January/February 1998
The scrap industry is undergoing massive consolidation that’s ushering in a new age of public conglomerates that offer scrap processing services and more. What does this trend mean, and when will it all end?
By Robert L. Reid
Robert L. Reid is managing editor of Scrap.
NEW YORK—The three largest scrap companies in North America—which seem intent on buying every firm in their industry—stunned Wall Street today by simultaneously announcing plans to acquire each other. Financial analysts were unsure how this megadeal would be structured but speculated that it must involve about a zillion shares of common stock ...
OK, so things haven’t gone quite that far. Yet.
But in the past few years—and especially in 1997—a handful of companies have been consolidating the scrap industry at a frenetic, unprecedented pace. Consider this: As of early 1997, the three most active consolidators—Metal Management Inc. (Chicago), Philip Services Corp., then known as Philip Environmental Inc. (Hamilton, Ontario), and Recycling Industries Inc. (Englewood, Colo.)—had purchased some 16 scrap companies in roughly four years. As of mid-December, these three had added at least 30 more firms to their scrap holdings. (For a list of their acquisitions, see “Consolidation Scorecard” on page 42.)
And these three aren’t the only consolidators. The past year and a half has also seen Commercial Metals Co. (Dallas) sign an agreement to buy Sun State Recycling Inc. and its affiliates, as well as acquire Glosser Metals, Odessa Metals Inc., and Edinburg Iron & Metal; David J. Joseph Co. (Cincinnati) ink a contract to purchase Yorke Doliner Co./Daytona Salvage Co.; Schnitzer Steel Industries Inc. (Portland, Ore.) acquire Proler International Corp.; Simsmetal America (Richmond, Calif.) gain Peck Recycling Co.; and Imco Recycling Inc. (Irving, Texas) purchase Alchem Aluminum Inc., Rock Creek Aluminum Inc., and Imsamet Inc.
In addition, some of the acquired companies had previously done some acquiring of their own. Consider Steiner-Liff Metals Group, which purchased its neighbor—M. Cohen Iron & Metal Co.—shortly before being bought by Philip Services. And Mindis Metals Inc. purchased Berman Brothers Iron & Metal Co. last summer before joining Recycling Industries.
This consolidation trend, which is significantly changing the industry’s character and redistributing companies’ market shares, begs many questions. Why is it occurring, and why now? What does this consolidation mean for acquired companies, those that remain independent, as well as scrap suppliers and consumers? And where will it all end?
Old Story, New Pace
First, it must be said that consolidation isn’t new to the scrap industry.
In years past, private and public scrap companies such as Commercial Metals, David J. Joseph, Imco Recycling, Schnitzer, and Mindis Metals built large organizations in large part by buying other operations.
Plus, what’s happening in the scrap industry is hardly unique. One Washington Post article described consolidation as “Wall Street’s hottest business fad” and pointed to several industries—printing, funeral homes, solid waste haulers—that are the focus of “roll-ups” by larger, public companies.
What is new is the pace of consolidation, with some describing the trend as a “feeding frenzy” and others comparing it to a snowball rolling down a hill. And as the pace of buying quickens, it can take on a life of its own. “People grow more anxious—if they were going to buy someone, they might want to move more quickly,” notes Stephen Wulff, vice president of planning for the ferrous division of David J. Joseph. Wall Street has also noticed the juggernaut nature of the scrap industry buying spree, with one analyst’s report on one of the leading consolidators bearing the headline: “Resistance is futile.”
Adding to the pace of current consolidation is some fear among unacquired companies of “being the last one left standing,” notes Robert K. Waxman, president of Philip Services’ metals recovery group. Thus, it’s not uncommon for the major consolidators to have scrap operators contacting them to express interest in being acquired.
The Heart of the Matter
So what’s behind this acquisition boom?
For starters, the highly fragmented nature of the scrap industry reportedly makes it a prime candidate for consolidation. “We’re made up of thousands of small, family-owned and family-operated scrap businesses,” notes Robert W. Philip, Schnitzer’s president. A conservative count puts the industry at more than 3,000 firms. With that many players, there’s ample room to consolidate operations regionally and nationally to reduce overhead and achieve better economies of scale—and potentially a competitive edge.
Another reason, Philip points out, is that “many of these companies were established in the early 1900s and are now facing family succession and business exit constraints.”
While consolidation certainly gives some processors a succession plan of sorts or the option to cash out, it gives others the chance to stay in the game, share management burdens and expenses, gain access to more capital, expand their purchasing and marketing opportunities, and grow their business as part of a larger entity.
And, of course, these acquisitions wouldn’t be occurring if the consolidators didn’t see the potential for long-term profits and shareholder value in the industry, particularly the ferrous side of the business. It’s no coincidence that the majority of recent purchases have involved ferrous scrap operations, with many including automobile shredders. And no wonder, given the expected growth in scrap-fed electric-arc furnace steelmaking in the future. Today, for example, electric furnaces account for about 46 percent of domestic steel production, but that market share should reach 50 percent in a few years, notes John Correnti, president and CEO of Nucor Corp. (Charlotte, N.C.), a leading U.S. minimill steel producer.
A Public Phenomenon
While most scrap processing companies are privately held businesses, the recent consolidation is a “public” trend—that is, it’s being driven by public companies. Sure, there have been public scrap companies for years—Commercial Metals, Schnitzer, and Imco Recycling, to name a few—but the new public players, particularly Philip Services and Metal Management, have been more aggressive, issuing millions of shares of common stock to finance their purchases.
That’s a significant change from the cash-based purchases that used to be the industry’s norm. For while stock-based purchases make huge amounts of capital available for such transactions, they also carry greater risks, especially if the current strong market for scrap goes bust. That, in turn, raises questions about the prices being paid for some of the acquired companies, prices that some scrap executives consider too high, even prohibitive.
Wulff, for instance, notes that the privately held David J. Joseph has seen companies it might have considered buying priced out of reach.
Ditto for Commercial Metals—the high prices being paid for scrap firms have practically driven it out of the acquisition market. While the company remains interested in acquiring more companies, “it’s becoming more difficult even to look,” says Harry Heinkele, president of the firm’s secondary metals processing division, who adds, “look at the value of these acquisitions. Does it make any logical sense?”
Not according to John Crabb, managing director and CEO of Simsmetal Ltd. (Sydney, Australia), the privately held parent of Simsmetal America. At a company meeting last year, Crabb denounced “acquisitions in the U.S.A. funded through Wall Street, by individuals with little or no experience in the metal recycling business. This irrational approach to industry consolidation has led to the payment of unrealistically high prices and is, in our view, unsustainable.”
At publicly owned Schnitzer, Philip echoes such concerns, noting that “an interesting question is emerging: Will the stock market support further acquisitions financed from stock issuance to pay premium prices for scrap businesses?” As Wulff points out, “the people investing in the scrap industry today—the shareholders putting up the capital to buy the stock—aren’t wedded to scrap” in the same way as someone running the family scrap business. If the scrap market turns sour, such investors might pull their money out and put it someplace else, he says.
One explanation for the reportedly high prices being paid for scrap companies is offered by Gerard M. Jacobs, CEO of Metal Management. As he notes, the stock-based nature of his firm’s recent moves can inflate purchase prices when, as a direct result of the acquisition, the value of Metal Management’s stock increases.
Yet, even though some consolidators concede that the price of scrap companies is generally on the rise, Wall Street has thus far remained bullish on domestic consolidation. At press time, Recycling Industries’ stock had increased 700 percent in 1997, says Thomas J. Wiens, chairman and CEO. As Jacobs adds, “I can’t help it if the stock market applauds these deals.”
But what if Wall Street or the scrap market should stop applauding?
Jacobs isn’t worried. “When you start combining companies, making them more efficient and eliminating duplicated equipment and expenses,” he explains, “they’ll be better-positioned to survive the business cycle than competitors who haven’t done the same.” For instance, now that Metal Management owns Proler Southwest Inc. and Hou-Tex Metals Co. Inc., both in Houston, the company expects to save $6 to $8 a ton by shipping Proler’s scrap on Hou-Tex’s barges rather than sending the material by rail, Jacobs says.
Waxman asserts that Philip Services has “proved time and time again that we know how to buy businesses, integrate them, and gain synergies so that they tend to be more profitable than before.” Plus, he notes, Philip offers diversified services beyond scrap processing and thus has other revenue sources to fall back on. And at Recycling Industries—which prefers to use cash rather than stock for its acquisitions—Wiens says the companies his firm buys have “long track records of profitability, including successfully weathering movements in the markets over the years.” Thus, he expects Recycling Industries to be stronger with its new acquisitions than without.
Many Roads to the Same Goal
While the basic destination of the major consolidators is the same—growth through acquisition—each company is following a distinctly different route to get there.
Philip Services—now considered the largest ferrous scrap processor in North America—views scrap processing as a major service, but not the only service, that it offers its steel mill customers. Waxman uses the term “cross-selling” to describe the firm’s philosophy, which essentially goes: It’s easier to sell additional services to an existing client than to get new clients. For instance, Philip Services recently visited a steel mill whose principal scrap suppliers are Luria Brothers (Cleveland) and Luntz Corp. (Canton, Ohio), both now part of Philip. “We talked about scrap, of course,” Waxman says, “plus $23 million worth of other services—such as slag handling and electric-arc furnace dust disposal—they also want us to supply.”
Philip Services also takes a more worldwide view of the scrap business than other large consolidators, targeting Canada, the United Kingdom, and three regions in the United States—the Northeast, Southeast, and Midwest—for future growth.
As with many of the recent scrap acquisitions, the company tends to leave the existing management in place while helping the firms achieve economies of scale through standardization of activities such as human resources and financial systems.
Philip Services also strives to avoid stifling the entrepreneurial spirit of processors who join its ranks. “It’s not always easy to let go,” Waxman says, adding that he can relate to scrap executives of newly acquired firms because he’s been in their shoes: His family’s company, Waxman Resources Ltd. (Hamilton, Ontario), was Philip’s first purchase in the scrap processing field in 1993.
Recycling Industries, meanwhile, is carrying out the growth plan it developed five years ago. That plan, currently targeting the upper Midwest and Southeast, relies on making strategic acquisitions in major metropolitan areas, followed by additional purchases to fill in and expand in those regions to achieve economies of scale. When the company announced its intent Nov. 4 to buy its first Atlanta-based scrap processor, Central Metals Co., for example, it didn’t take long—only eight days—for the firm to announce that it also planned to buy Atlanta’s Mindis Metals.
According to Wiens, these acquisitions are just the first phase of Recycling Industries’ overall strategy. The second phase will focus on technological advancements, such as finding ways for scrap companies to better use their processing wastes rather than sending them to landfills.
As for Metal Management, stick a pin in a map of the United States for each of the firm’s acquisitions and the pattern will be concentrated in Texas and the Midwest. But that’s only temporary. “Ultimately, we intend to be national,” Jacobs explains. “But we can’t do everything at once. So we’re focusing on metropolitan areas that are the best fit right now.”
In the long run, he envisions a “national family” of Metal Management companies operating in a decentralized environment, with each company considering itself a partner and operating without mandates from the company’s Chicago headquarters.
To that end, the firm is actively seeking input and buy-in from the scrap executives of the companies it acquires. Representatives from leading Metal Management companies, for instance, comprise a new management structure named the office of the president. This group meets approximately every six weeks with the firm’s new president and COO, Albert Cozzi, to discuss company issues. These 15 or so representatives then form task forces to share information about the best practices in areas such as insurance, computer systems, market activity, environmental controls, and other logistical problems.
This decentralized structure—which also designates certain companies as “quarterback” for key regions—allows Metal Management “to have our cake and eat it, too,” Jacobs says. “We’re seeking national approaches through consensus, not something imposed by a couple of guys in Chicago.”
One particular guy in Chicago, however, is key to making the new system work: Albert Cozzi, who helped fill a “big hole” in the company’s organizational structure. As a firm with less than two years’ experience in scrap metal recycling, Metal Management needed someone like Cozzi who already knew “how to operate a scrap company on a day-to-day basis, how to integrate these companies, cross-fertilize the best practices, and get the synergies,” Jacobs says. And with Cozzi taking care of those aspects, Jacobs and T. Benjamin Jennings, Metal Management’s chairman and chief development officer, are free to do what they do best—raise money and negotiate deals.
Assessing the Effects
While the consolidation trend can bring rich rewards to acquired scrap companies, is it the beginning of the end for those that remain independent, especially smaller processors?
Jacobs, for one, stresses that no one is out to corner the scrap market, labeling such accusations as “myth.” Nearly everyone, in fact, believes that there will always be room for small operators, though the going may get tougher for them. Frank Cozzi, Cozzi Iron & Metal’s president and a Metal Management vice president, stresses that the proverbial “mom-and-pop” shops will always have a place in the scrap industry, but for midsized firms “it will make more and more sense to team up with larger organizations that can help them compete.” Likewise, Schnitzer’s Philip notes, “continued access to significant capital for major equipment and facility improvements is a key requirement for the scrap industry. It’s a major hurdle for many family-owned scrap companies, which find themselves worrying more about how to meet the next paycheck rather than growing the business and marketing future growth.”
So how can smaller processors survive in this era of consolidation and megafirms? “Find a niche and service the hell out of it,” advises Sam Hummelstein, president and treasurer of Hummelstein Iron & Metal Inc. (Jonesboro, Ark.). As an example, he points to the financial industry, where big banks bought up many smaller institutions. At the same time, other small banks moved in to service the clients who felt left out by impersonal conglomerates. “We have to see ourselves as problem-solvers who just happen to be in the scrap business,” suggests Hummelstein.
And history shows that the presence of a big company in a region doesn’t automatically mean the demise of other processors in the area. For example, “Commercial Metals is a dominant factor in Texas, yet there are plenty of other processors in the state,” notes Herschel Cutler, senior adviser to ISRI. “You might wonder how they compete against a company that large, but they do—such entrepreneurship and resourcefulness has long been an industry characteristic.”
As for how scrap industry consolidation could affect scrap consumers, Jacobs sees the trend leading to longer-term contracts between processors and big consumers.
One raw materials manager for the automotive industry sounds this alarm, however: “If you have too much consolidation in any given area, especially the ferrous scrap market, you have a real good chance of limiting competition.”
But others, notably Nucor’s Correnti, assert that the scrap industry is too large for one company, or even a handful of companies, to dominate. Plus, he says, there are always scrap complements such as pig iron, DRI, HBI, and iron carbide to keep at least ferrous prices competitive.
At Wabash Alloys (Wabash, Ind.), North America’s largest secondary aluminum smelter, “we don’t know yet if consolidation is good or bad,” says James Diamond, vice president of metal purchasing. “If it leads to centralized management under responsible control and answering to shareholders, that would be all right.” It would not be all right, he states, if it leads to “companies driven strictly by growth, without regard for their responsibility to their industry, such as selling and buying at market prices.”
Will the Snowball Keep Rolling?
After such a frantic year of major mergers and acquisitions, you might expect the trend to slow down, right?
Don’t count on it.
Philip Services, which takes credit for launching the current consolidation boom, expects the acquisitions to continue at least through 1998. Ultimately, 60 percent of the industry will be consolidated by about a half-dozen “very large entities,” predicts Waxman.
Though Recycling Industries has bought some 15 firms in the past four years, it’s not stopping there. “We could double that number by the end of 1998,” says Wiens, who expects his company to eventually control roughly 30 percent of the domestic scrap market. Putting its money where its mouth is, the firm announced in early December that it had obtained $220 million in financing to support its “rapid expansion plans.”
Metal Management also plans to continue growing and is in various stages of negotiation with at least 30 more companies, both large and small. “I don’t see any of us backing off,” Jacobs states. “The binge will go on for many years—we’re just scraping the surface of a huge market. Several major companies will be committing to one company or another within the next 12 months.”
Incidentally, Metal Management’s Jennings predicts that his firm will end up with about a 25-percent market share. Of course, these three won’t be the only scrap companies playing the consolidation game. At the same time that Simsmetal’s Crabb was attacking Wall Street-funded consolidation, for instance, he also announced that his company “will continue to seek out businesses we believe offer value for money.” Likewise, Schnitzer plans to “pursue selective acquisitions and joint ventures or partnerships that are additive to our scrap volume, complement our network of scrap sources, and offer synergistic opportunities for growing the business,” states Philip. And other large scrap players express similar intentions.
What this all means is—hold onto your hat. The wild consolidation ride isn’t over yet.
Consolidation Scorecard
Here’s a list of scrap industry acquisitions made by the three most active consolidators.
*Metal Management Inc.
Emco Recycling Corp. (Phoenix)
MacLeod Group (South Gate, Calif.)
Hou-Tex Metals Co. Inc. (Houston)
Cozzi Iron & Metal Inc. (Chicago)
Reserve Iron & Metal L.P. (Cleveland)
Proler Southwest Inc. (Houston) and Proler Steelworks L.L.C. (Jackson, Miss.)
Gold Metal Recyclers Inc. (Dallas)
Yonack Iron & Metal Co. (Dallas and Little Rock, Ark.)
Yonack Services (Dallas)
Atlas Recycling (Del Rio, Corpus Christi, and Brownsville, Texas)
Spectrum Metals (Houston)
Aerospace Metals (Hartford, Conn.)
Isaac Group (Maumee, Ohio) [which had just acquired Kohart Surplus & Salvage
(Paulding, Ohio)]
Houston Compressed Steel Corp. (Houston)
Goldin Cos. (Gulfport, Miss.)
PerlCo L.L.C. (Memphis)
Salt River Recycling Inc. (Phoenix)
Superior Forge Inc. (Huntington Beach, Calif.)
Philip Services Corp.
Metal Recovery Industries (Hamilton, Ontario)
Recyclage Cote-Nord Inc. (Baie-Comeau, Quebec)
Recyclage d’Aluminium Quebec Inc. (Baie-Comeau, Quebec)
Waxman Resources Ltd. (Hamilton, Ontario)
Cousins Inc. (Painesville, Ohio)
Reclaimers Inc. (Kendallville, Ind.)
Luntz Corp. (Canton, Ohio)
Alcan Aluminium Ltd.’s secondary aluminum smelter in Guelph, Ontario
Roth Brothers Smelting Corp. (East Syracuse, N.Y.)
Allied Metals (Cardiff, Wales)
Conversion Resources Inc. (Cleveland)
Warrenton Resources Inc. (Warrenton, Mo.)
Luria Brothers (Cleveland)
Steiner-Liff Metals Group (Nashville)[encompassing Steiner-Liff Iron & Metal Co. (Nashville), Southern Alloys & Metals Corp. (Knoxville, Tenn.), McKinley Iron Inc. (St. Louis), Shredders Inc. (Birmingham, Ala.), and M. Cohen Iron & Metal Co. (Nashville)]
Southern Foundry Supply Inc. (Chattanooga)
Intermetco Ltd. (Hamilton, Ontario)
BM Metals Recycling Ltd. (Cinderford and Gloucestershire, England)
Reynolds Metals Co.’s Bellwood processing
facility in Chesterfield County, Va.
E. Pearse and Co. Ltd. (London)
Recycling Industries Inc.
Nevada Recycling Inc. (Las Vegas)
Anglo Iron & Metal Inc. (San Juan, Texas)
Mid-America Shredding Inc. (Ste. Genevieve, Mo.)
Weissman Industries Inc. (Waterloo, Iowa)
Addlestone Recycling Corp. of Georgia (Metter, Ga.)
Addlestone International Corp.’s Georgetown, S.C., facility
Jacobson Metal Co. (Chesapeake, Va.)
Grossman Brothers Co. (Milwaukee) [including Milwaukee Metal Briquetting Co.]
Brenner Companies Inc. (Winston-Salem, N.C.) [including Brenner Iron & Metal Co. and Brenner Steel]
United Metal Recyclers (Kernersville, N.C.)
William Lans Sons Co. Inc. (South Beloit, Ill.)
Central Metals Co. (Atlanta)
Mindis Metals Inc. (Atlanta) [including Berman Brothers Iron & Metal Co. (Birmingham, Ala.)]
*Some transactions were pending at press time. •
The scrap industry is undergoing massive consolidation that's ushering in a new age of public conglomerates that offer scrap processing services and more. What does this trend mean, and when will it all end?