Unalloyed returns

Private equity's critics may complain about quick flips, but limited partners never do.

Platinum Equity LLC's investors certainly won't have any quarrel with the firm's profit on its investment in PNA Group Inc., an Atlanta steel fabricator and distributor that Platinum bought two years ago with a measly $17.5 million equity investment. Beverly Hills, Calif.-based Platinum won't reveal its return, but figures disclosed in a prospectus last year, when PNA planned to go public, show that Platinum stands to make 25 times its money, give or take a few multiples, when it sells PNA to Reliance Steel & Aluminum Co.

Reliance and Platinum announced June 17 that Reliance would pay about $1.1 billion for PNA, which Platinum bought in May 2006 for $365 million from Germany's TUI AG, a one-time shipbuilder that has morphed into a tour and travel company. PNA's primary products are carbon steel plate and bar, structural and flat-rolled products.

"When we acquired PNA, two of its three operations were performing well, Delta Steel and Infra-Metals, and one was dismal [Feralloy]," says Platinum partner Jacob Kotzubei, who led the investment in PNA. "In addition, the three companies operated without any sense of cooperation," he adds.

As chief executive, Platinum installed Sandy Nelson Jr., a retired industry veteran who quickly moved to sell one money-losing facility and consolidated others, then oversaw three acquisitions.

Metals Supply Co. Ltd., which PNA bought for $54.1 million in 2006, and Sugar Steel Corp., which it bought for $44.5 million in March, bolstered PNA's position in the structural beam market. The company strengthened its high-end plate value-added processing business with the $54.6 million purchase of Precision Flamecutting & Steel LP in December.

The purchases, which required no new equity from Platinum, helped push up PNA's annual revenue by a third, from $1.2 billion two years ago to $1.6 billion. PNA had net income last year of $27.3 million and Ebitda of $101.6 million.

Business is still buoyant this year. Sales in the first quarter were up 16% from the same period last year, at $474 million, net income was 50% over last year's figure, at $14.2 million, and Ebitda soared more than a third, to $40.7 million.

By the time PNA filed for an initial public offering in May 2007, barely a year after Platinum had closed the purchase, Platinum had already realized about $181 million, or 12.5 times its money, on its investment, including $162.5 million in dividends. (The rest consisted of management fees from PNA.)

Now Platinum stands to rake in a further $300 million or so on the sale of the company, according to a source familiar with the deal. That would bring Platinum's winnings close to $500 million, or more than 25 times the original outlay.

Reliance says the purchase would fill in gaps in its geographic and product offerings and would be immediately accretive to earnings. Its shares rose 3% the day of the announcement.

The acquisitions and better management "transformed PNA from a collection of good companies to being the market leader in structural beams distribution and processing and a sizable player in plate with a core geographic focus in the Gulf Region and the Northeast," says Kotzubei, "coupled with one of the largest volume players in hot-rolled steel focused in the Midwest." Internally, more emphasis is on cooperation and sharing of best practices, he adds.

For Platinum, it was just one of several bets it has made on metals businesses in recent years. In December 2005, it acquired steel services firm ESM Group Inc. from Germany's Degussa AG for $55 million. Platinum sold ESM to SKW Metallurgie Group in October 2007. That month it paid $2 billion to take private Ryerson Inc., which sells steel products, aluminum, copper and industrial plastics to machinery manufacturers and metal mills.

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