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M&A activity is on the rise in the U.S. metals sector, even as service centers face volatile market conditions, according to the latest research from Brown Gibbons Lang & Co., a Chicago- and Cleveland-based investment banking firm.

Growing complexity in the regulatory landscape has led to uncertainty about supply and demand, the says in its latest Metals Insider report. That volatility has forced service centers to keep tight controls on working capital and expenses to protect margins.

"There is movement toward consolidation to mitigate the volatile operating environment with larger players pressured to improve profitability and expand product lines and geography," BGL reports. "Consolidation will create more stable supply/demand dynamics, potentially reducing volatility in pricing.

"Industry participants continue to seek acquisitive growth, targeting value-added processing as a way to enhance margin and better navigate demand volatility," the firm adds.

The service center market is highly fragmented and localized, which is conducive to acquisitive growth, the investment bank's researchers say. Market conditions likely will drive more sale activity.

"Strategic buyers have demonstrated a proven appetite for the right complementary acquisitions," BGL says, "with the need for growth keeping M&A multiples strong for healthy companies. As global economies and end-markets continue to expand, valuation trends will remain positive."

Last year, BGL advised Central Steel & Wire in its sale to Ryerson, which is trying to grow market share to 6 percent over the next three years. CSW added about $600 million in annual revenues and 1 percent market share.

Ryerson also acquired Fanello Industries in a deal that expands its value-added fabrication services in the Southeast. That acquisition supports Ryerson's  strategy to grow its value-added mix to 15 percent of sales.

In other deals, Reliance Steel & Aluminum has made value-added processing an area of strategic growth with the acquisitions of metal fabricators KMS and DuBose among recent buys.