L.A. deal bulks up a giant in steel

A booming market for steel is paying off big for two Los Angeles-area companies.

L.A.-based Reliance Steel & Aluminum Co. said Tuesday that it had agreed to buy a smaller metal processor from Beverly Hills-based buyout firm Platinum Equity for more than $300 million.

For Reliance, the country’s largest metal processor, the purchase of Atlanta-based PNA Group Holding Corp. would extend a string of more than 40 acquisitions since the company went public in 1994. Reliance’s stock jumped $2.09, or 3%, to a record high of $71.77 on word of the deal. The shares have climbed 32% this year as the overall stock market has slumped and are up more than 600% in the last five years.

For Platinum, the deal would represent a huge return on its investment. Counting $181 million in dividends and fees the private equity firm has already collected from PNA since buying it two years ago, Platinum would make more than 25 times the $17.5 million it invested in PNA.

“We knew the business had enormous potential when we acquired it,” Tom Gores, chairman and chief executive of Platinum, said in a statement.

Like the rest of the steel industry, Reliance and PNA have benefited from soaring global demand driven by rapid growth in China and other emerging economies.

Both companies buy steel from large manufacturers of the metal, then cut and shape it for customers in such industries as construction, oil, equipment manufacturing, telecommunications and utilities.

Reliance operates about 180 processing plants in the U.S., Canada, China, South Korea, Britain and Belgium. The acquisition would add PNA’s 23 U.S. locations plus interests in seven locations in the U.S. and Mexico that PNA holds through joint ventures.

“What PNA does for us is brings us into some new areas,” Reliance Chairman and CEO David H. Hannah said in an interview. “It gives us a wider footprint.”

As part of the acquisition, which is expected to close within 60 days, Reliance would assume $750 million in debt owed by PNA, valuing the Atlanta company at $1.1 billion. Reliance, which last year earned $408 million on $7.3 billion in revenue, plans to refinance that debt to reduce its interest costs.

Platinum bought PNA in May 2006 and grew the business by acquiring three other companies. PNA’s revenue in 2007 was about $1.6 billion, up from about $1.2 billion in 2005.

“Rising steel prices have certainly worked in our favor in terms of the performance of the business and our cash flow,” said Mark Barnhill, a principal at Platinum.

The sale of PNA would leave Platinum with one remaining steel company, Chicago-based processor Ryerson Inc., which the private equity firm agreed to buy last year for about $1 billion in cash. Barnhill said Platinum had no timetable for selling Ryerson.

Reliance’s Hannah said he expected the steel industry to continue to flourish despite the shaky U.S. economy.

“It’s a situation we haven’t seen before,” he said of the boom in demand. “And I think it’s going to stay this way for quite some time.”

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