Gordian was engaged by Metalico Inc.’s Board of Directors in February 2015 following a publicly announced unsolicited takeover attempt by a competitor. Gordian was tasked with advising the Board in a review of strategic alternatives.
CLIENT: Board of Directors of Metalico, Inc. (“Metalico”)
Metalico is a Cranford, NJ based scrap metal recycling company. The Company collects and processes ferrous and non-ferrous metals; and collects and processes industrial and obsolete scrap metal into reusable forms, and supplies recycled metals to consumers, including electric arc furnace mills, integrated steel mills, foundries, secondary smelters, aluminum recyclers, and metal brokers.
Due to significant declines in commodity prices that began in 2014 and then accelerated in early 2015, Metalico saw a significant decline in earnings that put the Company in violation of certain covenants on its outstanding debt and pressured management and the Board, especially in light of the announcement of the hostile takeover. Additionally, Metalico faced a liquidity crisis as increasing volatility in commodity prices, the strong dollar, and weak scrap demand depressed earnings further in early 2015.
With Metalico facing imminent liquidity issues and likely to run out of cash in just a few months, the Company elected not to move forward with its previous investment banker and instead engaged Gordian. Gordian ran a multi-track process, reaching out to nearly 100 parties to discuss potential transactions including: (i) refinancing, (ii) asset divestitures, and (iii) the sale of part or all of the Company. Meanwhile, Gordian secured a forbearance agreement with certain lenders, allowing Metalico to explore a larger transaction. A further complexity was the overhang of the Company’s pay-in-kind convertible notes, which had a high interest rate, were highly dilutive to equity, and could block a refinance or sale transaction.
Facing prospective default, Gordian advised Metalico in negotiating a deal with the eventual purchaser, Total Merchant Limited (“TML”) a Chinese scrap recycler, whereby TML provided Metalico with $5 mm of liquidity through pre-purchased product, thereby avoiding defaulting. This liquidity assistance provided a window to negotiate discounts with convertible noteholders and to finalize a sale, pursuant to which Metalico was purchased for $0.60 a share (approximately $108 million) providing shareholders with twice the value than the next highest bid and an LTM EV/EBITDA multiple of 14x. Finding a Chinese buyer that was also a customer was a successful strategy to navigate weakness in domestic scrap markets.
Absent the transaction, Metalico would have been forced into a Chapter 11 where value received would almost certainly have been worse, not only for equity holders, but creditors and employees as operations further degraded due to the liquidity situation preventing a necessary working capital build ahead of the peak season. Additionally, the transaction preserved jobs for Metalico’s over 800 employees in New York, New Jersey, Pennsylvania, and Ohio.