INVESTMENT BANKING

Banks loosen credit, opening options for metal center buyers and sellers

April 2015 - Unless the economy is running on all eight cylinders, uncertainty creeps into forecasts of how the typical service center business is going to perform financially in any given year. Yet owners still need to make decisions: Do they pay dividends, pass the company to the next generation, or sell out?

Three investment bankers disclose the questions their metals distribution clients are asking and the timely words of advice they provide.

In a cycle of falling prices, “A lot of metals companies are facing inventory losses, which leaves them tight on cash flow. They wonder what the financing market is going to look like for them,” says Vincent J. Pappalardo, managing director and head of the Metals Industry Group at Stout Risius Ross Advisors LLC, Chicago.

“What they usually ask is: Are people buying? Is there a buyer for my business? Then they specifically ask if ‘Dave Hannah at Reliance will buy us.’” 

Often, the sellers are nearing retirement and their children don’t want to take over the business. They held on through the last recession and recovery and are tired of waiting for the market surge that would clearly boost valuations.

In the short term, clients ask Pappalardo where he thinks the market is headed. “Everyone is saying we’re going to hit bottom, but flat-rolled pricing has been like the Tower of Terror at Disney World.”

He advises them to conserve cash, to “lean down as much as you can.” But if they are concerned that the slow, steady recovery is hitting a bump, perhaps they might want to “stay in the foxhole.”

Daniel P. Sullivan, managing director for Montrose Advisors LLC, Chicago, who specializes in M&A and financing for metals clients, says many market participants like to gossip, basically, about who is buying and who is selling, and what multiples they are trading for, but when it comes time to think hard about a potential deal, clients’ questions are more pointed. 

“When buyers start getting serious, they want to make sure they’re addressing a strategic objective, like adding new capabilities, growing in a market where they have little exposure or gaining synergies. Not every company is the right fit. Good buyers are disciplined about what they go after,” Sullivan says.

When sellers get serious, they want to know how long the process will take, how certain they can be about getting the value they seek, and whether they have a say about what the buyer does with the business.

“That question is very important because most owners want to find a buyer who will continue their legacy, treat their people well and do right by the business, and that’s sometimes the deciding factor under which a buyer is chosen,” Sullivan continues. 

Clients also want to know how assured they can be that the buyer will come through in the end with the cash they say they can raise.

Scott T. Berlin, managing director and principal at Brown Gibbons Lang & Co., Chicago, says the theme of his conversations with metals clients this year is “the availability of debt—the ability to borrow to take dividends out instead of selling.”

Some clients who earlier considered selling are instead passing ownership on to the next generation. “The health of the lending market is leading to more transactions that don’t lead to a change in control.

“The debt markets are stronger than they have ever been before. You can borrow more and the cost of capital is less,” Berlin notes. In fact, such debt instruments no longer require a personal guarantee, which for owners means less risk of losing everything.

“I get five to 10 calls per month from business owners wanting to talk about capital market alternatives,” he says. So far borrowers are able to adhere to terms, paying off the debt with cash flow and working to leverage back down.

Pappalardo agrees that the financing market is strong now. “The banks are looking to lend money. Banks are willing to fund expansions now and lending terms are reasonable. They are squeamish of oil country tubular goods, however. The end market is going to matter.”

Generally, investment bankers with metals industry experience can interpret the marketplace and be an effective translator between industry clients and “the money guys,” says Sullivan, and there is much for metal company owners to consider when seeking liquidity. For example, “How do I make sure that I’m taking care of the things that I don’t understand? People don’t want to get burned by nuances in transaction structures, shifting valuation metrics, legal aspects. They want to be sure that what they see is what they get.”

In the case of a family-owned company, “they go through this process only once,” he says. “Lots of them worry that if they get it wrong they may not have another chance to do it right.” MM