January 4, 2010 Esmark Investor Bouchard Bets Big on Steel Again
January 4, 2010, Crain’s, By John Pletz
Jim Bouchard is hopping back on the steel roller-coaster.
Last time around, Mr. Bouchard gathered up a collection of steel distributors and a struggling mill under the Esmark Inc. banner and sold them to Russia’s OAO Severstal for $1.2 billion at the industry’s peak in August 2008. Now, he and a group of investors that includes his brother Craig are looking to buy back the same businesses from Severstal at a steep discount.
“I think we can do exactly what we did before: buy low, be with the curve as demand picks up and make a bunch of money,” says Mr. Bouchard, chairman of Chicago-based Esmark, which is still the corporate vehicle for his acquisitions.
It’s a risky bet. This is no ordinary cyclical downturn. Demand in the U.S. plummeted 40% and prices fell by half this year from record levels in 2008 as the recession forced huge cutbacks in the automotive, appliance and construction industries, which are the primary buyers of steel. Severstal and other acquirers such as Los Angeles-based Reliance Steel & Aluminum Co. are licking their wounds, which may make it hard to find buyers next time.
“They were lucky in terms of circumstances and timing: They sold at the very top. Two months later, and they couldn’t have made the sale,” says Jim Reid, who sold Chicago-based distributor Century Steel Corp. to the Bouchards in 2004. “For them to be successful, the whole economy has to turn around. It will take a tremendous recovery in manufacturing and consumer confidence.”
Mr. Bouchard, 48, a Chicago native who spent much of his career working for giants Inland Steel Co. and U.S. Steel Corp., made millions on the sale to Severstal, though he won’t say exactly how much. After the deal, he expected to invest in oil, gas and other businesses. But the downturn in steel created bargains he couldn’t pass up.
Esmark is offering $110 million for the nine distributors it sold to Severstal for about $350 million. Severstal reportedly also received a bid from Chicago-based Ryerson Inc., the nation’s second-largest steel distributor. Severstal and Ryerson decline to comment.
Assuming revenue at the nine distributors tracked the decline in steel industry sales, Esmark’s offer values them at about 0.4 times annual sales. The Bouchards sold them to Severstal for about 0.6 times sales, twice the multiple they paid originally for the businesses.
If Severstal rejects their offer, the Bouchards say they will buy other distributors in the Chicago area. In November, they bought Amtex Steel Inc. in University Park for $10 million. They are in discussions with three other local companies.
“Eighteen months ago, these were $100-million companies. Now they’re $50- or $60-million companies, and they’ve had their credit lines decreased, which makes it difficult to survive,” Mr. Bouchard says.
The companies, called service centers, cut, coat and process steel from mills for use by manufacturers. About 3,000 such companies remain, about half in the Midwest, despite a consolidation wave this decade that cut their ranks by 25%.
While the basic idea is the same as before, the Bouchards are tweaking the game plan. They are focusing only on distributors, not mills. They plan to limit risk by not taking on bank debt for acquisitions, though they have arranged a $100-million line of credit for working capital with GE Capital. Investors, including the Kelly family that bought and sold Beatrice Foods Co. 25 years ago in Esmark’s previous incarnation, have ponied up about $120 million for acquisitions.
Buying cheap is just the start. The Bouchards and partner Tom Modrowski, who runs their steel operations, must produce the 10% annual dividend their investors expect. They don’t plan to slash and burn, however.
“We’ve always tried to grow volume and keep the people,” Jim Bouchard says. “We’ll substantially add to the commercial sales operations of the companies. We need to run facilities efficiently.”
That’s what the Bouchards did when they bought Sun Steel Co. in Chicago Heights in 2004, adding to the sales staff, buying new equipment and reducing production lines but increasing volume and profitability, says Dave Brewer, vice-president of operations at Sun. “We had some attrition but didn’t lay anyone off,” he says. “We were very well-treated.”
Mr. Bouchard figures the industry has hit bottom and will take 18 months to recover. He plans to build up the company over the next three years and sell it in five, with the goal of a 20% annualized return on investment.
“Once we consolidate up, we’ll have a profitable steel company,” he says. “If we have an offer from somebody larger, we’ll sell it. If we don’t get an offer, we’ll operate it indefinitely.”
©2010 by Crain Communications Inc.