September/October 2001
Metal Management Inc. has been from the top of the scrap heap to bankruptcy court and back in recent years. Chairman and CEO Albert Cozzi reviews the firm's trials and where it plans to go from here.
By Kent Kiser
Kent Kiser is editor and associate publisher of Scrap.
For two and a half years—from 1996 to mid-1998—Metal Management Inc. was a business success story extraordinaire.
It began as a single company and ended up as the largest scrap processing company in North America with 50 recycling facilities in 15 states. It also owned a 28.5-percent interest in a Southern recycling company that had 17 processing plants in five states. All told, Metal Management controlled about 5 million tons of ferrous scrap and 627 million pounds of nonferrous scrap a year.
The company's masterstroke came in 1997 when it merged with Cozzi Iron & Metal Inc. (Chicago), one of the premier scrap companies in the country. In this merger, Metal Management gained the expertise of Albert Cozzi, the former president of Cozzi Iron & Metal, who became Metal Management's president and COO.
Such bold moves earned the company a high profile in the trade and national media, with some comparing its name and rollup strategy to a well-known consolidator in the waste industry—Waste Management. Metal Management also quickly became a hot property on Wall Street. Investors jumped on its consolidation bandwagon, sending its stock price skyward. The company—and the scrap industry consolidation trend—seemed unstoppable.
Even when scrap market conditions started sinking in 1998, Metal Management fared better than its main consolidation rivals—Philip Services Corp. and Recycling Industries Inc.—both of whom went bankrupt in 1999.
Metal Management faced the tough times by trimming its work force and closing or consolidating some operations, even as it continued to acquire companies. It held on through 1999, battling a tide of red ink and multiple challenges: For one, its founders—Gerard Jacobs and T. Benjamin Jennings—jumped ship. The company also saw its stock price fall precipitously. NASDAQ threatened to delist the firm from its national market in 1999 for failing to meet one of six listing requirements. The company responded by transferring its stock to the small cap market in June 1999.
Depressed market conditions persisted through 2000, but Metal Management survived against all odds. Finally, on Nov. 20, 2000, the burdens became too great and the company sought Chapter 11 bankruptcy protection. Soon thereafter—on Dec. 29—NASDAQ delisted the firm's stock from the small cap market, bringing to a close Metal Management's amazing consolidation run.
The company didn't give people long to bemoan its fate, however. On June 29, 2001—seven months and nine days after it declared bankruptcy—the reorganized Metal Management was born. According to Al Cozzi, the firm's bankruptcy filing was a "strategic tool that allowed us to efficiently recapitalize the company."
And recapitalize it did.
The reorganization plan—which Metal Management says received the "overwhelming support" of its creditor constituencies—called for approximately $215 million of debt to be converted into common stock of the reorganized company. About $4 million of other prepetition debt was slated to be paid out at a discount over time. The firm's restructuring reportedly reduced its annual debt-service obligation by about $18 million. Additionally, through reduced bank borrowing, Metal Management reduced its interest expenses by another $4 million. The firm's total annual interest expenses declined from nearly $40 million to $15 million. It also entered into a new credit agreement with its existing senior lenders, giving it $150 million of borrowing capacity.
Today, Metal Management is a slightly pared-down version of its pre-bankruptcy self, with 40 recycling facilities in 14 states and estimated annual revenues of about $800 million on sales of 4.4 million tons of ferrous scrap and 567 million pounds of nonferrous scrap. Its stock is now traded on NASDAQ's OTC bulletin board under the symbol MTLME.OB.
Cozzi, unbowed by the firm's trials, asserts, "We are positioning our company to make money in any type of market condition by reducing operating expenses and inventory levels." He's still a believer in consolidation, stating that one of Metal Management's missions is to "prove the basis for industry consolidation with a rational capital structure, lower fixed costs, and strong regional management teams."
Will the new Metal Management prove that point and succeed in the long run? For some insights, Scrap called on Al Cozzi, the man who has seen the company through its storm and emerged on the other side to tell the tale.
In 1997, you were president of Cozzi Iron & Metal, one of the premier privately owned scrap companies in the country. Why did you decide to merge Cozzi with Metal Management?
Cozzi Iron & Metal had been involved in consolidating the Chicago market for many years. Over the previous 10 or 12 years, we had acquired and consolidated probably 25 companies in the Chicago market, and we believed that the industry was ripe for consolidation, very much like the waste industry. We were positioning ourselves to take the company public to gain access to public capital and have the liquidity and cash availability that going public would provide. We felt that taking the company public would also enable us to acquire other scrap companies across the country.
As we were doing this, we expanded outside of our region as well, opening scrap operations in Wisconsin and Pittsburgh and partnering with existing companies in Memphis and Phoenix. Part of our goal was to create a system of operation and control that we could transplant into other strategic markets in preparation for consolidating the industry on more than a local basis, moving from local to regional and ultimately to national.
While we were interviewing investment bankers about taking Cozzi Iron & Metal public, Metal Management, Recycling Industries, and Philip Services were already public companies that were consolidating the industry. At the time, we felt that we could consolidate the industry faster if we partnered with Metal Management than if we continued to do it on our own.
After Cozzi Iron & Metal merged with Metal Management in 1997, the company continued to grow quickly through multiple acquisitions. The consolidation trend was in its heyday at that time. When did you start noticing problems in the market and what were they?
In 1998, there was a confluence of a lot of factors. You had the Asian crisis, the Latin American crisis, the Russian crisis, and the steel industry starting to go into the tank. That's when the markets started to deteriorate and fall apart, and exports of scrap metal from the U.S. began to dry up.
Aside from those market changes, which were out of your control, did Metal Management overpay for some of its assets?
In retrospect, yes, we did overpay for a lot of the assets we acquired. There was a feeding frenzy going on. All of the consolidators were trying to get their base in place. Everybody was out competing for acquisitions, and they were using very high multiples of results on very good years. Metal Management was no different. We paid the prices the market required us to pay for acquisitions, prices that proved in hindsight to be unprofitable. The good news was that we purchased a lot of the "Cadillac" companies in the industry.
What finally made you decide to seek bankruptcy protection?
It was a combination of a bad market and a bad balance sheet. Metal Management has acquired good companies with good management in good, important locations. Our company has strong customer bases on the supply side and the sell side. But we faced the combination of the poor market and the problems that the steel industry was going through, with its own bankruptcies and the risks involved in dealing with that industry. Coming off of the acquisitions we had done, we just had too much debt, so it was necessary for us to restructure that debt into equity. Having done that, we ended up emerging with a very strong balance sheet and significantly lower fixed costs.
Was it a difficult decision—personally or professionally—to file for bankruptcy?
Personally, it ends up being devastating for the original shareholders because we've given up all of our equity to extinguish the debt. A lot of people lost a lot of wealth in the original Metal Management, but we really didn't have a choice. Faced with the kind of interest burdens we had, we had to restructure. Now, the original shareholders hold only 1 percent of the equity in the new Metal Management.
On a personal and professional level, it was difficult for everybody. One of the things that Metal Management had going for it—and still has going for it—is that it's made up of a team of people who only know how to win. So it was a bitter pill to have to file for bankruptcy. It's like admitting that you're losing.
That said, I'm very proud of the accomplishments of this team. We were in bankruptcy for a short time. We ended up paying all of our scrap suppliers whatever we owed them, which is relatively unique in bankruptcy proceedings. So, rather than looking at it as a defeat, we—the company, its management, and its employees—are looking at it as a victory going forward.
What were some of the hardest aspects of the reorganization process?
It wasn't that difficult from an operational aspect. We had a huge amount of support from our banks. We had a huge amount of support from our customer base. We had a lot of support from the bondholders as far as restructuring the company. Everybody worked with us to get in, restructure, and get out.
The most difficult thing was to keep the morale up among our employees, to convince them that, yeah, we're going to go into bankruptcy but we're going to come out a lot better. Again, I'm very proud of our managers because they really held the team together. Generally, in bankruptcy, people start looking for other opportunities, but we were able to hold onto our people.
How did the reorganization affect Metal Management's reputation in the market?
That's a difficult question to answer because you have to view it from both ends of the marketplace. From our suppliers' viewpoint, there was a lot of concern whether we were going to survive and whether they were going to get stuck. But our buyers and salespeople assured our suppliers, "We're going to be OK, stick with us." They did, and they ended up being OK. We put together what we called a critical vendor program to make sure that they got paid. So I think we've enhanced our credibility, by and large, with our suppliers.
On the consumer end, initially they were concerned how consolidation in the scrap industry was going to affect them. There was a lot of fear and paranoia that it would shift the balance of power. They discovered, though, that the consolidation was benefiting them. Rather than having to deal with a fragmented industry that was historically made up of speculators and gamblers, they were able to deal with companies whose philosophy was to buy scrap, process it, and sell it. After a while, they came to realize that, rather than costing them money, consolidation in the scrap industry was providing benefits to them, reducing their cost, and reducing the volatility of the market.
After we went into bankruptcy, I think that some of our consumers feared that we weren't going to emerge and it would be disruptive to the supply base. They started to see the benefits of consolidation and were afraid that, if we weren't able to pull it out, the industry could become more fragmented.
| A Metal Management Chronology
1996—Investment bankers Gerard Jacobs and T. Benjamin Jennings purchase a 27-percent share in General Parametrics Corp., a publicly traded manufacturer of computer printers and related consumables. They subsequently gain control of the company in a narrowly won proxy fight. Jacobs and Jennings change the company's name to Metal Management Inc., acquire scrap processing company EMCO Recycling Corp., sell off the company's computer-related business, and move the firm's headquarters to Chicago. 1997—Metal Management acquires seven scrap corporations, including large entities such as the MacLeod Group of Cos., Reserve Iron & Metal, the Isaac Group, Proler Southwest, and Cozzi Iron & Metal Inc. Albert Cozzi, former president of Cozzi Iron & Metal, becomes the firm's president and COO.
1998—Metal Management purchases 16 scrap companies, including such entities as Goldin Industries Inc., Naporano Iron & Metal Co., Michael Schiavone & Sons Inc., M. Kimerling & Sons Inc., and PerlCo L.L.C. 1999—Metal Management acquires a 28.5-percent interest in Southern Recycling L.L.C. in February. That same month, Gerard Jacobs leaves Metal Management, creating a holding company that purchases the company's aluminum hand-forging operation, Superior Forge Inc. NASDAQ threatens to delist Metal Management from its national market for failing to meet one of six listing requirements. The company transfers its stock to the small cap market in June. T. Benjamin Jennings exits the company in July. Despite market conditions, Metal Management continues its acquisitions, buying Metallico/Hartford Inc. dba Stanley Sack Co. and National Metals Co. Inc. Michael Tryon, formerly president of Harris Waste Management Group Inc., joins Metal Management as president and COO. Albert Cozzi retains the positions of chairman and CEO. 2000—Metal Management closes its stainless steel facility in Heidelberg, Pa., consolidating that business into its operations in Elizabeth, Pa. The company signs a three-year exclusive supply agreement to purchase all the ferrous scrap processed by Rose Metal Recycling Inc.'s facility in Houston. In April, MetalSite L.P., Philip Services Corp., and Metal Management launch ScrapSite.Net, a scrap e-commerce marketplace. Metal Management files for Chapter 11 bankruptcy protection on Nov. 20. NASDAQ delists Metal Management's stock on Dec. 29. 2001—In early June, ScrapSite.Net halts its scrap e-commerce operations. Metal Management's common stock is traded on NASDAQ's over-the-counter market under the symbol MTLME.OB. On June 18, the United States Bankruptcy Court for the District of Delaware approves Metal Management's plan of reorganization. The company emerges from bankruptcy protection on June 29. |
How has the bankruptcy experience changed your strategies for the company?
In not a lot of ways. Metal Management's founders believed that the scrap business needs to be decentralized, with all decisions made locally. I'm a big believer in decentralization, but I also believe we have to be one company. So we've been devoting a lot of our time toward getting the whole company on the same systems and centralizing freight, insurance, and administrative functions to free the plant managers to buy scrap, process it, and ship it. We want the managers to run their operations as entrepreneurs, but sales, finance, and transportation arrangements can be centralized and coordinated.
Do you have any plans to sell any of your assets, or are you in any position to buy anything at this point?
We're going to work on continuing to shore up our balance sheet. Obviously, in this kind of market, anything that's for sale tends to be sold at an attractive price. So if the right deal comes along, we're certainly looking, though we won't be making any major moves in the near future.
As far as selling assets, we don't have any immediate plans to sell any operations other than property that has become redundant through our consolidation process.
Having said that, we do own some facilities that don't fit our core strategy as well as others, and some of those facilities might be worth more to others than they are to us. If there's a deal where somebody is interested in a facility at a price that makes it worth more to them than to us, we would look at it. Currently, though, we have nothing on the market to be sold.
The reorganized Metal Management has been born into a difficult market, yet you've stated that you expect the company to be profitable in fiscal 2002. How will you achieve that goal?
Through several ways. Selling off some of the redundant properties will raise cash to help us further reduce debt. We have reduced our total debt load from almost $400 million to $150 million. Consequently, our interest payments have gone down by $2 million a month. Also, we've taken an additional $2 million a month out of our cost structure—$1 million out of variable costs, $1 million out of fixed costs. In addition, writing off the goodwill and restating the values of assets through fresh-start accounting will save $1 million a month of amortization and depreciation expense. So we need to make $5 million a month less to be profitable than what we had to make in the past.
Even as bad as things currently are in the scrap business, we've performed well and emerged from bankruptcy. We expect to be profitable in our current quarter ending September 30.
Early in 2000, Metal Management helped launch ScrapSite.Net, which ceased operations this June. Do you still see scrap e-commerce as a viable business?
I do. The problem was that none of the scrap e-commerce sites were able to develop the functionality needed to ultimately be successful.
For the items we were selling as a reverse commodity, e-commerce streamlines the process for both buyers and sellers and enhances the value that the seller gets. I never was convinced that it would work for selling ferrous scrap. It has already worked well for nonferrous scrap, and we're excited that we've developed some modest technology to continue to sell under that format. Hopefully, we'll soon be marketing that material in a better functionality through our own Web site.
One scrap executive has asserted that "the problem in the U.S., to a large degree, is the lenient bankruptcy laws." The laws are unfair, he said, because they allow bankrupt companies to continue, minus a large portion of their debts, and unfairly compete with other nonbankrupt companies. What's your take on that?
Certainly I've suffered the same frustrations as he has. There's a major difference in the bankruptcies of Metal Management and Philip Services compared with the steel industry. We paid our suppliers. In most bankruptcy cases, the ones who get hurt are the suppliers. In our case, the ones who got hurt were the equityholders, and those are the ones who should get hurt.
The executive who made that comment has been hurt dramatically—like many other scrap executives—by the steel industry's bankruptcy problems. It used to be that, if a steel company went bankrupt, it had a lot of loyalty to its suppliers. Now, if they go bankrupt and you've lost a lot of money with them, they make you feel as if it's your fault and that they're going to reorganize and not favor you with any more business. The old loyalty isn't there.
Another scrap executive has stated that consolidation has been a "failed exercise." What's your opinion on that?
Consolidation didn't fail. Some of the consolidators failed, especially those that came in from outside the industry. Still, there are a lot of scrap firms that are actively engaged in growing their businesses and consolidating the industry on the local, regional, and national levels. I think that will continue.
Have you ever looked back and regretted your decision to go from private to public? Do you ever long for the old Cozzi Iron & Metal days?
It's pretty difficult not to second-guess myself in view of what we went through. Hindsight is always 20/20, but you can't live in the past. You have to prepare for the future. If we hadn't sold to Metal Management, Cozzi Iron & Metal could have prospered or it could have suffered. Who knows? The fact of the matter is we did sell to Metal Management, and Metal Management—along with many others in the industry—had difficulties. It's our job to work through that and make sure we're creating shareholder value going forward.
How do you feel about the company's prospects from here?
I think our prospects are very bright. Now, the industry is weak with a lot of weak players, but I can remember an economics professor I had at the University of Chicago who used to say that the only cure for high prices is higher prices, the only cure for low prices is lower prices, and the only cure for bad business is bad business. There will always be a scrap industry in this country. As bad as the steel industry is and as much as it's suffering, there will always be a scrap industry, scrap will continue to be generated, and we'll be recycling it.
Metal Management is in a good position to participate in the scrap industry in the future because of our locations and the strength of our balance sheet. No matter how low metal prices get and how bad business conditions are, the scrap industry has to learn how to be profitable in any kind of market—and Metal Management has learned how to do that. •
Metal Management Inc. has been from the top of the scrap heap to bankruptcy court and back in recent years. Chairman and CEO Albert Cozzi reviews the firm's trials and where it plans to go from here.