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FULL OF SCRAP ‘If you can’t run with the big dogs, stay on the porch’

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Not too many years ago, I received a decorative license plate holder as a birthday gift. It bore a picture of an old hound and the words "If you can't run with the big dogs, stay on the porch." Perhaps it was a critique of my feeble attempt to recapture my youth by jogging. The plate is gone, as is my wish to stay in shape by running. Shin splints and exhaust fumes killed that.

But the admonition about keeping up with the big dogs has stayed, tucked away in a back pocket of my memory. It came to mind a few weeks ago after Metal Management Inc. (MMI) and Sims Group Ltd. announced their plan to partner up and become the big dog in the scrap industry—not just here in the United States, but around the world. By their own estimates, together they will be handling some 15 million tons of scrap metals a year, including 1 billion pounds of nonferrous (or roughly 500,000 tonnes of copper, brass, aluminum and other metals).

Michael Marley
Michael Marley
The announcement in mid-September startled many in the U.S. scrap industry. Sims does not have nearly as many Australian rivals to be shocked and awed by the deal, although there was a measure of chauvinistic hand wringing in the Australian press over the shift of management to U.S. shores. The combined company will still be "domiciled" in Sydney, its shares traded on the Australian Stock Exchange (with American Depositary Receipts available to those in the United States that want to own a piece of the combined company), but day-to-day operations will be run from offices in New York.

This is not the first time that Metal Management looked like it was destined for marriage. Shortly after it emerged from bankruptcy five years ago, European Metal Recycling Ltd. (EMR), Britain's largest scrap processor, was eyeing the company. It had acquired 15 percent of Metal Management's shares and even lent money to the company's former chairman to buy shares and possibly sell them to EMR.

Jeremy Sutcliffe, Sims' chief executive officer, provided a simple explanation why he would be yielding the top job to his U.S. counterpart, Daniel Dienst, Metal Management's chairman, president and chief executive officer. The new company needs a chief executive in the same time zone as the company's main area of operation, making "minute by minute" decisions. "I recognize that this business really needs to be driven from North America," he told a reporter for the Sydney Times.

Wherever the company is based, its sales will soon balloon from a little more than $1 billion to several billion dollars a year, regardless of whether you are counting them in U.S. or Australian dollars. Those figures will be big numbers for the scrap metals business, an industry that arose in the past century as mainly a collection of small family owned and operated businesses. Many started with little more than a small lot or garage in a rundown part of a city. Some with even less. One successful secondary aluminum industry executive used to boast that he started in the scrap business "with $500 and a pickup truck."

Where does the industry go from here? Some veteran traders and executives wonder whether this megadeal (at least from a scrap industry perspective) would set off a wave of more buyouts, much as Philip Services Corp. did in 1997 when it acquired Luria Brothers, Steiner-Liff Industries and Southern Foundry Supply, three major industry players, in one swoop. It was seen as a blockbuster deal then and foreshadowed a flurry of buyouts in subsequent months.

Several acquirers have cited one major hurdle the current high prices of both ferrous and nonferrous metals. That price spiral hasn't just affected the value of the inventory on the ground or the metals stacked in gaylord boxes in a warehouse. Most successful scrap dealers aren't just good at evaluating a pile of metal and making a couple of bucks from selling it. They are traders. It's almost a part of their DNA. As a result, most know the value of their own business—its accounts as well as the equipment and assets on the ground—and can even inflate a bit.

This is not to say that companies like Sims, Metal Management and others have not been acquiring scrap companies recently. Three months earlier, the Australians inked a joint venture with Adams Steel, a West Coast shredder operator; Metal Management acquired Detroit-based Mars Industries earlier this year; Alter Trading continues to widen its footprint in the Upper Midwest; and EMR gobbled up four Minneapolis-St. Paul yards to go along with its takeover of Camden Iron & Metal and Southern Scrap's chain of Gulf Coast yards.

The weakness of the U.S. dollar vs. other major currencies has made many U.S. companies attractive takeover targets. Consolidation in the steel industry also seems to have been mirrored by scrap and its other supplier industries. That might be a key part of the next wave of acquisitions. Companies like Commercial Metals Co. and Gerdau Ameristeel Corp. already have scrap-processing facilities as part of their operations; others have newly moved into the scrap business through acquisitions of yards or the addition of shredder plants.

Indeed, some in the scrap trade speculated that Metal Management might be a potential takeover target by a steel mini-mill. Dienst could not comment on such speculation, but a company spokesman noted that he had said in conference calls with industry analysts that Metal Management is a publicly held company and as such is for sale every day.

Perhaps that's why the notion of the old dog lazing on the porch came to mind. If there was another potential suitor eyeing either Sims or Metal Management, they should have been out there running a lot harder.


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