What does Nucor see in garage doors? An opening

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Before the pandemic, industrial companies struggling to grow had few options. They could split up and use financial engineering to shine a light on different parts of their business, even if those splits were increasingly less profitable. They might buy a software company – and many have – but investors have become increasingly skeptical of the sky-high valuations these deals typically entail, and so far these acquisitions have had limited measurable impact on industrial valuations. There is a third option: diversification – a previously crude word in the industrial realm that is interestingly becoming minus two years into the onset of Covid and supply chain disruptions.

Nucor Corp., America’s largest steelmaker, announced last week that it was buying CHI Overhead Doors, a maker of garage and warehouse doors that uses steel for many of its products, from KKR & Co. The $3 billion deal follows the $1 billion purchase. of the insulated metal panel business of Cornerstone Building Brands Inc. and the $370 million takeover of steel shelving manufacturer Hannibal Industries Inc., both of which took place last year. The purchases expand and complement Nucor’s existing steel deck, joist and building product systems business. But CHI is also the company’s biggest acquisition ever and a sign that its efforts to think beyond the steel beams and bars made for other manufacturers are kicking into a new gear. “We are the industry leader in just about everything we do. This platform for growth is locked in if we want to stay in North America,” Nucor President and CEO Leon Topalian said in an interview. “We have to diversify.

Read more: Covid casts conglomerates in a new light

The CHI agreement is the latest turning point in a growing push by industrial companies to achieve more stability and balance in their operations. The old octopus-like conglomerate model will likely never return, but the lopsided impact of the pandemic on the economy has forced a reassessment of the limits of hyperfocus on a specific industry. The irony of the many claims of conglomerate death is that business diversification continued to exist and many businesses thrived under a more disciplined and intentional version of sprawl. The former United Technologies Corp., for example, divested its Carrier Global Corp air conditioning units. and elevator companies Otis Worldwide Corp., but acquired military contractor Raytheon Co. to create a more balanced aerospace and defense giant. Others, like Sherwin-Williams Co., Hershey Co. and American Eagle Outfitters Inc., acquired parts of their supply chain as pandemic recovery logistical blockages convinced executives that it was important to have more control over their production and delivery processes. .

In Nucor’s case, the company is already investing in its core steelmaking capabilities, including a $2.7 billion plant in West Virginia and a $350 million micro-plant in Lexington, NC. North. But steel mills are a notoriously volatile, capital-intensive business and don’t typically generate a ton of free cash flow. A foray into the European market via Italy brought a host of headaches and writedowns for the company, and Nucor exited a joint venture with Duferco at the end of 2020. The company has also already integrated much of its chain supply chain: Nucor bought scrap metal processor David J. Joseph Co. in 2008 for $1.44 billion and continued to grow its raw materials business, especially as the post-pandemic recovery boosted demand . Nucor now controls more than 4 million tonnes of direct reduced iron production annually, Topalian said. That leaves finished goods – which tend to generate higher margins and have more attractive growth trajectories – as the richest untapped opportunity.

“We have to move one standard deviation,” Topalian said. “We are not going to make socks and trainers. We will stay connected to industries where the core competency is manufacturing efficiency. The garage door business in particular was attractive as Nucor already sells other building products as well as pre-engineered metal buildings that may require up to 40 such doors per unit. CHI only has an estimated 4% market share in the commercial sector of the industry – think warehouse and retail – and Nucor will aim to use its existing relationships to sell and grow the products. But with about 65% of CHI’s revenue coming from the residential sector, the deal also brings Nucor closer to the consumer economy. When asked if early signs of a slowdown in purchasing power had given him pause, Alex Hoffman, Nucor’s general manager of business development, pointed out that about 70% of residential demand for doors CHI’s garage was for repair and replacement. “If your teen backs into the garage door, you need to fix it,” Hoffman said. “It’s totally acyclical. It has nothing to do with housing starts or economic growth.

Investors are not entirely convinced of the benefits of Nucor’s diversification efforts. Shares fell about 3% on the day the deal was announced. Several analysts have questioned the wisdom of paying a richer valuation for CHI than Nucor orders alone. The purchase price values ​​the garage door business at about 13 times its estimated 12-month earnings before interest, taxes, depreciation and amortization when the deal closes this summer. This compares to Nucor’s own multiple of around 3 times its current Ebitda. That being said, CHI has grown its revenue by an average of 10% “for many years,” according to a Nucor presentation, and earns margins of around 30% on those sales. The deal seems less strategic in many ways than the expensive software purchases that manufacturers have splurged on in recent years. Time will tell how long investors’ tolerance for better balance and vertical integration will last and whether the pendulum will begin to swing back in the direction of simplicity.

“No one thinks that just because we acquired a business at 13x EBITDA, we will be trading at a higher multiple,” Topalian said. “We will trade at a higher multiple when investors recognize that the potential for earnings throughout the cycle is far greater than that of a single steelmaker. Our downstream business is larger than many downstream businesses alone. He added, “I would never consider us a conglomerate. This is a thoughtful and deliberate plan to grow in conjunction with steel-centric industries and users. We bring value to them and they bring us value.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering transactions and industrial companies. A former M&A reporter for Bloomberg News, she writes the newsletter Industrial Strength.

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