SMU Community Chat: Bankers discuss M&A in metals

Vince Pappalardo has more than 25 years of experience in investment banking. As a managing director and principal at Brown Gibbons Lang & Co. (BGL), he leads the company’s metals and advanced metals manufacturing group. Cleveland-based BGL is an investment bank and financial advisory firm that focuses on the global middle market. (Middle-market companies are typically valued between $10 million and $1 billion.)

Andy Pappas is a managing director at BMO Financial Group, heading up the Metals Lending practice within the US-asset-based lending (ABL) group.

The conversation revolved around the current trend of private-equity groups and strategic buyers acquiring metals companies, with a focus on what drives consolidation and the impact on a company’s valuation.

M&A in metals

Pappalardo mentioned several things when Cowden asked what drives the multiples when determining a company’s valuation for an M&A deal.

A company’s size is important, as buyers are more comfortable knowing that a larger company won’t be going away anytime soon. Smaller companies have lower multiples due to stability concerns.

Also crucial are the company’s closeness with and importance to customers. Who the customers are and the stability of the customer bases matter, he said.

He also highlighted the importance of automation and end markets. More and more he is seeing automated companies commanding higher multiples.

“Automation is something we’re seeing a lot of, but when it comes to multiples, the end market tends to have a very large effect,” he noted.

For example, deals in the aerospace and medical sectors are seeing higher multiples than, say, somebody trading stainless steel into the oil and gas market. “The fluctuation in oil and gas tends to be one that makes people hesitate,” he commented.

Pappalardo mentioned the surprising pace of transactions in the metals industry.

“The baby boomer generation did exceedingly well in building businesses,” he said, noting that the two following generations have shown less interest in owning them, “especially when it comes to dirty or heavier industry where you might have to wear boots to work.”

As a result, private equity groups have been consolidating smaller companies to create synergies and increase margins. This has been happening more in the service center sector, but is also happening on the fabrication side, he said.

He said that service centers have been looking at higher margin fabrication operations, not just blanking and slitting ops, to help them navigate the volatility in steel pricing.

“Really, they are also getting closer to the customers, just like we saw the mills get closer to the customer,” he commented.

Financing middle-market businesses

Pappas’ discourse centered on financing and lending for middle-market and family businesses.

In middle-market business financing and deal-making, he said lenders focus on ownership support, financial performance, and inventory management. He highlighted the importance of management articulating a company’s vision and showing how it handles market downturns. Reliable financial reporting and timely information are priorities, he noted.

Some of the challenges that middle-market businesses can face include bloated inventories, cash flow management, and keeping up with capital expenditures, he said.

He also mentioned some financing options for middle-market businesses, including asset-based lending (ABL) and cash-flow-based lending. Consistency of earnings and asset values are two factors that can affect financing options for metals companies.

Foreign interest

When an audience member inquired about M&A in India, Pappas said, “India is definitely a growth area. We have some customers that are from India and they’re expanding, but, if anything, we see more foreign buyers, including Indian companies, looking to buy into the US.”

Responding to another question from the audience, Pappalardo suggested that Nippon Steel’s pending purchase of U.S. Steel would be good for the industry. Japanese businesses take a long-term view when making decisions and that could potentially help bring some stability to the US market, he commented.

Both gentlemen said there has been more interest from Canadian companies looking to buy in the US than vice versa.

To hear the whole conversation with Pappalardo and Pappas, SMU subscribers can access the replay on our website.

The two will also bring their show live to the SMU Steel Summit on Aug. 26-28 at the Georgia International Convention Center (GICC) in Atlanta. The Summit’s full agenda and additional information can be found on our website.