Vernon’s Reliance Steel to Acquire 2 More Companies in Midwest

Metal distributor Reliance Steel & Aluminum continued its drive to diversify its business nationally, announcing on Wednesday a deal to acquire two related companies in Illinois and Minnesota.

The acquisition, Reliance’s third expansion into the Midwest since March 1999, builds on a strategy that Wall Street has taken a shine to. Its shares have risen 25% over the last year, a period when stocks of competitors slumped.

Through 72 processing and distribution facilities in 21 states, Vernon-based Reliance acts as kind of a lumberyard for metals--selling everything from titanium for jet aircraft to piping for semiconductor plants to steel used in household appliances.

Each facility--or service center--tailors its offerings to what local industries most demand.

On Wednesday, Reliance agreed to acquire Viking Materials Inc., based in Minneapolis, and its sister company, Viking Materials of Illinois Inc., based in Chicago, marking its fourth purchase this year. Earlier this month, Reliance completed the purchase of East Tennessee Steel Supply Inc., based in Morristown, Tenn.

Though terms weren’t disclosed, the company said the Viking deal is bigger than the combined value of Reliance’s three previous acquisitions this year and will add about $83 million to its annual sales, which look to top $1.7 billion this year.

“We are trying to expand our presence geographically,” said Karla McDowell, chief financial officer of Reliance.

Shares of Reliance, the nation’s third-largest metal processor and distributor, closed up 25 cents at $25.38 on the New York Stock Exchange on Wednesday, off slightly from a 52-week closing high of $26 reached Monday.

The largest company in the metal-processing and distribution business, Chicago-based Ryerson Tull Inc. has seen its stock plunge 53% over the last year. Shares of Houston-based Metals USA Inc., the second-largest player, dropped 61% in the same period.

The two companies have been hurt by a slowdown in the automotive and other industries. Metal processors also got caught building up inventories just before a dip in steel prices earlier this year, said John Tumazos, an analyst with Sanford C. Bernstein & Co. in New York.

Reliance has escaped the slump in the industry so far through tight inventory control, a lack of dependence on the auto industry and a decentralized approach, Tumazos said.

He said Reliance instructs the managers of its facilities to turn inventories at least five times annually and to maintain a gross profit margin of 25%.

“Their performance this year has been quite remarkable considering what’s been going on in the metals industry,” Tumazos said.

Reliance posted a 7% gain in net income to $15.8 million, or 57 cents per share, in the third quarter ended Sept. 30. Sales rose 17% to a record $443.7 million during the same period.

McDowell said the company’s strategic move to keep out of the up-and-down auto industry has helped its performance, but she added that Reliance also benefited from developing a diverse customer base of more than 65,000 businesses.

Boeing Co., which last year accounted for 2.4% of Reliance’s sales, is its biggest customer, she said. After that, no single company has more than 1% of Reliance’s business.

How the coming year and an expected industrial slowdown will shape up for the company is uncertain, McDowell said.

“We think the construction industry will go down, and that’s a big part of our business,” McDowell said.

But that could be offset by gains in aerospace--analysts expect military spending to increase next year--and still-strong demand in the semiconductor industry, McDowell said.

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Bucking the Trend

Shares of Reliance Steel & Aluminum have risen this year even while those of its two larger competitors slumped. Weekly closes and latest:

Reliance

Careful acquisitions have put the company on a growth track.

Metals USA

The nation’s second-largest metal processor and distributor could be overtaken by Reliance.

Ryerson Tull

The market leader has been hurt by a slowdown in sales to automotive, farm equipment and household appliance markets.

* Source: Bloomberg News