Globe Specialty Metals Inc (NASDAQ:GSM) is one of the silicon metal industry’s successful consolidators. The company has acquired numerous companies over the last decade, including Yonvey in 2008, Core Metals in 2010, and Siltech in 2013. The acquisitions have added to Globe Specialty Metals’ book value. According to management, Globe Specialty Metals has spent a net $109 million in acquisitions since 1992 and has realized an increase in total replacement cost of $1.48 billion, giving Globe Specialty Metals a 13.5x return on its investment.
Many mergers sound good on paper but end up being bad in practice. Managers promise synergy, cross selling, and cost cutting, but deliver results that fall short of expectations. Because results don’t meet expectations, many mergers destroy shareholder value rather than create it, decreasing employee morale, distracting management, and alienating customers. Bad mergers haven’t stopped companies from merging, however. If done correctly, mergers can unlock tremendous value by consolidating an industry and achieving scale. Scale lowers production costs and reduces cost of capital. It increases margins and profits. In commodity industries, scale can mean the difference between a 5-bagger and a flat stock.
In February, Globe Specialty Metals announced its largest merger yet, a $3.1 billion all stock merger with Europe’s Grupo FerroAtlantica. Grupo FerroAtlantica is a European producer of silicon metal, manganese, and ferrosilicon alloys. By merging with Grupo FerroAtlantica, the merger should yield up to $95 million in synergies, with $65 million in anticipated cost synergies and $30 million in anticipated financing synergies. The deal is expected to be accretive to EPS in the first year and will close in the fourth quarter of 2015.
If done correctly, the merger will increase EPS and EBITDA. Given that the combined company had an annual EBITDA of $325 million before the merger and that the merger could save $65 million in cost expenses and $30 million in interest expenses, the merger has the potential to increase combined EBITDA by 20% and EPS by almost 30%. Analysts are bullish because of the merger, expecting Globe Specialty Metals to earn $0.96 per share in 2016, up from 2015’s $0.82 per share. Analysts also have a target price of $25.67 on the stock, 35% above Globe Specialty Metal’s current share price.
A big hedge fund is also buying Globe Specialty Metals Inc (NASDAQ:GSM)’s stock. Steve Major‘s Corsair Capital recently filed a 13G, disclosing that it owns over 3.69 million shares, up from 1.73 million shares at the end of the first quarter. Corsair’s 3.69 million shares give the hedge fund a 5.01% stake in the company. Corsair Capital joins Clifton Robbins’ Blue Harbour Group and Chuck Royce’s Royce & Associates as major shareholders of the materials company. Blue Harbour Group owns 5.78 million shares, worth over $109 million,and Royce & Associates owns over 2.2 million shares, worth $42 million. Although Blue Harbour kept its position the same during the first quarter, the hedge fund could add if the merger outperforms.
Silicon metals and alloy demand will grow by more than 6% year-over-year in the coming decade as several mega-trends drive growth. Because solar panels use silicon as a primary ingredient, solar demand for silicon will increase. Because car manufacturers are substituting lighter weight aluminum and silicon for steel to make their vehicles lighter, aluminum demand for silicon will increase. Given that natural gas is cheap in the United States, the energy costs to produce silicon metals and alloys will stay low, increasing margins. All of these factors should help Globe Specialty Metals Inc (NASDAQ:GSM) do well in the coming decade. If management executes and the company realizes synergies of $95 million or more, Globe Specialty Metals should trade above $25 a share.
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