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).
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
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
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
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.