Consolidation to come?

As I write this column in mid-April, many U.S. states are still under shelter-at-home orders because of the COVID-19 outbreak, the disease caused by the novel coronavirus. That means many nonessential businesses have closed or have asked their employees to work from home where possible. Even those businesses that have been deemed essential, including our publication and many recycling businesses, from scrap yards to material recovery facilities (MRFs), have restricted on-site staffing, with those who can work from home doing so.

The COVID-19 outbreak in the U.S. has led our federal government to pass a number of economic stimulus measures—three to date as of April 15—that are designed to help individuals and businesses survive the upheaval that has occurred since governors have begun instituting shelter-at-home measures in March. Included among these measures are provisions for direct payment to individuals and an extension of unemployment benefits, including to those people who don’t typically qualify for traditional benefits. Businesses will benefit from $500 billion in loans, loan guarantees and investments.

In times such as these, some companies may be better positioned to prevail, while others may be looking for an exit opportunity.

According to the “Metals Insider,” an industry report released by Cleveland-based Brown Gibbons Lang & Co. (BGL), a middle-market investment bank and financial advisory firm, many economic forecasts reflect either a U-shaped or V-shaped recovery within the next six to 12 months.

“In times such as these, some companies may be better positioned to prevail, while others may be looking for an exit opportunity.”

BGL says the economic uncertainty of the COVID-19 recession means that companies along the metals value chain are evaluating strategic alternatives, with many looking externally for growth. “M&A will remain integral for competitive positioning heading into an economic recovery,” according to the firm.

“Acquisitions still remain a primary lever to achieve growth targets, with some investors seeing the current environment as a buying opportunity to acquire capabilities and enter new markets,” according to the BGL report. “Well-capitalized buyers will continue to be opportunistic at the ‘tuck-in’ level, seeking capabilities that fit into forward strategies.”

The company adds that money should be available to fund such deals. “Bank balance sheets are healthy. Private debt funds are plentiful and eager to invest capital. Private equity funds are coming off years of record fundraising. Significant dry powder (highly liquid marketable securities) will need to be deployed in growth acquisitions. Private equity will be creative in how they deploy capital in today’s market, with more seeking minority equity stakes and looking at sharing risk opportunistically.”

Should the firm’s prediction prove true, it will be interesting to see which deals get done over the next year.