When Reliance Steel and Aluminum Co. agreed to purchase Earle M. Jorgensen Co. last month, it took a big step in solidifying itself as one of the major distributors of steel and aluminum products in North America.
More than that, the deal continues a trend of consolidation driven by an evolving world steel industry, as U.S. mills close and both big and small companies join forces amid heightened international competition.
“This deal is a snapshot of what’s been happening over the past five or so years,” said John Novak, an analyst with CIBC World Markets. “A lot of the smaller companies have been consolidating to stay competitive.”
Often considered the acquirer of choice for North American distributors, Reliance has rolled up more than 30 companies in the last 10 years. The strategy has paid off handsomely for the Los Angeles-based company, which both processes and distributes aluminum and steel. Its shares now trade around $82 after more than doubling last year and quadrupling over the past three years.
As in almost every manufacturing sector, pressure from overseas has shaved margins and increased competition, making it more difficult for smaller, privately held companies. Last year, China, once a negligible player, produced 350 million tons of steel, a third of the world’s output. It also exported 20 million tons, up from about 6 million six years ago.
At the same time, there has been consolidation at the very top of the industry, where Netherlands-based Mittal Steel, the world’s largest steelmaker, built its business cobbling together mills across the world starting in the 1970s. (Last week, though, it failed in its bid to take over rival Luxembourg steel titan Arcelor.)
“Some of these smaller companies may find it intimidating when dealing with the larger companies overseas,” Novak said. “When they consolidate with a larger company, they get a little more clout.”
Reliance scooped up Lynwood-based Jorgensen for $934 million, which included $291 million in debt.
EMJ sold less than half its stock in an initial public offering last April that netted only $176 million, far short of the $300 million it had hoped to get.
In buying EMJ, Reliance gets all of its 39 distributors and service facilities through the U.S. and Canada, adding to their existing 100-location network. Already one of the largest North American steel companies, Reliance expanded its geographic reach into New England, Canada and strengthened their presence in the Midwest market.
The acquisition also stabilizes Reliance’s overall product base, adding Jorgensen’s broad mix of carbon, alloy, stainless steel and aluminum bar, tubular and plate product line consisting of more than 25,000 products. It’s a hedge against a possible flood of lower-priced imports if Asian demand wanes.
