In less than a decade, metal processing and distributing company Metals USA (NASDAQ:MUSA) has been around the block. It was formed in 1996 through an eight-company merger, went public in 1997, became the third-largest metals distributor by 1999, was a classic roll-up story through 2000, went bankrupt by 2001, and just yesterday agreed to be bought out by a private equity company for $447 million.
For any investor with the stomach to remain with it for the whole time, it's been quite a ride.
In particular, 2004 was a banner year for the company, and for metals and steel producers in general. With metal supplies tight and demand high, prices soared to record levels, producing higher revenues and earnings for the maker of flat-rolled steel products. Yet the market soured in the first quarter of 2005, and while revenues remained high due to consistently higher steel prices, Metal USA's profit margins took a hit, falling 7% from a year ago.
It's a very different picture from the company that sought bankruptcy protection just four years ago. 2000 had been another banner year for the steel industry, with high volumes being recorded. That was immediately followed by average daily shipping rates falling 30% over the next 18 months coupled with steel imports lowering prices by 25%. Metals USA had set itself up for failure, going on a tear of acquisitions just as the industry was about to keel over. While the companies it acquired were sound, assimilating them into the corporate structure was not smooth. The resulting bankruptcy required the company to sell off many of those assets at fire-sale prices and use the proceeds to pay off the massive debt it had accumulated.
The restructured company that emerged was focused on three areas: flat-rolled steel and aluminum; plates and shapes; and building products. These were Metals USA's core competencies and they served the company well. It also didn't hurt that the industry began to rebound soon thereafter.
So while this might seem an odd time for an equity firm to be making an acquisition, it's perhaps a good time for management to exit the stage. Well, except for CEO Lourenco Goncalves, who will continue to lead Metals USA when it goes private.
Apollo Management, the equity firm taking over Metals USA, has apparently surveyed the steel industry and likes its prospects over the next few years. It's paying Metals USA shareholders some $22 in cash for their shares, a 58% premium, which will be financed by a combination of equity and debt.
There is still room for growth in steel. For example, there's a push to expand steel's presence in the housing market, where it accounts for less than 2% of all new single-family homes constructed in the U.S. But rising wood prices -- up 20% over the past year -- and falling steel prices might make steel more attractive. Metal roofing is another area with potential growth: market research firm Fredonia Group estimates it will grow 25% over five years.
Automobiles continue to remain an important customer of the steel industry, with shipments to the manufacturers up almost 6% at the beginning of the year. Of course, those higher steel prices are part of the problem in creating a junk yard of auto parts suppliers. One threat to the industry is China, which became a net exporter of steel at the end of last year. With a number of state-owned steel companies, it has the potential to wreck havoc in the market.
Even so, the market liked what it saw in the Apollo deal. Metals USA shares soared on the news, rising 51% over the previous day's close. Also joining in on the excitement were Olympic Steel (NASDAQ:ZEUS), which rose 26%; InsteelIndustries (NASDAQ:IIIN), up 12%; AK Steel (NYSE:AKS), up 18%; and Reliance Steel & Aluminum (NYSE:RS), up 9%. Undoubtedly there is hope that there will be further consolidation in the industry.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in the article. The Fool has a disclosure policy.
