Metals USA acquisition
In April 2013, Reliance Steel & Aluminum Co. (RS) acquired Metals USA Holdings Corp. for a sum of $1.25 billion. This was the biggest acquisition in Reliance Steel’s history. Reliance Steel expects the acquisition to drive its future earnings.
We’ll look at the strategic implication of this deal for Reliance Steel.
The deal’s strategic rationale
Metals USA provides Reliance Steel with geographical, product, and customer diversification. All this will add to both revenues and net profits for the company.
Metals USA has a track record of industry leading. It also has consistent earnings before interest, tax, depreciation, and amortization margins. It also generates strong cash flows, which will further add to Reliance Steel’s balance sheet strength. Apart from the visible financial benefits, Reliance Steel is hopeful of realizing synergies to the tune of $15 billion to $20 million per year.
How Reliance Steel has added value to this acquisition
Metals USA helped Reliance Steel increase its shipments measured in tons sold by more than 20%. The chart above shows the key financials of Metals USA. Reliance Steel made several strategic actions to further realize the potential of this acquisition.
- Reliance Steel has achieved a meaningful reduction in inventory at Metals USA and has converted more than $80 million of inventory into cash. Please note that there is an opportunity cost of holding excess inventories in terms of the financing cost. By reducing its inventories, a company can reduce its finance expenses.
- Through its management, Reliance Steel has been able to improve inventory turnover at Metals USA to 4.5, compared to 3.4 earlier. Simply put, inventory turnover is sales divided by the average inventory held over the year. This is an important measure of a firm’s operational efficiency.
- Reliance Steel divested certain non-core assets of Metals USA.
These strategies helped Reliance Steel increase the gross profit margins at Metals USA to 23.9% from 2.25%, the pre-acquisition level.
Please note that Reliance Steel, ArcelorMittal (MT), United States Steel Corporation (X), and Nucor Corporation (NUE) are leading steel companies in the U.S. The steel industry can also be accessed through the SPDR S&P Metals and Mining ETF (XME).