Moving Metal

The joint venture lost money from the start due to the severe recession that hit the United States in early 1980—the result of rising oil prices, as well as the high interest rates intended to stanch inflation. The steel industry was crippled and, although the Carter administration suspended TPM in March, for several months red tape kept the venture from purchasing steel products at world market prices and selling them at a profit. The record high interest rates, meanwhile, added high debt service costs to the already heavy losses and strained the relationship between Reliance and Mitsui. There was no chance for improvement as long as the world economy remained chaotic, and so the joint venture verged on bankruptcy. In October 1981, Gimbel informed the Reliance Board, “I have been deeply concerned about the poor showing of Reliance Steel Company, Inc., and have given a great amount of thought to the options available to us.” None of the options was particularly good. The partners could continue to operate the plant at a loss until the economy improved. They could recapitalize the venture—at a cost of $3 million. Or one of them could give up. Gimbel considered selling Reliance’s fifty percent interest to a third party, but that would have risked antagonizing Mitsui. He decided that buying Mitsui out and repurchasing the property in Vernon was the best alternative, but that required capital that Reliance did not have. In ameeting the followingmonth, Gimbel learned that the Japanese were also looking for an honorable way out. Mitsui also believed that a Reliance buyout was the best solution to the problem, and was willing to take a one-time loss of $4 to $6 million to make it happen. In early 1982, Mitsui agreed to sell its interest in the venture to Reliance Steel & Aluminum

minimal,” Gimbel promised the Directors, “and the probable return very attractive.” With the Board’s blessing, Gimbel came up with a plan that he believed would be mutually beneficial to Reliance and Mitsui. It called for Mitsui to buy the Vernon real estate and then lease the property back to Reliance. In a jointly held cor- poration, Mitsui would provide property and capital, Reliance the equipment and manpower. The new corporation would be capitalized through a cash contribution of $4.7 million by Mitsui. Reliance agreed to contribute $200,000 in certain fixed assets and the value of its legal status as a “going concern,” estimated at $4 million. It retained ownership of most of the machinery and equipment, however, leasing it back to the joint venture. In effect, Reliance was exchanging a struggling division for a half-interest in a wholly new subsidiary co-owned by a global trading giant. Gimbel presented his proposal to Mitsui in early August 1979. On August 24, Mitsui Senior Vice President Hiroshi Ohara informed Gimbel, “We are seriously interested in the basic concept as described in your proposal.” He for- warded it to Tokyo for further consideration. Several months of intense negotiation ensued, and in early December, Reliance and Mitsui announced that they had struck a deal. The fifty-fifty joint venture began operating as Reliance Steel Company, Inc. on January 2, 1980, at the site on 27th Street in Vernon. It was managed primarily by Reliance officers, with Bill Gimbel as President and Joe Crider as Executive Vice President. The Vernon General Manager, William E. Beilharz, stayed on as a Vice President, while Los Angeles division employees were transferred to the new organiza- tion. Mitsui provided a single Vice President-Controller to manage its interests.

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