Big Steel Merger Coming Up
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Over the past few weeks, the long-anticipated merger between Reliance Steel & Aluminum (NYSE: RS) and Metals USA (NYSE: MUSA) has taken several important steps forward. First announced in early February, the merger values Metals USA at around $1.2 billion and offers considerable value for the company's shareholders and employees. From Reliance Steel's standpoint, it also has the potential to create exciting synergies that may ultimately reduce its operational costs and allow it to increase production in the United States and elsewhere.
As of the second week of March, the "shopping" period during which Metals USA was permitted to solicit alternative takeover bids has passed into oblivion. With the customary regulatory investigation of the deal coming to an early close, there appears to be little standing in the way of the expedient completion of this merger. If all goes according to plan, the deal could be finalized as early as the end of the second quarter of 2013.
About Reliance Steel & Aluminum and Metals USA
Los Angeles-based Reliance Steel & Aluminum is a metal processing company that makes, stores and distributes a staggering array of metal-based products. The company's most popular materials include various aluminum derivatives, alloys, various steel blends, copper, brass, titanium and specialty metals. It also engages in the production and distribution of simple finished products like pipes, tubes, bolts and bars as well as high-quality tools that it makes "to order" for oil drillers, communications firms, manufacturers and other specialized outfits. Reliance Steel operates in North America, Europe, the Middle East and East Asia. In 2012, the company earned $403.5 million on $8.4 billion in gross revenues.
Fort Lauderdale, Florida-based Metals USA is a metal processing firm that focuses on producing basic mechanical and structural components using steel, aluminum, and other pure metals and alloys. The company's products include bars, pipes, bolts, plates, angles, tubes and other items. It also engages in a variety of metalworking services, including shearing, splitting, bending, burning and alloy production. Metals USA deals with clients in the aerospace and construction industries as well as outdoor furniture manufacturers and industrial machinery assemblers. The company earned $52.7 million on gross 2012 revenues of about $2 billion.
Since Reliance Steel and Metals USA operate in many of the same industries, it is only natural to assume that they have some common competitors. In particular, they face stiff pushback from larger firms like Alcoa (NYSE: AA), as well as smaller, more specialized outfits like Worthington Industries (NYSE: WOR).
Of course, Alcoa is far larger than either Reliance or Metals USA. While it produces virtually every basic and finished aluminum product in existence, it does not compete directly with either company's steel-processing operations. As such, Alcoa, Reliance and Metals USA have coexisted peacefully for many years. At the same time, both companies are cognizant of the moves that Alcoa makes due to its ability to influence aluminum prices. Relative to Reliance and Metals USA, Alcoa has a much lover ROA of 1%, versus about 7% for the others.
For its part, Worthington engages in many of the same manufacturing and development processes as Reliance and Metals USA. Specifically, it is a major producer of cold-rolled and hot-rolled steel, as well as various plates and rods. However, Worthington's customer base is a bit narrower than that of either of the parties to this transaction. It deals primarily with the HVAC and outdoor furniture industries. This may be the reason for its higher than average profit margins of over 5%. As such, it does not produce structural steel that competes with the high-end materials that Reliance and Metals USA make.
How the Deal Is Structured
Under the terms of the deal, Metals USA shareholders as of March 4, 2013 will receive cash payments of $20.65 per share. Relative to the company's current share price of $20.63, this deal offers a negligible premium. However, it did provide a premium of more than 18 percent to the company's pre-announcement closing price. Once the deal has been finalized, the newly combined company's revenues will approach $10 billion.
Legal Issues and Complications
Although news recently broke that a law firm had opened a legal investigation into the terms of the deal between Reliance and Metals USA, the merger's success remains all but assured. After all, the company has not traded above its $20.65 offer price in at least two years and has clearly been under-performing relative to its peers. In addition, the FTC recently signaled that it would bless the deal by allowing the customary antitrust waiting period to expire early. Finally, the shareholder vote that has been set for April 10 appears likely to come off without a hitch.
Long-Term Outlook and Possible Plays
Given the volatile nature of the steel and aluminum industries, it makes sense that two mid-sized players like Reliance and Metals USA have agreed to combine. Investors who seek a strategy to play this merger may simply wish to open a long position in Reliance and wait for the merger's synergies to be felt in the company's bottom line. The earnings reports that the company releases over the next few quarters will determine whether its stock will consolidate for some time before moving higher.
In sum, ongoing economic expansion will provide metalworkers with considerable tailwinds over the coming years. Investors who look beyond the small premium that Reliance is paying for Metals USA may well be rewarded for their patience. Of course, all investors must complete their own due diligence before committing to a specific course of action.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!