US listed scrap player Schnitzer Steel and competitor of Sims Group Limited (SMS) has announced the acquisition of Regional Recycling LLC. The acquisition is for US$65.5m cash plus the assumption of an undisclosed level of liabilities. Investors have reacted to the announcement by pushing SMS up 21 cents, or just over 1.2%, to $17.68.
The target, Regional Recycling, is based in the South-Eastern US market with 10 facilities across Georgia (7) and Alabama (3). It processed around 500,000t of ferrous metals and nearly 100m pounds of non-ferrous metals in 2004 generating $190.4m in revenues.
Pricing suggests that the Schnitzer/Regional deal has been concluded at a price in line with that paid by SMS for Hugo Neu. The assumption of an undisclosed level of liabilities makes it difficult to obtain the full enterprise value paid for Regional Recycling. Assuming a minimal amount of liabilities and a US$70m enterprise value, this implies the acquisition was made at 37% of trailing sales.
This is the same ratio paid by SMS for Hugo Neu ($650m/$1,742.5m). Alternatively, on a price per tonne sold, Regional Recycling has been purchased at an approximate value of $182 per tonne of ferrous sales. The Hugo Neu acquisition implies $150/t ($650/4.3mt). The acquisition represents the first expansion for Schnitzer following its separation from joint ventures with Hugo Neu.
The Regional Recycling assets are situated on the US East Coast but are likely to far South to be of significant interest to SMS at this stage, particularly while it is finalising the Hugo Neu acquisition. Post the merger of SMS and Hugo Neu, SMS will hold a strong position in New Jersey, New York and Virginia. The most obvious consolidation play for SMS going forward is to "in-fill" some of the gaps in this region which would include Pennsylvania and Baltimore. The acquisition appears to create a new pocket of operations for Schnitzer rather than extending their existing East Coast presence.
Macquarie Research Equities (MRE) maintain an Outperform recommendation for SMS given a positive outlook for ferrous scrap markets.
SMS Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
