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Tuesday, Feb 7, 2023

CEO Proves Mettle in Deal

Signature Group Holdings Inc. announced its $525 million acquisition of a Cleveland-based aluminum recycler in October, making it one of the Valley’s largest deals of last year. But for Craig Bouchard, chief executive of the Sherman Oaks acquisition company, the deal for Global Recycling and Specification Alloys was far from done. In fact, the last several months have been nothing but a series of meetings as he scrambled to finance the purchase with a $28.5 million secondary stock offering and the issuance of $305 million in senior notes. And that’s not to mention the sale this month of Signature’s only operating subsidiary, North American Breaker Co. LLC, a Burbank distributor of electric circuit-breakers. The $78 million in proceeds will also help finance the Global Recycler purchase. “We were able to raise a lot of capital at a difficult time with the energy and commodities markets in flux,” said Bouchard, 61, who was eager to go into depth about the deals but unable to talk until this month. (Securities regulations prohibit executives from talking about deals while raising money on public markets.) Signature is the successor company to Fremont General Corp., a former Anaheim subprime mortgage lender that went bankrupt in 2008. Earlier in its history, the company specialized in workers’ compensation insurance and got caught in a pricing war, leading to a state takeover in 2000. Signature Holdings was created when a shareholder group bought the assets out of bankruptcy in 2010. As a result of previous failures, the company has accumulated nearly $900 million in net operating losses, or NOLs, that can shield any future profits from federal taxes. Bouchard plans to make Signature a powerhouse by purchasing profitable companies, sheltering their profits from taxes and using that cash to grow the businesses. During his meetings with about 50 institutional investors to promote the stock and bond issues, Bouchard said the NOLs were a popular conversation topic, but not the fundamental reason to invest in the aluminum recycling operation. “The NOLs are icing on the cake, but not the drivers of the deal,” he said. “We will continue to buy companies and we will benefit from the NOLs. We have a competitive advantage in acquisitions, and that’s good.” Auto clientele In 2013, the most recent year of data, Global Recycler shipped 1.2 million tons of recycled aluminum and had revenue of $1.5 billion. The company employs about 1,600 people at 24 plants in North America and Europe, and sells to more than 300 customers worldwide. Its business involves taking consumer metal from soda cans and industrial scrap, melting it down and producing ingots. The metal is then sold to canneries or building siding makers, but mostly to auto manufacturers. And that’s where Bouchard believes the company has an opportunity for growth. With higher government-mandated fuel-efficiency standards hanging over their heads, the major car makers need to lighten up their vehicles. The only viable way to do that is to convert body panels, connectors and other parts from steel to aluminum. For example, Ford Motor Co. in Dearborn, Mich. recently released the 2015 F-150 pickup with an aluminum-alloy body on a steel frame that weighs as much as 700 pounds less than last year’s model. Gas mileage is 5 to 29 percent better, depending on the engine size. “There is a megatrend occurring in the world – the automobile industry is using less steel,” said Bouchard, who previously founded Esmark Inc., a Chicago steel company and now a family holding company. “It has been legislated, and the car companies know it. The trend is pretty much unstoppable.” To meet the growing demand, Global Recycler will need to source more aluminum. In part, the auto industry provides a virtuous cycle that feeds the company because the more cars the industry makes, the more scrap metal it produces, which gives Global Recycler more material to recycle, Bouchard explained. Dick Schultz, managing director of the automotive material practice at Ducker Worldwide, a consulting firm in Troy, Mich., said Global Recycler is a well-run company, but it still suffers from the cyclical price swings in the metal commodity market. In addition, the auto makers experience wild fluctuations in their need for raw materials. “You go up and down with the auto industry,” Schultz said. “This year they will make about 17 million vehicles, close to an all-time high. When they are making 16 million, aluminum is a pretty good business, but then they are making 12 million it’s not so good.” Schultz noted that Global Recycler reported EBITDA, or earnings before interest, taxes, depreciation and amortization, of $80 million, and as long as the factories continue to be well-run, those earnings should remain solid and fall to the bottom line. “This could end up being a win for Signature,” he said. “If you don’t have to pay taxes on $80 million, you end up with a nice financial position, even if the business isn’t very exciting.” Capital concerns Bouchard’s dream is to make one acquisition a year similar in magnitude to Global Recycling. Eventually, he wants to see Signature on the Fortune 500 with himself as chairman and chief executive. Signature has about 12 people in Sherman Oaks and a few in New York, and Bouchard believes the team can make more large purchases without expanding its payroll. That’s not as farfetched as it sounds. In 2003, Bouchard and his brother Jim Bouchard bought a small steel company for $2.5 million. The company, Esmark Inc., grew through acquisitions and eventually launched a successful hostile takeover of publicly traded Wheeling-Pittsburgh Steel Co. That gave the company revenues of nearly $4 billion and a place on the Fortune 500, a feat Bouchard hopes to repeat with Signature Group. In 2008, Esmark was sold to a Russian steel conglomerate for nearly $1.3 billion. Bryant Riley is chief executive of B. Riley & Co. LLC in Los Angeles, the brokerage that helped Signature sell its secondary stock offering to institutional investors. He considers Signature a publicly traded private equity fund, and he thinks the company will continue to access capital for large deals, as long as its last acquisition proves successful. “This was a complex story that we think is a compelling opportunity, but required more explanation than a social media play,” he said. “If this deal doesn’t work and this asset ends up a bad purchase, then that changes the dynamic, but if we are right about this, then absolutely he can do it again.” Bouchard, who gained control of Signature Group through a hostile takeover last year, lives with his family in Chicago, but spends about two weeks a month in Sherman Oaks or New York on Signature business. In addition to managing companies, Bouchard loves to write, having co-penned the 2013 New York Times bestseller “The Caterpillar Way.” The book illustrates Bouchard’s management philosophy. He and co-author Jim Koch developed a method of quantifying the management performance at companies to rate their attractiveness as acquisitions. Among public companies, Caterpillar Inc. in Peoria, Ill. ranked No. 1, a finding that led to the book. While Bouchard hopes to make Signature into a diversified industrial conglomerate, for now he is working to finalize the Global Recycler deal by next month and digest the massive addition to Signature’s financial statements, which previously only had income from its circuit-breaker subsidiary. “In one day, our company is going from $40 million in revenue to $1.5 billion,” he said. “We’ll go from a net income of basically zero to over $80 million in EBITDA. This is a remarkable accomplishment.”

Joel Russel
Joel Russel
Joel Russell joined the Los Angeles Business Journal in 2006 as a reporter. He transferred to sister publication San Fernando Valley Business Journal in 2012 as managing editor. Since he assumed the position of editor in 2015, the Business Journal has been recognized four times as the best small-circulation tabloid business publication in the country by the Alliance of Area Business Publishers. Previously, he worked as senior editor at Hispanic Business magazine and editor of Business Mexico.

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