by Maureen Flanagan
Founded in the 1920s as a dealer and broker of scrap metal, Tube City, Inc. has weathered recessions, market downturns, and the cyclical nature of the steel industry to become a leading diversified mill services company with sales of more than $470 million. In 1995, the company started Olympic Mill Services (OMS) which has become a successful slag processing and metal recovery division that serves 14 steel mills throughout the United States. Operating in a highly competitive environment, OMS recently further diversified its customer base by acquiring two long-term slag processing contracts with major integrated steel companies. Under the inspired leadership of CEO I Michael Coslov, this diversification has enhanced Tube City's ability to operate in the volatile steel-making industry. To provide Tube City the financial resources required to support this growth, American Capital (NASDAQ:ACAS) invested in subordinated notes and in senior secured notes issued by a subsidiary of the company, for a total financing package of $18.1million.
"American Capital's investment in Tube City's OMS division enables us to go forward on contracts with two major steel mills and further invigorates the company with continued growth in our slag processing operations," said Coslov.
Based in Glassport, PA, Tube City employs 545 people and operates scrap management and service facilities in seven locations. The company has been in the Coslov family for three generations -- Michael Coslov is the grandson of the company's founder and has been with the company for 35 years. During that time, he has built the business into one of the largest scrap brokers and mill service providers in the country. In 1986, he bought out his family to obtain 100% ownership of the company's stock. While maintaining the company's historical operations, Coslov expanded the breadth and depth of Tube City's mill service business and increased the number of scrap management contracts. In 1995, Tube City hired several top managers in the industry and started the OMS division. This division's top-notch management team aggressively grew the business of reclaiming metallics and processing slag from steel mills and was soon servicing many mills from coast to coast.
The financing from American Capital includes the purchase of $9.7 million in senior secured notes issued by Tube City Olympic of Ohio, Inc., a wholly-owned subsidiary of the company, and $8.4 million in subordinated notes issued by Tube City, Inc. The financing enables OMS to support slag processing services at two major integrated steel mills and puts the company in a strong position to carry out its growth plans. In conjunction with the American Capital subordinated debt, Heller Financial provided a $93 million credit facility.
"We have had a very positive experience partnering with American Capital. They worked hard to come up with a flexible financing structure to meet our needs and did so in a compressed time frame that enabled us to implement our business plan without missing a beat," Coslov said.
American Capital provides $3 million to $20 million in financing to middle market companies in need of capital for growth, acquisitions, ESOP buyouts, management buyouts, liquidity or restructurings. With capital resources exceeding $362 million, American Capital can provide long-term financing to support its portfolio companies' on-going financing requirements. Tube City is the second steel industry in its portfolio. American Capital has also made investments in Erie Forge and Steel, an employee-owned specialty forge operator. The Tube City transaction is also American Capital's second growth financing of an S-Corporation in the second quarter of 1999.
"We are pleased to team with Tube City," said David Ehrenfest Steinglass, American Capital Associate. "The company's management has made prudent decisions with respect to its operations and customers to transform Tube City over the years and take it to a new level. Prospects for its OMS division look bright."
Industry observers note that the difficult pricing environment for steel has created investment opportunities in the industry. Mini-mill capacity has steadily grown, now accounting for roughly 50% of the U.S. raw steel output. This growth has increased the demand for and the price of scrap metal, which is the primary raw material used by mini-mills. However, this price trend reversed in 1998 when worldwide scrap demand dropped along with production levels. At the same time, the U.S. market was flooded with cheap imported raw steel and finished steel products that reduced domestic production and resulted in a rapid decline in steel prices. New restrictions imposed by the U.S. government, including anti-dumping sanctions and quotas, have helped the steel industry recover.
Companies such as Tube City with a diversified base and long-term contracts with major steel producers are expected to do well. As basic steelmakers focus on their core business - making steel - companies like Tube City are looked to for the ancillary services associated with the steelmaking process. Tube City has made itself a valued and diversified partner to mini-mills and integrated steel producers alike. By so doing, the company has positioned itself to weather the industry cycles - as demonstrated by its steady performance through the current downturn.
Tube City has come a long way since its beginnings in the 1920s. New customers, operations, and a thoroughgoing commitment to finding new ways of serving the steel industry have enhanced the diversification strategy initiated by Michael Coslov and have transformed the company into a potent force within the industry. Teaming with American Capital, the company's OMS division can look forward to a future as strong as steel.
