March/April 2000
The scrap industry rollup that looked unstoppable in 1997 stalled when markets turned south. Here’s what happened to the three most-active consolidators, with a look at the merger trend among scrap consumers and producers.
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
It was the best of times…it was the worst of times.
It was, this time around, not A Tale of Two Cities but rather a tale of two cycles—two dramatic swings in the unforgiving cyclical scrap market.
At its peak, the booming metals markets of the mid-1990s made scrap processing companies so attractive that even Wall Street took notice. A “consolidation craze” swept the industry as a handful of large, publicly traded companies seemed determined to buy every scrap metal firm in sight, in deals often funded by stock swaps rather than cash, and frequently at prices that critics charged were extravagant and unsustainable.
As it turned out, the critics seemed vindicated. The upward cycle turned down again in mid-1998, plunging scrap prices to historic lows and dragging down stock values. Fortunes made—on paper, at least—disappeared. One company reportedly lost more than $3 billion in equity. And when the dust settled, two of the three most-active consolidators had sought bankruptcy protection, while the third teetered on the brink of being delisted from a major stock exchange.
Moving into the new millennium, the cycle appears—for the moment—to be swinging upward again. Commodity prices are recovering. And industry analysts note that many of the factors that drove the earlier consolidations, especially the industry’s fragmentation, still exist. What’s missing is the irrational exuberance of the past.
What’s more, scrap processors are hardly alone when it comes to consolidating. The same trend is happening to a number of scrap consumers and primary producers.
So, what happened? And what lies ahead?
Merger Mania Meets The Asian Contagion
In hindsight, it’s hard to believe the pace of consolidation of just a few years ago. The three leading consolidators—Philip Services Corp. (Hamilton, Ontario), Metal Management Inc. (Chicago), and Recycling Industries Inc. (Englewood, Colo.)—acquired roughly 30 scrap companies in 1997 alone.
And they weren’t the only ones on a buying spree. In that same period, there were also major purchases by Commercial Metals Co. (Dallas), Schnitzer Steel Industries Inc. (Portland, Ore.), IMCO Recycling Inc. (Irving, Texas), Simsmetal Ltd. (Sydney, Australia), David J. Joseph Co. (Cincinnati), and others.
At the time, there seemed no end in sight. As 1998 began, the major consolidators reportedly had lists of dozens more companies to acquire, while analysts predicted that it was “futile” to resist scrap consolidation.Yet there were early signs of trouble as well.
Asia’s financial crisis, dubbed the “Asian contagion,” had sent Wall Street into a near-panic stock selloff in late 1997. And though Wall Street recovered, the ongoing trouble overseas “only added to the uncertainty already prevalent among buyers and sellers on the world commodity exchanges,” wrote Robert J. Garino, ISRI’s director of commodities, in a May/June 1998 article in Scrap.
By the summer of 1998, that uncertainty combined with declining demand from Asia to send scrap prices tumbling across the board. Copper, aluminum, nickel, and stainless steel were unwanted industry leaders in this downward trend. Nickel and stainless prices were at five-year lows by August 1998, while aluminum continued a price drop that had begun late in 1997. Copper, which had plunged from a three-month average LME price of roughly $1.05 a pound in July 1997 to just above 75 cents a pound by July 1998, “set the tone for virtually all other LME-traded metals,” Garino wrote in the September/ October 1998 issue of Scrap, noting that for most market participants that tone was negative.
Even ferrous scrap, which had held its own up to that point, fell victim. Look at No. 1 HMS prices. Starting in August 1998, the price dropped rapidly, ending the year at an average composite of $70.33 a gross ton—roughly half where it had started 1998 and the lowest price in 12 years.
Not surprisingly, the top consolidators of 1997—Philip Services, Recycling Industries, and Metal Management—saw their fortunes follow scrap prices downward.
Philip Services’ Copper Crash
During the first week of January 1998, Robert Waxman, president of Philip Services’ metals group, abruptly resigned. A few weeks later, the company announced it had discovered a “difference between book inventory and physical inventory” in its yard copper business—an area that the firm also announced it was abandoning.
The bad news continued, with the company’s cofounders—Allen Fracassi, president and CEO, and brother Philip, COO—resigning in May 1998. While Philip left the company entirely, Allen remained as executive vice president, then briefly held the CEO title again on an interim basis before leaving the top slot for a second time in August 1999. (He still remains with the company as a consultant.)
And while Philip Services has often been touted as the largest scrap recycler in the world, the company actually tried to abandon that business altogether, putting its metal recycling companies up for sale in June 1998. Six months later, the company decided to hang onto its metals group as part of a debt-restructuring plan that recognized “the ongoing value of these metal operations in a restructured Philip.”
But the woes continued, with Philip Services facing a class-action shareholders’ lawsuit while launching its own $240-million legal action against Robert Waxman and others, as charges and countercharges of fraud and “creative accounting,” of missing copper and misrepresentations, flew back and forth.
Meanwhile, Philip Services’ stock plummeted from nearly $28 a share in September 1997 to just pennies a share by December 1999. At that point, its stock was available only on the Toronto and Montreal stock exchanges, having been suspended from the New York Stock Exchange for nearly all of 1999 and facing the ultimate Wall Street punishment—delisting. All told, Philip Services shareholders lost more than $3 billion in equity, while the company’s debt ballooned past $1 billion.
Philip Services sought bankruptcy protection in both the United States and Canada in mid-1999 and ended the year winning court approval of its reorganization plan in both countries—a move considered the final hurdle to emerging from bankruptcy protection. There were also plans to offer Philip Services’ stock on NASDAQ after the New York Stock Exchange decided to proceed with delisting.
But even as the company took those steps forward, it had to deal with the loss in December of its longtime auditing firm, Deloitte & Touche, which had opposed the reorganization plan.
As the year ended, Philip Services was literally under new management, with Anthony Fernandes serving as president and CEO beginning in September and Frederick Smith named in late December to head the metals services group.
Recycling Industries Fights a Steel Flood
Though once touted as a potential buyer of Philip Services’ scrap metal operations, Recycling Industries instead found itself also plagued with massive losses, plunging stock values, delisting, and the threat of bankruptcy.
The company spent the first half of 1998 acquiring several more scrap processors. But a number of deals—including Mindis Metals Inc. (Atlanta) (later renamed Regional Recycling L.L.C.), Jefferson Iron & Metal Brokerage Inc. (Birmingham, Ala.), Milwaukee Scrap Metal Co. (Milwaukee), and Morris Recycling Inc. (New Albany, Miss.)—ultimately fell through.
Recycling Industries blamed the failure of the Milwaukee Scrap Metal deal, in October 1998, directly on the weak scrap metal market, then trading at 30-year lows. At roughly the same time, the consolidator announced cost-cutting measures that trimmed its work force 23 percent. The company eventually posted net losses of roughly $38 million for the 1998 fiscal year, while its stock (traded on the NASDAQ national market) fell from more than $7 a share in May 1998 to roughly $1 a share by year’s end.
There was more bad news for Recycling Industries in 1999, with rumors flying that the company didn’t have enough cash to buy scrap, while its shredders were said to be processing only metal that was already in inventory.
Then, in late February, Chairman and CEO Thomas Wiens announced that the company would seek Chapter 11 bankruptcy protection. Wiens, the company’s founder, blamed “a flood of imported foreign steel” that had been dumped on the U.S. market for causing an “unprecedented drop in scrap prices and demand.” But he predicted that Recycling Industries had “an excellent chance” of quickly reorganizing itself under Chapter 11.
Within a week, however, Recycling Industries suffered another blow when NASDAQ halted trading of the company’s stock and then delisted it entirely a few weeks later. In May, Wiens resigned abruptly, turning day-to-day operations over to Raymond Lawhon, a turnaround specialist who had become the firm’s president when it filed for Chapter 11.
By summer 1999, Recycling Industries was trying to sell certain scrap properties, closing other sites, and even auctioning off equipment at some facilities. And in a move perhaps more symbolic than substantive, the company that was once praised for connecting its far-flung scrap empire via computers, even shut down its Web site.
Metal Management’s Tumult and Tenacity
Among the three most-active consolidators, only Metal Management emerged from the trouble of the past two years in relative financial health. In fact, throughout the period, the company continued to acquire more companies and launch new enterprises such as a $3-million scrap shipping port in Port Newark, N.J.
But that doesn’t mean the company went unscathed.
As with Philip Services and Recycling Industries, Metal Management saw its stock value fall like an old-fashioned drop-ball from more than $16 a share in January 1998 to slightly more than $1 a share in April 1999.
The company also had to call off its planned acquisition of Universal Scrap Metals Inc. (Chicago) in 1998, as well as its efforts to buy a minority interest (with an option to buy the remaining stock later) in Miller Compressing Co. (Milwaukee). And during a tumultuous five-month period last year, Metal Management lost both its founders—CEO Gerard Jacobs resigned in February while Chairman Benjamin Jennings left in July—and was threatened with delisting by NASDAQ for failing to meet one of six listing requirements for the exchange’s national market.
But despite its falling stock price and substantial losses—nearly $33 million in fiscal 1999—Metal Management never became a terminal case. The company’s “heart has stopped beating but the patient will survive,” said industry analyst Paul Higbee of BT Alex. Brown Inc. (New York City)—now Deutsche Banc Alex. Brown—during ISRI’s 1999 convention in Orlando.
Survival required shedding roughly 15 percent of its work force, closing or consolidating certain operations, even selling off recently acquired businesses such as Superior Forge Inc., an aluminum forging operation that Metal Management bought in March 1998 and then sold in March 1999 to a group of investors led by its own former CEO Gerard Jacobs. But the company dodged the delisting bullet when its stock was transferred to NASDAQ’s small cap market in June 1999. And far from seeking bankruptcy protection itself, Metal Management acquired a company that had been forced into Chapter 11: National Metals Co. (Phoenix).
That purchase came on the heels of other deals such as buying Metallico/Hartford Inc., which does business as Stanley Sack Co. (Bloomfield, Conn.), and acquiring a 28.5-percent interest in Southern Recycling L.L.C. (New Orleans), considered the largest scrap metal recycling operation in the South.
And in a rather unique twist on acquisitions, control of Metal Management was handed over to Albert Cozzi, whose own company, Cozzi Iron & Metal Inc. (Chicago), had been acquired by Metal Management in 1997. At various points during 1999, Cozzi held—sometimes simultaneously—the titles of chairman, CEO, president, and COO.
Ultimately, the management shuffle at the company ended with Cozzi as chairman and CEO and Michael Tryon as president and COO. Higbee, speaking in December at ISRI’s top management seminar, said Metal Management had successfully focused on operational improvements and slower growth, noting that the company’s recent financial performance showed signs of “significant improvement.” (For more on Metal Management, see “‘Cadillac’ Acquisitions” on page 92.)
Not the Only Game in Town
While consolidation of the scrap industry slowed in the past two years, consolidation in other industries—especially scrap consuming and primary production—was alive and well.
Look at aluminum. Last summer saw a flurry of major mergers announced, with the dust finally settling to reveal two global giants poised to dominate. First, Alcan Aluminium Ltd. (Montreal), Pechiney S.A. (Paris), and Alusuisse Lonza Group AG (algroup) (Zurich) merged into a nearly $22-billion conglomerate called Alcan-Pechiney-algroup (APA). At roughly the same time, Alcoa Inc. (Pittsburgh)—the world’s biggest aluminum producer before the birth of APA—fought hard to retain its leading role by merging with Reynolds Metals Co. (Richmond, Va.), thus creating another megacorporation rivaling APA in size.
Regulators must still approve these giant mergers, and industry observers offer varied opinions about the future of aluminum, with some arguing that the deals will bring needed improvements to the industry while others feel they will be anticompetitive.
The world of copper production also shrunk through consolidation last year, with both Grupo Mexico S.A. de C.V. (Mexico City) and Phelps Dodge Corp. (Phoenix) competing to buy Asarco Inc. (New York City), the third-largest U.S. copper producer. Grupo Mexico won the bidding war for Asarco, but Phelps Dodge didn’t surrender its plans for growth—it turned right around and acquired Cyprus Amax Minerals Co. (Englewood, Colo.).
Late 1998 and early 1999 brought several consolidations in the stainless steel industry as well, including Allegheny Teledyne Inc. (Pittsburgh) buying the Lukens Inc. stainless operations from Bethlehem Steel Corp. (Bethlehem, Pa.), Usinor S.A. (Paris) completing its acquisition of J&L Specialty Steel Inc. (Pittsburgh), and Carpenter Technology Corp.’s (Reading, Pa.) acquisition of the Talley Industries Inc.’s (Phoenix) stainless steel group.
Looking at steel, the global producer picture is shrinking through mergers such as Corus (produced when U.K.’s British Steel meshed with the Netherlands’ Koninklijke Hoogovens last year), as well as 1998’s combination of Thyssen-Krupp from German steelmakers Thyssen AG and Fried. Krupp AG Hoesch-Krupp.
And domestically, there has been some activity, such as 1998’s acquisition of Inland Steel (Detroit) by Ispat International (London) and Bethlehem Steel’s acquisition of Lukens Inc. (Coatesville, Pa.).
But there have also been some highly publicized misfires, such as the proposed merger between two West Virginia firms—Wheeling-Pittsburgh Steel Corp. and Weirton Steel Corp.—that fell apart last October. And at presstime, Bethlehem Steel was vigorously fighting a takeover attempt by Wheeling-Pittsburgh’s parent company, WHX Corp.
Will North American steel consolidation happen anytime soon? It’s hard to say—at least on the integrated producer side. But conditions are ripe, industry watchers note, for mergers in the fast-growing minimill sector, despite last summer’s failed merger between Co-Steel Inc. and Slater Steel Inc., both in Toronto.
Paper producers are also engaged in a type of merger mania, led by major consolidations such as 1998’s combination of Jefferson Smurfit Group with Stone Container Corp. to form Smurfit-Stone Container Corp. (Chicago), followed by International Paper Co.’s (Purchase, N.Y.) merger with Union Camp Corp. (Wayne, N.J.), and then just last year Weyerhaeuser Co.’s (Federal Way, Wash.) merger with Macmillan Bloedel Ltd. (Vancouver, British Columbia).
Paper industry analyst Mary Cesar helped explain the current consolation trend in paper at ISRI’s 1999 top management meeting. She noted that 80 percent of institutional investors in a recent survey weren’t interested in the forest products sector for reasons such as overcapacity and poor valuations. But consolidation can make a forest products company more attractive because the buyer is perceived as growing and prosperous—in other words, a “winner.”
Consolidation also has the potential of strengthening the combined companies, reducing product price volatility, creating synergies that can substantially reduce costs, and improving the overall competitiveness of the new organization, Cesar said.
Her conclusions: Consolidations undertaken without clear objectives can damage a company’s stock value. But when mergers are well-planned and executed, they “are an integral part in the restructuring work required for the pulp and paper industry to achieve better returns.”
A Larger or Smaller Scrap World?
So what’s ahead for the scrap industry—more mergers or a future of continuing fragmentation?
So far, the trends favor consolidation.
In 1995, the top-five scrap processors—OmniSource Corp., Commercial Metals, Schnitzer, David J. Joseph, and a collection of smaller firms—accounted for 7 million tons of ferrous scrap annually, or roughly 10 percent of the domestic market, according to Higbee. Today, the major players have changed somewhat, with Philip Services believed to be the largest producer, followed by Metal Management, OmniSource, Schnitzer, and Ferrous Processing & Trading Co., who together handle more than 18 million tons of ferrous scrap annually, or roughly 26 percent of the total market.
Higbee’s conclusion: “With commodity prices stabilized, consolidation will resume, slowly and at lower valuations.” But he also sees scrap consolidation expanding globally, as evidenced by the fact that France’s Compagnie Francaise des Ferrailles (CFF) has established itself as a European leader, while Netherlands-based SHV Holdings N.V. (parent of David J. Joseph) acquired Germany’s largest recycler, the Thyssen Sonnenberg operations.
Cozzi forecasts more consolidation ahead in North America. And even some critics of consolidation—such as John Neu of Hugo Neu Corp. (New York City), who recently described the merger trend as “a failed exercise”—have been known to open up their checkbooks for the right deal. Neu’s own company, for instance, partnered with Schnitzer Steel Industries in 1998 to acquire both New Jersey-based Schiavone-Bonomo Corp. and Tewksbury Industries Inc., which has scrap operations in Massachusetts, New Hampshire, and Maine.
Likewise, John Crabb, managing director and CEO of Simsmetal Ltd., was an early and vocal critic of merger mania. Nonetheless, the new millennium was less than two weeks old when Simsmetal announced plans to acquire Markovits & Fox (San Jose, Calif.) to complement its existing Simsmetal America operations.
So, though it’s hardly the best of times again, we’ll likely be hearing “buy, buy” rather than goodbye when it comes to scrap consolidation. •
"Cadallac" Acquisitions
Why did Metal Management Inc. (Chicago) come out of the recent scrap market downturn in much better financial health than some other consolidators? Because the firm bought “Cadillac companies” in strategically important markets, explains Albert Cozzi, chairman and CEO. Metal Management’s consolidation plan focused on first buying major “platform” companies where shredders existed or could be installed in locations such as Houston, Arizona, Chicago, and the Northeast, he says. Next, the company worked to find other good operations within the same regions to “tuck in” around the platform firms. When scrap prices plummeted, however, Metal Management had to become even more selective in its purchases. During the recent downturn—the worst of five such cycles he’s lived through, Cozzi says—reporting and control measures kept top management aware of each company’s costs, inventory, volumes, and other data on a daily basis, he says, adding that cash became as precious as oxygen.
With scrap markets recovering, Cozzi expects scrap industry consolidation to restart. And the trend is likely to spread beyond scrap processors to consumers such as minimills, he predicts.Metal Management, in particular, will “become more aggressive” at tucking in companies around its existing platform firms, Cozzi says. Plus, the firm might buy additional platform companies in other strategic regions, though none have yet been targeted. —R.L.R.
The scrap industry rollup that looked unstoppable in 1997 stalled when markets turned south. Here’s what happened to the three most-active consolidators, with a look at the merger trend among scrap consumers and producers.