Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Big Steel Merger Coming Up: Alcoa Inc (AA), Reliance Steel & Aluminum (RS), Metals USA Holdings Corp (MUSA)

For its part, Worthington engages in many of the same manufacturing and development processes as Reliance and Metals USA. Specifically, it is a major producer of cold-rolled and hot-rolled steel, as well as various plates and rods. However, Worthington’s customer base is a bit narrower than that of either of the parties to this transaction. It deals primarily with the HVAC and outdoor furniture industries. This may be the reason for its higher than average profit margins of over 5%.  As such, it does not produce structural steel that competes with the high-end materials that Reliance and Metals USA make.

How the Deal Is Structured

Under the terms of the deal, Metals USA Holdings Corp (NYSE:MUSA) shareholders as of March 4, 2013 will receive cash payments of $20.65 per share. Relative to the company’s current share price of $20.63, this deal offers a negligible premium. However, it did provide a premium of more than 18 percent to the company’s pre-announcement closing price. Once the deal has been finalized, the newly combined company’s revenues will approach $10 billion.

Legal Issues and Complications

Although news recently broke that a law firm had opened a legal investigation into the terms of the deal between Reliance Steel & Aluminum (NYSE:RS) and Metals USA, the merger’s success remains all but assured. After all, the company has not traded above its $20.65 offer price in at least two years and has clearly been under-performing relative to its peers. In addition, the FTC recently signaled that it would bless the deal by allowing the customary antitrust waiting period to expire early. Finally, the shareholder vote that has been set for April 10 appears likely to come off without a hitch.

Long-Term Outlook and Possible Plays

Given the volatile nature of the steel and aluminum industries, it makes sense that two mid-sized players like Reliance Steel & Aluminum (NYSE:RS) and Metals USA Holdings Corp (NYSE:MUSA) have agreed to combine. Investors who seek a strategy to play this merger may simply wish to open a long position in Reliance and wait for the merger’s synergies to be felt in the company’s bottom line. The earnings reports that the company releases over the next few quarters will determine whether its stock will consolidate for some time before moving higher.

In sum, ongoing economic expansion will provide metalworkers with considerable tailwinds over the coming years. Investors who look beyond the small premium that Reliance Steel & Aluminum (NYSE:RS) is paying for Metals USA may well be rewarded for their patience. Of course, all investors must complete their own due diligence before committing to a specific course of action.

The article Big Steel Merger Coming Up originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.