CHICAGO Reliance Steel & Aluminum Co. has consistently tried to grow the value-added, high-margin component of its business. Now its doing so with its acquisition choices, but its paying more in the process.
Earlier this month, for example, Reliance bought Houston-based National Specialty Alloys LLC (NSA), a multibranch processor and distributor of stainless and nickel alloy bars and shapes, Reliance chairman and chief executive officer David H. Hannah said during a conference call. NSA sells to energy, aerospace, utility and other markets.
Reliance last August also acquired Spring, Texas-based Continental Alloys & Services Inc., which distributes steel and alloy pipe, tube and bar, and makes custom well-completion tools.
During the first quarter, Los Angeles-based Reliance saw its average selling price increase "partially due to a shift in our product mix," according to executive vice president and chief financial officer Karla Lewis, who cited Continental Alloys sales as a contributing factor.
"There are more acquisition opportunities out there. Were busier this year looking at opportunities," Hannah said. "We expect that will continue and perhaps even accelerate as business gets better."
Reliance leaders frequently learn about "companies we didnt know existed that (earn) $100 million or $200 million in revenue," he said. "You just have to maintain relationships and be in the right place when those owners want to talk."
Reliances entry into the energy market helped it widen its pool of candidates, Hannah said. "When we acquired Continental Alloys, it put us in front of a group of companies that dont necessarily view themselves as service centers (but) as being involved in the pipe and tube and oil services business," he added.
"NSA was one that didnt really run around in service center circles, but because of our Continental acquisition we popped up on somebodys radar there," Hannah said. "So the pool of industries in which we are recognized has expanded. Thats been a benefit for us and will continue to be."
Because the growth trend for the energy market is upward, "we have paid, and most likely will pay at the higher end of a normalized range of multiples than we typically paid in the past," he said. "Not many pure service centers are at a six times Ebitda (earnings before interest, taxes, depreciation and amortization), but some of these energy-related companies were at six or maybe just slightly over that."
Commonly, "you could look at revenues of a typical service center, and equity purchase price was 40 to 50 percent of that. For these higher-value-add companies, (however), their returns could easily be 50 to 60 percent higher," Hannah said.