Bluescope's bold buy

Paul O'Malley, less than two months into his new role as Bluescope Steel's chief executive, has announced his first major acquisition, the $US730 million purchase of a group of US steel building products manufacturers. With the US potentially facing a recession, it is a bold start to his tenure.

The businesses to be acquired under the banner of the IMSA Steel Corp – Steelscape, ASC Profiles, Varco Pruden Buildings and Metl-Span – don't have any significant exposures to residential construction, which has been battered by the impact of the sub-prime crisis. A prolonged period of slow growth in the US economy or a recession would, however, inevitably affect commercial construction.

But Bluescope isn't averse to backing itself to acquire and improve businesses in difficult conditions. Its first significant foray into the US market was the acquisition of Butler Manufacturing in 2004. Butler had been forced to put itself up for sale by its creditors after an apparently inexorable decline into losses.

O'Malley's predecessor, Kirby Adams, saw Butler, not just as an entry into US manufacturing but more particularly as a backdoor entry into China. Butler was, and is, the market leader in pre-engineered buildings in both markets.

Bluescope paid $US204 million for Butler, which also included a downstream aluminium business, Vistawall. In June, having dramatically turned around the earnings of Butler's steel-based businesses, Bluescope sold Vistawall for $US190 million – essentially it got the businesses it actually wanted for almost nothing.

The group's successful experience of managing and adding value to difficult manufacturing businesses in the tough US market would have given it confidence to embark on a far larger expansion of its presence there, despite the uncertain times.

That confidence would have been bolstered by the fact that two of the businesses – Steelscape and ASC – were once part of the BHP family from which Bluescope itself was spun out. Those businesses were sold to a Mexican buyer in 2000 as part of Paul Anderson's reshaping of the then-troubled BHP, ahead of the spin-offs of OneSteel in 2000 and Bluescope in 2002. They were onsold, within a package of other businesses, to an Argentinian group, Temium, earlier this year.

Thus Bluescope knows some of the businesses very well – Steelscape has remained a big customer for Bluescope's Port Kembla hot rolled coil product and the other acquired businesses also purchase coil from it.

The acquired businesses will add to Bluescope's geographical diversification and its vertically integration – there appears to be scope to supply more coil from Port Kembla -- and substantially expand both its capabilities in the US market and its distribution network.

Bluescope believes it has competitive advantage in its segments of manufacturing. It also believes there will be $US40 million a year of synergies available within three years and that the purchase will be earnings-per-share accretive in its second year, providing it with some insulation from the risks of the increased exposure to the US construction cycle.