After the Fall

Slightly more than one year ago, the consolidation of the scrap industry still seemed to many like a foregone conclusion.

Executives of three companies in particular that had been acquiring scrap recyclers at a frenzied pace still spoke of building $1 billion companies and consolidating the North American scrap market into discernible market shares with a half-dozen primary players.

The momentum seemed unstoppable, and many wondered whether the roster of family businesses in the scrap industry would dwindle to the point of becoming an endangered species. 

CALCULATING THE MULTIPLE

Attendees of a session at the ISRI Gulf Coast Convention in 1998 must have known what to expect when attending a presentation entitled “How to Maximize the Value of Your Business and Cash Out on Your Own Terms.”

What they heard was an advisor from a national merger, acquisition and divestiture firm remark how—with his company’s help—the owner of a scrap recycling company should be able to have an equal or greater annual income after selling off the business. “So you’re working 50 or 60 hours a week to earn less,” the speaker declared.

After the presentation, several attendees conversed with the speaker and more than a few business cards were exchanged. Talk of high multiples (the number an annual revenue figure is multiplied by to determine a business purchase price) had many business owners anxious to learn whether their business was a candidate for one of the hungry consolidators.

  Chances are, few in that audience are now enjoying life on the golf course after selling out to Metal Management Inc., Recycling Industries Inc., or Philip Services Corp.

The session took place on May 29, 1998. By that time, the woes of Philip Services Corp., Hamilton, Ontario, Canada, were already becoming public. Metal Management Inc., Chicago, and Recycling Industries Inc., Englewood Colo., still had a few more deals to close upon, but their lines of credit were soon to dry up when the price of ferrous scrap began plummeting in August.

The days of seller-pleasing multiples were about over, but during the preceding 18 months some four dozen scrap companies had “cashed out on their own terms,” allowing the three emerging consolidators to build far-flung empires that seemed to be the foundations of corporations that would last well into the next century.

A SCREECHING HALT

With just six months left before 2000 dawns, all three of the major consolidators are still in existence. But the best spin these companies can put on the past year is that their plans to consolidate the industry ran into unforeseen bumps in the road, and that the journey will soon resume.

Philip Services Corp. lost a staggering amount of money in 1998—more than $1.5 billion—but has so far held onto most of its scrap recycling facilities. The company at one time announced that its entire metals recycling division was up for sale, but has since reversed field and seems determined to hang on to its scrap assets through looming bankruptcy proceedings.

Recycling Industries has filed for bankruptcy and seen the departure of its CEO Thomas Wiens. Metal Management has avoided bankruptcy, but after posting some money-losing quarters it has seen the departure of Gerard Jacobs—one of its founding executives—and has seen its stock delisted by the NASDAQ exchange.

The halt was sudden, but not entirely unforeseen. Skeptics of consolidation contended that holders of stock in publicly-traded scrap processing companies would not easily tolerate the rapid downturns that can hit the cyclical scrap market.

When questioned about this for a Recycling Today cover story, former Metal Management CEO Gerard Jacobs said that, “our business model is based on buying at a margin. We’re not going to be speculating on inventory. As long as we can maintain our margins at a level that can allow us to recover our costs and make a reasonable profit, it’s an acceptable situation for us.”

Unfortunately—as many veteran scrap dealers would attest—margins are not always easy to maintain during a down cycle. Metal Management lost $18.5 million during a nine-month period running from April to December 1998.

DOWN BUT NOT OUT?

The deals may have come to a sudden stop, the stock values plummeted, and bankruptcy papers, in some cases, have been filed. But each of the three consolidating companies is still in business. And each of the three certainly retains facilities considered among the premier scrap processing sites in North America.

Will the managers of each of these companies be able to guide them back to prosperity? Will investors have any confidence in a company that has scrap processing as its largest operating segment? (Yet another round of speculation centers on whether many of the former family business owners might be “waiting in the weeds” to buy back their facilities for pennies on the dollar.)

 For any of the three companies to get back on the acquisition track, they will probably need access to capital beyond what they generate from operations. After the initial contact with a publicly-traded scrap company that some bankers and investors experienced, it remains to be seen what type of treatment the same public companies can expect in terms of credit ratings and investment recommendations.

As its problems piled up in late 1998, Philip Services received a credit downgrade from one Chicago-based credit reporting company that noted, “Philip Services has faced delays in its asset sales programs for a variety of reasons, including volatility in the capital markets. Additionally, very weak conditions in the ferrous scrap industry have reduced cash flow from these operations and have reduced the potential for Philip Services to achieve targeted sales prices.”

Many would argue that Wall Street does not have a very long collective memory, and that second chances there are routine. Certainly, those who wish to revive the fortunes of Philip Services and Recycling Industries Inc. will soon find out.

Bridges have also been burned between the consolidating companies and some of the business owners whose enterprises were acquired during the consolidation frenzy. Former owners and officers from companies acquired by Philip Services Corp., in particular, in states such as Tennessee and Ohio have either filed suit against Philip or been involved in very public separations from the company.

THE QUIET COMPANIES

Not all the acquisitions of the 1990s have been made by the three consolidating companies that somewhat loudly declared consolidation as their reason for being.

Several other companies were also adding facilities to their fold, though not on the scale or at the pace of Philip Services, Metal Management or Recycling Industries.

Many of these smaller consolidators are not publicly traded, while others may be but their scrap processing operations make up less than 50% of their revenue stream.

Among the companies that seem to have withstood the recent market plummet while still maintaining the wherewithal to grow their businesses are IMCO Recycling Inc., Irving, Texas; OmniSource Corp., Fort Wayne, Ind.; Commercial Metals Co., Dallas; Schnitzer Steel Industries Inc., Portland, Ore.; Hugo Neu Corp., New York City; Ferrous Processing & Trading Co., Detroit; and Alter Trading Corp., St. Louis.

Different strategies have been employed by the companies in the course of accumulating significant scrap processing operations. OmniSource, Ferrous Processing & Trading (FP&T), and Alter Trading, for instance, have focused on consolidating scrap operations within their home regions.

Most of OmniSource’s facilities are in Indiana or in bordering regions of Ohio, Illinois and Michigan. The majority of Alter Trading Corp.’s yards are in Iowa, with others located in neighboring states. FP&T has stayed focused on the Detroit market, with its major processing facilities located almost exclusively within the city.

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An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

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SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

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SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

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An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

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An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

FP&T CEO Jeffrey N. Cole calls his model of consolidation “concentric,” and told Recycling Today in mid-1998 that the strategy is more workable than what the called the “dots on a map” strategy. “I’m confident that our model will work, because unlike the dots-on-a-map plans, our assumptions are not devoid of the possibilities of truly consolidating operations,” he remarked.

Companies such as Schnitzer Steel Industries and Commercial Metals Co. (CMC) have built more diversified companies, although scrap operations remain a key component. CMC has a steelmaking division with diverse operations from mini-mills to fabricating shops; a copper tubing plant; and operations in the concrete products industry. And within the scrap segment, CMC has focused on making acquisitions at a slower pace. “Basically, we [grew] more systematically,” says CMC Secondary Metals Processing Division president Harry H. Heinkele. “We had no mandate to try to double, triple or quadruple overnight. This allowed us to integrate new operations as we acquired them.”

IMCO Recycling Inc. has focused on consolidating the scrap markets for specific materials, most notably zinc and aluminum. At a presentation at the ISRI Annual Convention in April, Paul M. Higbee, a managing director of BT Alex Brown Inc., New York City, called IMCO a “sleeper” for investors, and speculated that the company’s stock price may be weighed down because of the woes of other metals recycling companies.

The company’s growth has certainly not been impeded by the woes of other consolidators. IMCO now calls itself “the world’s largest recycler of both aluminum and zinc” and operates 23 facilities in the U.S. In the first quarter of 1999, the company processed more than 350,000 tons of aluminum and zinc, up from 290,000 tons processed in the first quarter of 1998.

“Looking forward, we currently believe that our higher processing capacity and cost control programs will allow us to improve IMCO’s full-year 1999 financial results from the record $19.6 million or $1.17 per diluted share earned in 1998,” CEO Don V. Ingram says of the company’s prospects for this year.

A LESS FRENZIED APPROACH

The acquisition atmosphere within the scrap industry in 1997 and early 1998 almost had the feel of a commodities trading floor, with bidders practically shouting to make their offers known.

What seems evident is that those “shouting” to make deals suffered for their technique, while those that backed off during the frenzied bidding stages had balance sheets that were far better prepared to withstand the price plunge that hit the ferrous scrap market.

Some observers are still convinced that another round of rapid-fire acquisitions will occur within the scrap industry as ferrous scrap prices approach a level where margins are more generous.

BT Alex Brown’s Higbee told his audience of ISRI members that though the march toward consolidation had indeed slowed to a crawl, he still sees it as inevitable. Certainly, deals are still being made and the factors that are pointed to as spurring consolidation (mini-mills seeking “reliable” suppliers offering all the tonnage they need; scrap family business owners seeking exit strategies; and investment bankers always looking to garner commissions from setting up acquisition deals) are still very much in place.

Lessons may well have been learned by both company buyers and sellers from the turbulent series of events that took place within the scrap industry in 1997 and 1998.

If not, owners of family scrap processing companies may once again be faced with lucrative offers to “cash out” on terms that seem too good to pass up.

The author is editor of Recycling Today.