April, 2025- Modern Metals has tracked 20 sales of companies, or physical assets, in the service center, toll processor and metals fabrication/manufacturing space in the trailing 12 months ending in March (see table, Page 31). The transactions were all peer-to-peer acquisitions. Transaction values are rarely reported publicly.
A great amount of variables inform acquisition decisions, according to four investment bankers and lenders that work with clients in the metals industry.
WHAT IS OF VALUE?
Andy Pappas, managing director and head of ABL Metals Group at BMO Bank N.A., Chicago, says there are two types of buyers. “Buyers willing to pay a fair and higher price, even with market ups and downs, need to see consistent earnings. They also want to see the customer mix as diversified by end markets such as auto, construction, energy, aerospace, appliances and heavy equipment.”
Location is a major consideration, he says. “Texas is a hot spot. A lot of foreign companies wanting to return to U.S. will move into the South to avoid union shops i.e., Texas, the Carolinas, Alabama. Ohio and Indiana remain attractive, due to tax incentives and right to work laws.”
Other buyers seek out distressed companies, at or below book value. “Plenty of those deals have happened. In those situations, buyers look at receivables, inventory and fixed assets owned; and pay the value of those assets along with a negotiated premium. That’s a different analysis than someone seeking an immediate profit,” Pappas says.
Vince Pappalardo, managing director and principal at Brown Gibbons Lang & Co., Chicago, says he has observed several primary approaches to M&A one and two are “filling geographic gaps and product line gaps. They [purchasers] want more coverage. A third approach is looking at such factors as downstream processing capability, which provides a higher margin.” That helps companies deal with gyrating steel prices and add value for customers.
“The people are most important in these transactions. It’s hard to run these companies if folks leave their jobs. Having a strong management team and a group that can run things is good. Talent and experience matter,” Pappalardo says.
The state of customer relationships is vital. “How tight is the customer to you?” The ratio of contract versus spot market business is examined. “The spot market is great for profit margins, but those customers are quick to leave.”
Purchasers are looking “for certainty and for value,” says John Montgomery, principal at Heritage Capital Group, Jacksonville, Florida. A third-generation veteran of the steel industry, Montgomery notes, “If you can tell a strategic buyer: here is a good company with good returns over the cycle, a good management team in place that will stay put, good safety and environmental stewardship, and good operating practices, buyers will be willing to pay a control premium. They will see the value and deliver a premium multiple.
“The people who do a good job managing their business get the buyers’ attention,” he continues. “An independent owner might be able to stay on but, if there is no succession plan, the premium is smaller. Management team is important. They don’t want to parachute talent into the business that they just spent a fortune on and get them up to speed to learn the business.”
He echoes Pappas in saying buyers want “a diverse customer base without a heavy concentration on a handful of accounts. The biggest account should be less than 10 percent of your revenue stream.” That prevents risk to the whole enterprise when a big account is lost.
On the demand side, says Montgomery, “all the strategic buyers are sitting on mounds of liquidity. They have it to use for acquisitions and capital projects.”
Michael Jenny, managing director at Stout Risius Ross LLC, Chicago, says that a lot of buyers “are looking for economies of scale, to be able to ship more volume, gain administrative efficiencies and create one back office that supports multiple locations. They are looking to diversify geographically and with different capabilities. If a company or assets have the potential to add synergies, that’s attractive.”
A few years ago, says Jenny, Stout sold a Chicago metals company “because it had expertise in aluminum coil slitting and processing for small batch shipping. The buyer didn’t already have that skill or competency.” In another deal, “we recapitalized a large service center; the value there was driven by the variety and scale of what they did with flat-rolled steel and because they had many branches.”
CHA-CHING
Prices paid for an acquisition will depend on the size of the company, consistency of historical earnings and whether the buyer is a strategic or investment firm, says Pappas at BMO. For example, when a middle-market service center is sold to a large service center network, that network may pay an above-average multiple. Bigger buyers are willing to pay more than the average multiple mainly due to stable and consistent earnings and the desire to grow the network. “Paying more doesn’t matter in the long run, especially if there is a clear fit and the deal is accretive to earnings.”
Generally, smaller companies will pay 4X to 5X Ebitda, Pappas says, and the top end of the scale may be 7.5X to 8X when earnings are more consistent in this space.
The industry has seen a lot of ups and downs. From 2021 to 2023, Ebitda numbers were huge due to Covid and supply chain constraints.” By the second half of 2023 and during 2024, service centers battled falling prices. “So what do you base your bid on? Assets? Earnings—last year or a three-to-five-year average? Future earnings? Location? Customer base? Even if it is a down year but the assets and customer base are good, and you can do better with raw material purchasing,” the valuation can still remain strong.
Every buyer comes to their own conclusions. “You will pay more for companies with better margins and that have closer relationships with a certain customer base, like automotive suppliers. They are buying relationships with those who can add value to these customer,” says Pappas.
Montgomery notes that certain levels of revenue “get you more interest” from buyers. A company bringing in $20 million a year is more attractive than one with $5 million in sales. “As you move up the market to bigger, more sophisticated companies, you typically get bigger buyers who can pay higher values for investment-grade assets,” he says.
The “walking around” multiples conversation for service centers range from 5X to 7X Ebitda. “Smaller companies are closer to 5X, while bigger players with superior earnings, reputation and systems may get more, depending on the assets,” says Montgomery.
From a private transaction perspective, there are exceptions to these multiples, says Jenny at Stout. “Some have gone higher, but that would be for a larger operation with special capabilities, or a specialty metal that the target has expertise with. Higher than average margins will also attract a higher offer. Other companies will sell for less if they are smaller or more stressed.
“This tends to be a cyclical industry and many look at a multiyear average and apply the valuation to that,” Jenny says. “Ultimately, it is a negotiation.”
POLICY
PICTURE SOME OF THE POSITIVE IMPACTS OF TARIFFS MAY BE SHORT-LIVED
THE U.S. STEEL INDUSTRY CLEARLY WELCOMED TARIFFS to protect their output and support fair competition in the domestic market.
“The idea is that tariffs will help raise prices on inventories, but that is temporary,” warns Andrew Pappas, managing director and head of ABL Metals Group at BMO Bank N.A. “Sure, there has been more demand to buy metal to get ahead of the tariff curve,” and short term, the industry expects higher current pricing will lead to higher margins.”
At BMO’s metals and mining conference earlier this year, “the topic was tariffs,” Pappas says. “Steel producers and the service centers are part of organizations that have lobbied for these tariffs. They are not disappointed by their implementation.”
Most aluminum companies are less pleased because primary aluminum imports represent 60 percent or more of the domestic market, especially shipments from Canada. “They are also worried about demand longer term. Most of these companies have adjusted to the tariffs. They are figuring out ways to get aluminum elsewhere.
“There is still uncertainty around demand—do higher costs destroy some future demand? Currencies that are floating are adjusting to some of the tariffs, meaning the impact may not as bad as most people think,” Pappas suggests.
A large concern is what the carmakers are going to do. “Some say they will move more production from Mexico back into the U.S. We think more manufacturers will move production to the U.S., and there is talk about joint ventures forming in the U.S.”
John Montgomery at Heritage Capital Group says that tariffs affect sentiment. “We have seen this movie before. Prices ran up very high, very fast, in 2018 and lasted six months, and then we saw a hangover effect. Prices eventually settled down at a lower level than before the tariffs. It’s a mini cycle but buyers don’t like the comedown. And the hangover is always longer than the up cycle,” he warns.
2025 PROSPECTS
Pappas believes this will end up being a decent year for M&A. “The first couple months have been slower due to the uncertainty over tariffs. I saw deals fall apart because of worries about the purchase price in light of the market response to tariffs. How do they shake out, and will there be changes in corporate taxes? Those things will have to be resolved somewhat.”
M&A 2024–2025 TRANSACTIONS*
KEY TO TYPE OF BUSINESS
SC = SERVICE CENTER
M = MANUFACTURER
F = FABRICATOR
TP = TOLL PROCESSOR
DPD = DOWNSTREAM PRODUCTS DISTRIBUTOR
*Trailing 12 months; Sources: Company press releases, SEC report
Pappas sees some buyers “dragging their feet. Once certainly is established, the deals will get done. Some deregulation will help generate transactions. General tax policy will also be a factor. At a minimum, Trump will raise tariffs and they are here to stay,” prompting some end customers to enter the U.S. with production capacity or create joint ventures with American companies.
By the second half, he predicts, “there should be a stronger environment for M&A and higher inventory value will mean higher valuation.”
Buyers often want to tap into a product line they don’t already carry or enter additional geographic regions.
According to Pappalardo, plenty of owners have indicated they do intend to sell, most later this year. “We had a lot of inbound inquiries during the first quarter. We expect the pipeline of companies for sale will increase.”
Heritage Capital Group is also bullish on 2025. Although “we are coming off a difficult 2024 —no one is excited about those returns—there is optimism about the new administration so the outlook is good, prices are moving up, quote activity is good and orders are doing fine,” says Montgomery.
"I can sense a palpable shift in sentiment based on early discussions,” says Jenny. “We are expecting deal activity to strengthen slowly throughout calendar 2025. There is continuing talk of deals that were put on hold, waiting for a generational exit,” he explains. “The broader trend of onshoring and reshoring will also be germane to M&A activity
Investment bankers and lenders foresee an uptick in dealmaking during the second half of this year.
EXTRA INSIGHTS
“Service centers and fabricators are often family owned and they are scattered all over North America,” says Pappas at BMO. “Continued consolidation will happen because the third and fourth generation owners find it harder to survive long term in the global marketplace. Historically, they were able to set prices on purchases and sales to customers, but it’s now such a global environment and markets set prices. Information is readily available to everyone.”
Also, it’s harder to grow smaller operations “unless they are well capitalized. There is more pressure on family metals companies than ever before. That creates more room for M&A.”
Montgomery advises owners who want to sell within the next five years that “if you have an issue with succession, start working on it now.” Areas that buyers are most interested in include a clear succession plan, margins, reputation, systems, processing, safety. “Those each take a long time to sort out. You can get it together and bring the company to market. Don’t wait until there is a health problem.”
Jenny suggests that “anything the owner can do to remove risk to the earnings stream accrues to you in value. Audited financial statements, strong financial controls and monitoring the business continually all help in due diligence,” he says.
