Moving Metal

While awaiting an upturn in the business cycle, Reliance management began pursuing one such opportunity. Hannah, Mollins, and Lewis noticed that the automotive and appli- ance industries had managed to do better than other sectors during the downturn. Reliance had few customers in these markets, however. There was one company, though—Preci- sion Strip, Inc.—that did about sixty percent of its business in the automotive sector and much of the rest in the appliance industry. And it was for sale. Founded in 1977 in Minster, Ohio, Precision Strip was the leading toll processing company in the United States. A toll processor does not take ownership of its product, but instead charges a fee for services. A typical transaction worked like this: a steel mill might have a supply contract with an auto manufacturer, although the automaker required shapes and specifications that the mill could not provide. So before delivery to the auto plant, the steel producer would contract with a toll processor to process the steel into the required shapes and forms. This was a good line of business for the toll processor because it provided reliable cash flow and carried no inventory risk. On July 1, 2003, Reliance closed its biggest deal to date, purchasing Precision Strip for $220 million and the assump- tion of $26 million of debt. The transaction was funded by issuing $135 million in senior secured private placement notes and borrowing on the existing $335 million syndicated bank line of credit. This financial stretch was well worth making. “What we saw in Precision Strip was a way to diversify and to do the things we felt comfortable doing,” Hannah explained. The company became a wholly-owned subsidiary of Reliance. Precision Strip’s specialty was slitting and blanking flat- rolled products. Its business was divided sixty-five percent in

ees had seen the value of their ESOP—and their retirement funds—evaporate. When Reliance took over Pacific Metal in the wake of the bankruptcy, Dave Hannah beat a path to Portland. For more than a decade, Reliance had succeeded in the acqui- sition game by respecting corporate culture, and that meant knowing the company history. Hannah had done his homework. When he reached headquarters he took his turn addressing a skeptical assembly: “Listen, you guys. I want to make something very clear. You used to be Pacific Metal. Then you became Metals USA. Then we bought you. You’re now Pacific Metal.” The crowd erupted with joy at Hannah’s pronouncement. “They cheered. They went crazy. They loved it,” remembered Bill Sales. Reliance had given the employees their company back—Hannah could be certain that they would make it a success. As always, Reliance offered plenty of leeway, but guidance as well. “We have a lot more resources now. All those things help you deliver industry-leading profitability,” said Sandy Nosler. As years passed, Nosler noted, Pacific Metal’s strong sense of tra- dition was augmented by the Reliance business model of “service your customer to the fullest.” It did not take long for Pacific Metal to prove to be another good buy for Reliance: the company’s 2002 sales approached $85 million—despite the recession. It was not a bad way to hit bottom, and indeed, 2002 was the lowest point of the recession for Reliance, with net income coming in just above $30 million. The next year Reliance saw some improvement in business, with net income up thirteen percent to $34 million. Most importantly, the company had a strong balance sheet that would enable it to seize new oppor- tunities when they arose, despite the troubled times.

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