March/April 1997
With its fragmented nature and potential for profit, the scrap industry offers prime opportunities for outside companies to enter the business through acquisitions. And that’s just what three public entities have done in recent years.
By Kristina Rundquist
Kristina Rundquist is an associate editor of Scrap.
Any recycler who has read industry trade publications in the past few years has undoubtedly come across the names Philip Environmental Inc., Recycling Industries Inc., and Metal Management Inc.
These firms have been in the news a lot thanks to their frequent and seemingly unending acquisitions of existing scrap processing operations. Together, in fact, these three companies have purchased around two dozen recycling firms since 1991, more than half of these in the past two years.
While consolidation is nothing new to the scrap industry, what is different is the nature of these new players—all public entities—and their goal of steadily establishing regional, and perhaps national, processing networks.
While some see these entrants as positive new players in the market, providing efficient and economical sources of scrap and other services, critics view them as a competitive threat, even the beginning of the end for family-owned processing operations.
Here’s an introduction to these three aspiring scrap recycling giants, with a look at their plans and what they could mean for the industry.
Reviewing the Players
First, meet Philip Environmental, a Hamilton, Ontario-based conglomeration of resource recovery and industrial service operations, including—of course—a handful of scrap recycling facilities. The firm, in fact, claims to be the largest cable and wire chopper in North America.
Philip Environmental’s current size belies its humble roots as a small family business. It was in 1965 that Enzo Fracassi moved his family from Italy to Canada and set up his own waste hauling business, removing sand and scrap from steel mills and foundries. His sons, Allen and Philip, joined the firm in the late 1970s, and though the company later faltered, they secured loans that enabled it to get up-and-running again as a steel-mill sand hauler—and scrap recycler on the side. As the story goes, the brothers wouldn’t take the sand straight to the landfill, but instead would take a slight detour to their backyard, where they would sift through the sand and pull out scrap to be resold.
Fast forward to 1990. Lincoln Capital Corp., a Toronto-based merchant bank that owned a nearby landfill, purchased the company, which by then was called Philip Enterprises Inc. Both Allen and Philip stayed on in management positions and in 1991 Lincoln changed the company’s name to Philip Environmental. Later that same year, when St. Lawrence Cement Inc. (Montreal) purchased a minority share of the by-then public company, it finally had the necessary capital to begin acquiring companies with guns a-blazing.
And acquire it did. In the ensuing three years, Philip Environmental—led by Allen as president and CEO, and Philip as COO—purchased more than 20 companies to the tune of $290 million, including two Quebec-based aluminum dross processing operations. Still, the firm had not ventured full-force into the scrap business.
That all changed in the fall of 1993 with the purchase of Waxman Resources (Hamilton, Ontario), a processor of scrap wire and cable, and the subsequent acquisition of oil and solvent recyclers Burlington Environmental Inc. (Seattle) and Nortru Inc. (Detroit). The purchases more than doubled Philip Environmental’s assets and gave it a solid footing in the scrap business.
Since then, the company has acquired a legion of North American scrap processing operations and recently took its first foray into Europe with the purchase of Allied Metals (Cardiff, Wales), one of the United Kingdom’s largest steel scrap processors and mill service operations. (See “Who Owns What” below for a complete listing of the scrap acquisitions of these three companies.)
About the time Philip Environmental was purchasing Waxman Resources, another company—Environmental Recovery Systems Inc. (ERS) (Englewood, Colo.), an environmental technology firm—also happened to be venturing into the scrap business. Company founder Tom Wiens had set out to capitalize on the growing interest in recycling and to that end, he developed more than 200 patent claims to process municipal solid waste through recycling and composting, with the eventual goal of establishing turnkey recycling systems nationwide.
Wiens found, however, that few wanted to have a solid waste processing plant in their region, let alone their backyard. And when he instead looked into purchasing existing solid waste processing plants, he discovered that licensing was considerably more difficult and costly than he had expected. It was at this point that he turned his attention to opportunities in the scrap metal recycling business. Since then, the company—which was named Recycling Industries in 1995—has been on a virtual buying spree, acquiring all or part of a number of scrap entities.
Of these three new players, the newest entrant onto the scrap scene is Chicago-based Metal Management Inc. The company was founded in early 1996 by Gerard M. Jacobs, president and CEO, and T. Benjamin Jennings, chairman and chief development officer, who prior to becoming scrap moguls were investment bankers. Through a shared client—USA Waste Services Inc. (Houston)—they learned the benefits of consolidation firsthand. So when their client’s chairman developed an interest in an Arizona scrap processor, they and several investors went looking for a public vehicle through which to acquire the recycler.
They found such a vehicle in General Parametrics Corp. (Berkeley, Calif.), a computer printer manufacturer whose chairman and majority shareholder wanted to retire. After acquiring a 27-percent share of the company and later gaining control in a narrowly won proxy fight, the new owners proceeded with their plans to purchase the Arizona processor—Emco Recycling Corp.—for $12.8 million and promptly sold off General Parametrics’ other holdings. Thus, a new scrap recycling entity was born. And to reflect the firm’s new focus on the scrap industry, the principals changed its name to Metal Management.
In addition to the Emco purchase, the company has made other acquisitions, including the ferrous, nonferrous, wire chopping, and plastic recycling and trading operations of the MacLeod Group (South Gate, Calif.) and Hou-Tex Metals Co. Inc. (Houston), a scrap metal processor.
Why Scrap? Why Now?
That explains how these three companies entered the scrap recycling industry. Of more importance perhaps is why they targeted the industry in the first place.
One reason is that the scrap industry is “shockingly decentralized and fragmented,” according to Paul Higbee, managing director of B.T. Securities Corp. (New York City). This disjointedness not only gives outside interests the opportunity to gain a foothold in the business, but also makes it relatively easy for them to do so.
The scrap industry also holds out the opportunity to make an attractive profit, at least during up cycles and times of expanding consuming capacity. For instance, the proliferation of new minimills—both domestically and internationally—has created and will continue to create new demand for ferrous scrap. “A lot of people within and outside the industry believe that the economic time is right for an active level of consolidation,” says Higbee.
Add to these enticements the fact that some family-run scrap firms are having difficulty passing their business to the next generation, and you have a situation ripe for acquisition by outside companies. As Jennings observes, “Many recyclers who have been in business for years are now looking to transition their business, but how do they do that if they don’t have a legacy they want to leave the business to?” This situation, he notes, has created not only opportunity but—in some cases—an outright need for acquisitions in the industry.
While private scrap companies are perfectly able to make such acquisitions—and have, in fact, accounted for much of the industry’s previous acquisitions—public companies such as Philip Environmental, Recycling Industries, and Metal Management reportedly have some advantages over private firms. To name just one, there’s the ready access to capital through public stock offerings. “As far as capital goes,” Jennings notes, “private companies just don’t have the same access.” Adds Higbee, “It’s no coincidence that the more active acquirers are the ones that are publicly held.”
And to hear these three players tell it, their recent spate of acquisitions have largely been friendly takeovers. In some instances, they claim, scrap companies have come to them, actively seeking to be acquired. Metal Management, for one, is frequently approached by investment bankers with clients wishing to sell their companies. “We’re getting unsolicited phone calls,” Jacobs says. “There’s a tremendous amount of discussion going on. There’s probably not a scrap company president to whom the idea doesn’t occur at least once a month.”
Building a Scrap Network
Though these three new players have been purchasing scrap operations at a furious pace, they haven’t been doing so indiscriminately. Each firm has strict criteria for determining which companies are prime candidates, as well as an overarching strategy behind their acquisitions. “We’re not hit-and-miss,” says Robert Waxman, president of Philip Environmental’s metals recovery group. “We look at all situations intensely.”
As for what Philip Environmental looks for in its acquisitions, Waxman notes that the company usually seeks “large industrial-based businesses with long-standing reputations in the industry so we can attempt to cross-sell our existing services.”
For its part, Recycling Industries seeks “successful companies that have established a strong position in a locale, with good management in place that will add to the companies we already own,” notes Mike Price, president and COO. His company is not, he asserts, in the business of buying ailing companies and turning them around.
Metal Management’s “ideal company,” meanwhile, is one with “an enthusiastic and successful management that has an interest in growing the company into a leading consolidator in the region,” Jacobs says, adding that “an excellent candidate would be an anchor tenant in a metro area.”
In addition to these criteria, the three companies generally select their acquisitions based on strategic geographic considerations and their desire to establish regional—and perhaps national—networks of processing operations. The ultimate goal is to achieve competitive economies of scale and easy access to suppliers and consumers across North America.
Recycling Industries, for example, has “a growth strategy to become one of the largest operators and providers of scrap metals to the United States marketplace and will continue to acquire companies to meet that goal,” Price notes. Already, the firm’s acquisitions have given it operations in the South, Southwest, and Midwest.
Metal Management has a similar objective as it strives to build a national franchise of scrap metal operations. “We have no plans in the near future to be a major player in plastics, glass, or paper, but we are looking at becoming a significant player in ferrous and nonferrous scrap in a number of metropolitan areas,” Jacobs says. “That’s our vision. We have big plans within our horizon of scrap metal companies.”
Philip Environmental has taken that a step further and is looking to be a one-stop shop of sorts, offering its customers a variety of complementary services ranging from environmental consulting to recycling and emergency cleanup. Its segue into the scrap industry has reportedly allowed it to fill in the gaps in its services. Accordingly, the company strives for acquisitions that complement its existing firms and provide a boost to its share value. “We’re trying to acquire operations prudently,” says Waxman, “and attempting to grow the metals recovery business while other divisions each become interdependent for customers and clients.”
Interestingly, all of the ambitious expansion activities of these three new players haven’t included establishing one single greenfield processing operation. Why? “Because in the scrap business,” Price explains, “it takes a very high capital to build plants from scratch—and that’s assuming you can get the necessary permits.”
Further, not only does starting from the ground up require a great deal of time and startup capital, but that approach erases the very advantage of purchasing an established firm—its client base and, in many cases, experienced management. “Any potential acquisition of ours will have a long history of dealing with steel mills and a large industrial base,” says Waxman, noting that these attributes “are inherent in some long-standing family businesses.”
And far from dismantling the existing management structure of their acquisitions, these players often prefer for the previous management to remain in place, viewing such continuity and experience as invaluable assets. Notes Waxman: “We’re not so sure we’d be interested in acquiring a family-run business if some of the integral players didn’t stay on.”
It’s not always possible, however, to retain the previous management, as some executives choose to leave of their own volition. Also, there are always potential difficulties in assimilating a traditionally family-based management structure into a larger, public corporate entity, Waxman notes.
No End in Sight
In the end, what does the emergence—and gaining momentum—of companies such as Philip Environmental, Recycling Industries, and Metal Management mean for the scrap industry?
For certain, they represent a new force that will perpetuate the industry’s ongoing consolidation and rationalization. And if their growth goes according to plan, they could become significant regional and/or national processors, with potential competitive implications for other recyclers. Higbee, for one, believes the industry “will see a larger number of regional players being built,” driven by the opportunity to “take advantage of economies of scale and cost savings by combining different players in a specific market.”
One point that these public players all agree on, however, is that they’re not out to drive existing recyclers out of business. As Waxman remarks, “There’s no limit to anything we’re doing, but no one here is looking to become the busiest one in the graveyard.”
Another burning question is whether these aspiring scrap Goliaths will continue building their companies at such a furious pace? The answer, it appears, is a resounding “yes.”
“Of all the acquirers I’ve talked with, none has plans to stop,” says Higbee. “And if they do have plans to stop, they haven’t gotten anywhere near the end yet.”
Who Owns What
Metal Management Inc.
Emco Recycling Corp. (Phoenix)
MacLeod Group (South Gate, Calif.)
Hou-Tex Metals Co. Inc. (Houston)
Philip Environmental Inc.
Metal Recovery Inc. (Hamilton, Ontario)
Recyclage Cote-Nord Inc. (Baie-Comeau, Quebec)
Recyclage d’Aluminium Quebec Inc. (Baie-Comeau, Quebec)
Waxman Resources (Hamilton, Ontario)
Burlington Environmental Inc. (Seattle)
Nortru Inc. (Detroit)
Cousins Inc. (Painesville, Ohio)
Reclaimers Inc. (Kendallville, Ind.)
Luntz Corp. (Canton, Ohio)
Alcan Aluminium Ltd. (Guelph, Ontario)
Allied Metals (Chepstow, Wales)
Instel Southwest L.P. (Houston)
RMF Global Inc. (Toledo, Ohio) (pending)
Recycling Industries Inc.
Nevada Recycling Inc. (Las Vegas)
Loef Co. (Athens, Ga.) (20-percent share)
Anglo Iron & Metal Inc. (San Juan, Texas)
Mid-America Shredding Inc. (Ste. Genevieve, Mo.)
Weissman Iron & Metal Inc. (Waterloo, Iowa) •
With its fragmented nature and potential for profit, the scrap industry offers prime opportunities for outside companies to enter the business through acquisitions. And that’s just what three public entities have done in recent years.