January 12, 1998
Heard on the Street
Metal Management Moves
To Consolidate Scrap Industry
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
It has been done with telephone companies, garbage haulers, used-car lots and funeral parlors -- but scrap yards? Metal Management, a young Chicago company, is moving to buy up dozens of high-quality scrap yards, cut costs and become a premier supplier to the expanding steel minimill industry.
Metal Management
Business: Scrap-metal recycling
Closing price, Jan. 9: $17.00
1997
1996
Revenue (millions)
$157.35
$29.94
Net Income (millions)
$0.73
-$0.62
Share earnings
$0.02*
-$0.07
Latest quarter (Sept. 30, 1997):
Per-share earnings: Nil vs. -$0.08
Average daily volume: 130,471 shares
Shares outstanding: 30 million
Trailing P/E: Loss in most recent four quarters
Dividend yield: Nil
*After preferred dividends
This consolidation play has some high-profile backers. A group linked to Chicago real-estate tycoon Sam Zell put up $25 million last month for stock and warrants.
Some industry insiders, however, remain skeptical.
And some short sellers -- who borrow stock and sell it in hopes that its price will decline -- have targeted Metal Management and criticized its financing.
After a seven-fold leap through mid-August of last
year, Metal Management's stock price has plunged 40% amid marketwide
skepticism about midsize stocks, and nervousness that a big acquisition took longer than expected to complete. At Friday's closing price of 16 3/4, it has still quadrupled in the past year.
Bulls see the stock resuming its climb as Metal Management builds what Chief Executive Gerald Jacobs hopes will be 15% to 25% of a $20 billion-plus market. "We have closed eight acquisitions,
have 13 announced and pending and have more in the pipeline," Mr. Jacobs says. Once pending acquisitions are complete, he says, the company will have $900 million in annual revenue -- or about 4% of the market.
Ralph Wanger, a longtime investor in young companies,
says his Acorn Investment Trust sold some stock near the high but still owns some Metal Management. He sees "a logic to consolidation in the scrap business," and adds, "I generally believe in going in the same direction that Sam [Zell] is going." Mr. Zell declined to comment.
But Robert Garvey, chairman and chief executive of Birmingham Steel, scoffs at Metal Management's hope of developing "Japanese-style" long-term supply contracts with minimills. "It wouldn't be very appealing to us," he says.
Prices and supply sources for raw scrap -- things like old cars -- are volatile and unpredictable, Mr. Garvey says, and efforts have failed so far to stabilize them by setting up a futures market for scrap.
Independent industry analyst Charles Bradford says that scrap prices are near their 1974 peak. If they remain high, he notes, scrap alternatives such as imported pig iron will become more popular, and if they decline, profit margins will face pressure. He notes that scrap yards often face hidden environmental problems involving hazardous wastes and worries that completing dozens of acquisitions could prove complex.The company's $500 million stock-market value is only a slight premium to some estimates of revenue for the year ending March 31. But because so few of the planned acquisitions have been completed, analysts say, the stock trades more on whether investors buy the story. "Once you get some earnings," Mr. Bradford says, "people will put a multiple on it and this could be a $5 or $10 stock." Metal Management's Mr. Jacobs says several minimills
have been receptive to the idea of long-term contracts, although he
won't say which ones. He says his policy is to sell products quickly and not carry big inventories, profiting on the trade and avoiding the
effects of price volatility. Analyst Jordan Estra of BT Alex. Brown says he thinks scrap-metal demand will exceed supply, which should be good for prices.He sees five or six companies eventually dominating a business currently split among 3,000 small competitors. He recommends Metal Management stock and his estimates show its underlying enterprise value tripling
over five years.
But Peter Kamin, a partner in Boston hedge fund Peak Investment, has sold Metal Management short and says he doesn't like some of its financial arrangements. He points to two privately placed issues of convertible preferred stock that last year raised $45 million
for acquisitions. Terms permit holders to convert them, in a worst-case scenario, to common stock at a price below the market price. Mr. Kamin says that aggressive conversion of preferred to common could drive down the stock.
Mr. Wanger, the Metal Management stockholder, acknowledges that such financing is "unusual," though not unheard of at small companies.
Metal Management's Mr. Jacobs says the buyers of the preferred are "constructive holders" whom he knows well, who expect the stock to rise and don't expect to sell at a time of weakness. He says
provisions of the preferred bar its holders from antagonistic acts such as short selling.
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