. One can also contend that the parade of buyout announcements has made a psychological impact on family scrap business owners. Many wonder quietly—if not aloud—if they are in danger of being left behind to compete against giants.

The three companies most associated with consolidation are clearly in the scrap business, but in their early stages they can also accurately be said to be in the consolidation business. Their primary industry may be scrap, but their raison d’etre—as stated by some of them in their mission statements—is to acquire other companies. Thus, virtually all scrap company owners can appropriately think of themselves as acquisition targets. 

Apparently, it is not an uncomfortable thought for many of them. The executive officers of one of the large consolidators claim that they receive up to a half-dozen unsolicited calls each week from company owners wondering if their companies might be of interest as acquisition targets.

The common demographic make-up of many of the scrap sole proprietorships—aging family founders with the next generation more willing to relinquish sole control in exchange for greater security—has perhaps helped the speed of consolidation. “Many of these guys are getting to the age where they either need to pass the business on or sell it for estate purposes,” says Mark Parr, Steel Analyst with McDonald & Co., Cleveland. “A lot of the guys who got involved during the early boom years of the 1960s are reaching that age.”

Parr believes that changing industry conditions—including the wider, global trading of ferrous scrap in standardized forms—have allowed consolidation to become feasible in the scrap sector.

“Probably one of the biggest impediments or barriers to consolidation had been the volatility of the price of scrap,” says Parr. “As you inject predictability—and put that together with the underlying growth in demand for scrap—it makes consolidation more viable.”

That potential is being explored by companies from throughout the world, including those quietly adding facilities and offices to their fold (such as David J. Joseph, OmniSource and Simsmetal). New partnerships are also being formed, such as that between Schnitzer Steel Industries Inc., Portland, and Hugo Neu Corp., New York, which allows them to have operations on both coasts.

But there are three companies in particular that have been labeled as consolidators and that have the acquisition of other companies as one of their primary activities: Metal Management Inc., Chicago; Philip Services Corp., Hamilton, Ontario, Canada; and Recycling Industries Inc., Englewood, Colo. All three companies were highly active in 1997.

CONSOLIDATION: THE EARLY RETURNS

The three companies that made the largest waves with scrap processing acquisitions in 1997 have met with varying levels of success in making themselves attractive to investors. 1997 may have been a strong year in terms of activity and revenue growth, but per share prices have not yet soared higher.

• Metal Management Inc. made news in early 1998 by attracting the attention of Sam Zell, a Windy City real estate tycoon. Zell was reportedly a key part of an investment group that pumped $25 million into Metal Management.

The company’s 1997 acquisitions pushed it close to a $1 billion annual revenue figure. The largest acquisition was of fellow Chicago company Cozzi Iron & Metal Inc. “It was the watershed transaction for this company,” says Metal Management CEO Gerald Jacobs. “It was sort of the quantum leap in terms of our profile; our ability to raise the hundreds of millions of dollars we’ll need to raise on Wall Street.”

The company’s per share stock reached a high of $30 in the fall of 1997, but has since declined. It was trading—as of press time—in the teens. Analysts differ on the company’s long-term prospects. In a January Wall Street Journal piece that looked at the company, two analysts interviewed were optimistic about Metal Management while another expressed concern over the company’s financing structure.

• Philip Services Corp., Hamilton, Ontario, Canada, made several high-profile purchases in 1997, including those of Steiner-Liff Metals, Nashville, Tenn. and Luria Brothers, Cleveland. The company began 1998 by issuing a business plan stating that much of its acquisition work was behind it—now it will focus on consolidating the operations it acquired. That focus may need to be sharp to lift Philip’s stock above the $15 range it traded in during most of 1997. A class action shareholder lawsuit announced in February caused the company’s stock to fall to under $10 as of press time. The suit claims that Philip over-stated its inventory value by more than 25% in its quarterly filing for the quarter ending on September 30, 1997.

• Recycling Industries Inc. (RII), Englewood, Colo., is also looking at the $1 billion annual revenue figure as a corporate goal. The company announced or finalized the acquisition of nearly a dozen companies in 1997. “We’re not just a holding company—we intend to integrate and operate these companies to increase shareholder value,” says Alexander V. Lagerborg, RII’s director of investor relations. The potential is certainly there to increase the per share value of RII. The company’s stock has traded for less than $10 per share throughout the past two years. Recycling Industries’ shareholders “are pleased with our growth,” says Lagerborg, adding, “They’re concerned about the stock price and the overall sector.”

While Philip Services may have few acquisition announcements to make in 1998, last year’s other fast-growth companies say they will have more deals to announce. Lagerborg says industry observers can expect to see Recycling Industries continue to acquire in 1998 as its nears its $1 billion goal.

“Our pipeline of transactions is very full,” remarks chief development officer T. Benjamin Jennings of Metal Management. He says potential targets result “from our own efforts and unsolicited efforts from companies throughout North America that are approaching Metal Management. We get as many as three to five calls a week.”

One of the more interesting predictions regarding the future of the fast-growing trio came from Barry Shapiro, Jr., president of National Metals Co., Phoenix, Ariz. “It wouldn’t surprise me if in the next 12 to 18 months one of the three purchased one of the others,” he remarks.

Another wild card that worries analysts tracking the three companies is the growing desire of scrap consumers—primarily steel mini-mill companies—to vertically integrate and control their own scrap (or scrap substitute) supplies. It is a trend that affects the entire ferrous scrap industry, and certainly the long-term growth prospects of the publicly-traded companies.

“I don’t really view the consolidations as much as a problem as I would the scrap companies that are part of steel companies,” says Joel Beren, president of A. Edelstein & Son Inc., Toledo, Ohio.

Shapiro of National Metals believes mills—vertically integrated or otherwise—pose the most formidable barrier to the scrap consolidation strategy. “I think the one big stumbling block could be the consumers’ ultimate reaction. They’ll make the decision whether they support the consolidators with their business or whether they will compete with them. A lot of the mills are not going to let themselves be put in the position of being beholden to one vendor.”

A THREAT TO FAMILY FIRMS?

“Fear” and “threaten” are two words often found in consolidation stories regarding the phenomenon’s effect on family business owners. But many former family business owners are pleased with the offers they accepted and the roles they now hold. And many who remain independent are not quick to label the consolidating companies as threats.

In a competitive environment that includes consolidators and national companies, “1997 was a good year for us,” says Joel Beren, who notes that “consolidation might ease some of the over-capacity” that exists in his region.

“I think it’s been good for our market,” says Shapiro of Phoenix’s National Metals. “We saw the consolidation of our two largest competitors. They’ve eliminated some redundancies and brought some efficiencies,” he notes.

“Every marketplace is different,” he says of the local nature of scrap. “Having a strong, healthy company regardless of its size is what you have to look for.”

Does Shapiro feel he may ultimately have to sell out?

“We’ve been approached several times by a lot of different sources of consolidation. We’re practical business people. If someone came to us with something we thought made sense for the long-term future of this company, we would strongly consider it,” he says. “I think there are a lot of people in my position who like the idea of having the investment community as a source of capital.”

WINNERS AND LOSERS

Who will be standing five or ten years from now? Wall Street investors and analysts may have the most to gain by figuring that out, but most scrap industry participants seem just as interested.

While discussions among friends and trade publication editorials often address the issue of consolidation as a singular phenomenon, different results await different participants. “You can’t generalize. It’s like any business. Some people are better at making deals than others,” says Parr of McDonald & Co.

Which companies have been better at making those deals? Per share stock prices don’t portray a clear favorite, as none of the three has yet produced high returns for its investors.

The judgement of professional analysts can vary as greatly as those of football tout sheet operators. For Philip Services alone, early February recommendations ranged from “hold” to “strong buy.”

Without naming names, Joel Beren of A. Edelstein & Son says the companies that have paid the most attention to the local markets they are in hold the most promise. “I think that certain consolidators will be more successful than others, particularly those that confine their growth to a certain geographic area.”

Shapiro of National Metals is willing to offer a guess: “I think Philip has gone in a different direction by acquiring more diverse operations. I think that diversification is a good thing. Then you’re not living and dying by one cyclical business.”

He also suggests that some of the companies that are “quietly” consolidating are perhaps doing so more strategically. Shapiro put Australian giant Simsmetal, Commercial Metals Co. of Dallas, and Schnitzer Steel, Portland, Ore., in that quiet but effective category.

The ability of the new consolidators to effectively achieve savings from their joint operations may still be the most important long-term factor. 1998 quarterly results may provide a window on efforts by these companies to convert to corporate-wide systems and purchase corporate-wide services.

And can it be done without demoralizing the management teams that have been left in place at acquired facilities?

Gerald Jacobs of Metal Management believes it will at his company through the “Office of President”—a panel of acquired company owners that meets to compare best practices and consider joint purchasing opportunities.

“They meet about every three or four weeks, typically by speakerphone and quarterly in person,” says Jacobs. “This is our way of having our cake and eating it too. Equipment, truck purchasing decisions, computer system decisions: This is an opportunity to take those best practices and expand them.”

The company has “closed in on some significant opportunities for integration,” says Jacobs. He adds that significant capital equipment savings will be achieved as the duplication of equipment is eliminated and the equipment remaining is more fully utilized.

Consolidating companies have proclaimed that the knowledge and experience of the owners and personnel at facilities they acquire are an important asset.

But how many upper management salaries can stay on the payroll—and how many seats established on the board—without badly injuring the economies of scale principal?

DRIVING THE DEAL

Is it possible that consolidation can and does create arrangements where everyone wins?

Undoubtedly, many of the former owners of acquired companies are pleased with the deals they made. Many of them remain involved with their facilities—often with a satisfying degree of autonomy—and most say they received a more than fair price when they sold. Officers of the three major scrap consolidation firms are clearly optimistic about the outlooks for their companies.

What the future holds for all of these parties, of course, remains to be seen. What a cynic might say is far clearer is who profits up front when acquisitions are processed. The frenzy of deals means a steady flow of work for attorneys, investment bankers and an assembly of others who provide legal, financial and paperwork processing services every time a deal is struck. The amounts of money that “churned” in 1997 due to the numerous acquisitions were clearly significant.

And scrap processing is just one of numerous industries—along with the likes of funeral services, HVAC contracting, and waste hauling—targeted for consolidation. The technique seems to have become a bankable method for building a publicly-traded company virtually overnight.

Borrowed money—an element not traditionally closely associated with the scrap industry—has also been heavily used in the last two years as consolidating companies put together their various components.

Some scrap industry veterans wonder if borrowed money—the fuel that has driven consolidation—will also prove its weakness when the next economic hiccup occurs.

And if Wall Street does not respond positively to the actions of at least one of the three fast-buying consolidators, the acquiring may stop as abruptly as it started.

But few are bold enough to proclaim with certainty how the next two years will unfold. Certainly no one is claiming they saw the rapid consolidation of the ferrous scrap business in 1996 and 1997. “I didn’t see anybody who had a clear strategy two or three years ago,” says Shapiro.

“I don’t think even two years ago, anyone saw this serious of a consolidation trend in the industry,” adds Beren.

WILL OTHERS RISE TO TAKE THEIR PLACES?

Perhaps the single biggest question regarding scrap consolidation is whether it is part of a linear process or a circular one. In the linear scenario, the scrap processing industry will continue to witness the consolidation of market share into a smaller and ultimately fixed number of companies. The end result of this scenario would be a handful of national companies with the majority of the market share, complemented by a few remaining niche-filling local processors.

It is a model with precedents. Very few observers would argue that the U.S. will ever see a greater number of railroads, aircraft manufacturers or garbage haulers than existed earlier this century.

A circular scenario unfolds quite differently. While consolidation will cause a temporary reduction in the roster of scrap firms, future events and the ongoing attraction of business ownership will continue to bring new processors into existence.

It is doubtful that anyone would have predicted that new American steel companies would emerge in the last quarter of the twentieth century, but changes in steel making technology helped that happen.

Even while banks merged repeatedly in the 1980s and ‘90s, new banks were chartered to fill niches that for-mer bank officers felt were being ignored or overlooked by the large players.

A semi-consolidated scrap processing industry would seem to present opportunities for those who wish to enter the fray. Alienated or just plain restless former owners and upper-level managers may be among the primary start-up candidates. (Any service industry—some would argue—presents opportunities for those who can provide better service.)

As long as the intangible known as the entrepreneurial spirit exists, new competitors will enter the arena. That, anyway, is the theory.

The author is managing editor of Recycling Today.

 

Still in the Family

Six days a week, the scrap processing machinery roars and hums at A. Edelstein & Son Inc. in Toledo, Ohio. As it has been for over 70 years, the company is family-owned and run. Unlike in previous decades, however, the company is now a lone outpost of family ownership in Toledo. “It presents challenges,” says president Joel S. Beren.

“We’re not blind to what is going on around us,” says Joel. “You have to take the current trends into consideration when planning for the future of the business.”

Although Beren is only 40 years old, he has seen a great deal of change in the competitive environment both in his own north Toledo neighborhood—once home to a half-dozen family-owned scrap companies—and in the Detroit region that can be extended to include Toledo.

“There aren’t many left to talk to,” he says of fellow family scrap processors. “I sit and look though my Rolodex, and half the people I used to talk to are no longer running their own companies, if they’re in business at all. Of the processing companies I deal with on a regular basis, I can count on one hand the number that are family-owned businesses.”

The consolidating companies have not overlooked Beren’s firm. “We’ve been contacted,” he says. But as of yet, the company remains family-held, with Joel and his father Gary, who is CEO, as head officers.

“For the smaller processor, you’ve got to be awfully good at what you do, or else you should probably get out while you’ve got something to take,” Joel remarks. “The financial decisions that [the large publicly-traded firms] make are not necessarily the same ones you’d consider in a small business. It’s just a different environment,” he comments.

Joel says 1997 was a good year for A. Edelstein & Son, but adds, “the real challenge is trying to figure out what’s going to happen in 20 years. I don’t think even two years ago, anyone saw this serious of a consolidation trend in the industry.”

What goes through the mind of someone like himself or his father when they are approached with an offer by a consolidator?

“For most of the family-held businesses, there are two thought processes—a financial one and an emotional one. And the emotional one is probably the more difficult.”—Brian Taylor

CHANGES NOT DRASTIC

Moving from an independent, family operated scrap recycling yard to part of a large, national (or in some cases international) operation could create significant changes in the way business is done. However, for several scrap operators who have been acquired by some of  the fastest growing scrap metal companies, the decision to become part of a larger company has been business as usual.

George Isaac, president of Isaac Group, and executive vice president of Metal Management, points out that while Isaac is a part of Metal Management, the parent company “is committed to decentralizing its operations.”

Isaac Group of Companies, which consists of five facilities in Ohio, was acquired by Metal Management last June. The company, headquartered in Maumee, Ohio, is itself eyeing other companies to become tuck-in acquisitions for Isaac Group.

 As for any changes in the way the company conducts business, Isaac points out that the advantage of becoming part of a much larger company is “principally the growth strategy” Metal Management affords Isaac.

While continuing to conduct business as usual, Metal Management provides much of the support needed to succeed, including insurance, human resources and other synergies. Further, “A key benefit of being with a larger company is the better utilization and increased equipment efficiencies,” Isaac points out.

Ed Bradley, a vice president with Brenner Companies, Winston-Salem, N.C., feels their company being acquired by Recycling Industries Inc. “is a proactive move by the Brenners.” The company, initially approached last fall, was acquired by RII December 5 of last year.

As to the advantages being part of a company such as RII, Bradley says his company will be able to “pump more tonnage into the mills. “

Another advantage is being able to leverage and sell more material to end consumers. While the company only recently became part of the Recycling Industries group, Bradley sees no downside to being part of a larger company. As to the concern that a large company could be intrusive upon a regional operation it has acquired, Bradley says there is a hands-off approach by the parent company. Their approach has been “If it ain’t broke don’t fix it.” Daniel Sandoval

 

 

SHOPPING SPREE

(A partial listing of 1996, 1997 and 1998 acquisitions of scrap processors,

both announced and finalized.)

Metal Management Inc.

-138 Scrap Inc., Chicago

-Accurate Iron & Metal Corp., Chicago

-Aerospace Metals, Hartford, Conn

-Atlas Recycling, Corpus Christi, Texas

-Cozzi Iron & Metal, Chicago

-Emco Recycling Corp., Phoenix

-Gold Metals Recyclers, Dallas

-Goldin Industries, Gulfport, Miss.

-Kankakee Scrap Corp., Kankakee, Ill.

-Katrick Inc., Chicago

-M. Kimerling & Sons Inc., Birmingham, Ala.

-Reserve Iron & Metal, Cleveland

-Superior Forge Inc., Huntington Beach, Calif.

-Spectrum Metals, Houston

-Yonack Iron & Metal and Yonack Services, Dallas

-The McCleod Group, Los Angeles

-Houston Compressed Steel, Houston

-The Isaac Group of Companies, Toledo, Ohio

(before being acquired by Metal Management, The Isaac Group acquired Kohart Surplus & Salvage, Paulding, Ohio, in early 1997)

-Hou-Tex Metals Co., Houston

-Proler Southwest, Houston

-Proler Steelworks, Jackson, Miss.

-Yonack and Gold Metal Group, Dallas

-PerlCo LLC, Memphis, Tenn. (acquired as part of the Cozzi deal)

-Salt River Recycling, Phoenix, Ariz. (acquired as part of the Cozzi deal)

 

Philip Services Corp.

-Allwaste Inc., Houston.

-Conversion Resources Inc., Cleveland

-Intermetco Ltd., Hamilton, Ontario

-Luntz Corp., Canton, Ohio

-Luria Bros., Cleveland (a division of Connell Ltd. Partnership, Boston)

-Steiner-Liff Metals group of companies, Nashville, Tenn.

-Southern Foundry Supply group of companies, Chattanooga, Tenn.

-Warrenton Resources Inc., Warrenton, Mo.

-Intsel Southwest Partnership, Houston, a steel distributor

-Alcan’s aluminum alloys plant in Guelph, Ontario

-Northern Telecom’s wire chopping facility, Barrie, Ontario

-Reynolds Metals Co.’s Bellwood processing facility near Richmond, Va.

-Allied Metals, a large ferrous scrap processor in the United Kingdom

-BM Metals Recycling Ltd., Cinderford, England, and E. Pearse Ltd., Exeter, England (acquired by the company’s European subsidiary, Philip Services (Europe) Ltd.). That subsidiary also announced plans to build an electric arc furnace dust recycling plant in Cardiff, Wales. (At last count, the company boasted 19 facilities in the U.K.)

 

Recycling Industries Inc. (RII)

-Addlestone Recycling Corp., Metter, Ga.

-Anglo Iron & Metal Inc., San Juan, Texas

-Brenner Companies, Winston-Salem, N.C.

-Central Metals Co., Atlanta

-Grossman Bros. Co. and its sister firm Milwaukee Metal Briquetting Co., both based in Milwaukee

-Jacobson Metal Co., Norfolk, Va.

-William Lans Sons Co.,

South Beloit, Ill.

-Mid-America Shredding Inc., Ste. Genevieve, Mo.

-Mindis Metals Inc., Atlanta

-Nevada Reycling Inc., Las Vegas

-Peanut City Iron & Metal Co. Inc., Suffolk, Va.

-Republic Alloys Inc., Charlotte, N.C.

-United Metal Recyclers,

Kernersville, N.C.

-RII also opened a new recycling facility in Warrenton, Ga.

 

Simsmetal Ltd.

-Frankel Iron and Metal, Fontana, Calif.

(incl. 60% of Ferromet Inc., Etiwanda, Calif.)

-Peck Recycling Corp., Richmond, Va.

-Steel Recyclers, Auckland, New Zealand

-PNG Recycling, Papua New Guinea

 

Commercial Metals Co.

-All Metals Processors Inc., Houston

-Sun State Recycling Inc.,

Gainesville, Fla.

 

Schnitzer Steel Industries Inc.

-General Metals, Tacoma, Wash.

-Schnitzer also formed a partnership with the Hugo Neu family called Hugo Neu Schnitzer East, which operates yards operating under the Metals Reycling LLC name in Massachusetts and Rhode Island.

This partnership recently acquired several facilities formerly operated by Schiavone-Bonomo Corp. and Schiabo Corp., Newark, N.J.

 

Alter Trading Co. (St. Louis)

Chanen Scrap and Steel,

Burlington, Iowa

 

David J. Joseph Co. (Cincinnati)

Swenson Metal Inc., Spanish Fork, Utah

 

Ferrous Processing & Trading Co. (Philadelphia)

TBS Industrial Recycling, Pontiac, Mich.

Industrial Services of America Inc. (Louisville, Ky.)

TMG Enterprises, Louisville, Ky.

OmniSource Corp. (Fort Wayne, Ind.)

Jackson Iron & Metal, Jackson, Mich.

 

Zalev Metals Inc. (Windsor, Canada)

SLC Recycling, Warren, Mich.

 

BFI—A LONG JOURNEY

According to its company history, Browning-Ferris Industries, one of the largest waste management companies in the world, started off as a small residential operation that formed in 1967 with one truck servicing a Houston subdivision. It grew into a large, multi-billion dollar company that now owns thousands of independent waste hauling companies.

The journey BFI has taken is circuitous, but reflects the way many large companies have utilized consolidation to grow into their present situations.

BFI initially was a single-truck collection firm called American Refuse Systems. The company eventually acquired controlling interest in Browning-Ferris Machinery Co., a distributor of heavy construction equipment. With this acquisition, BFI was born.

Along the way BFI has acquired countless waste hauling and handling firms; acquired and shed recycling operations; expanded its curbside recyclables collection operations to include around 200,000 households; and expanded its international presence through the acquisition of several large European-based waste management firms.

Over the course of 20 years, the company, headquartered in Houston, has grown to become an international corporation with around 43,000 employees, 10,000 collection vehicles and annual revenues of more than $5.8 billion.

Lately, the company has been viewed by many as a laggard in the market, with its stock price fluctuating around $35 to $38 a share. A question many now are asking is whether service companies the size of BFI can continue to profitably offer the flexibility that they were once known for.—Daniel Sandoval