Energy competition, record LPG and steel prices have propane marketers looking to sell

Even the allure of an imminent heating season cannot offset mounting business pressures that have some propane marketers looking to cash out rather than dig in for a long, cold winter.

Marketers say today’s business climate is the most intensely competitive they have ever faced in the business, often spanning decades. In addition to price-slashing propane retailers, they also must battle the growing influence of electricity, natural gas and now geothermal for home heating accounts.

Add the challenges of record-high product and steel prices, conservation, tightening credit lines and new government mandates – such as filling out top screen reports in the middle of winter – and you understand the inclination to surrender the business hassles to a buyer with the best offer.

“Acquisition activity, I believe, is a bit heavier right now,” confirms Daniel Dixon, a consultant who helps facilitate company sales for Propane Resources of Mission, Kan.

“Lots of times propane marketers make that decision to sell because ‘the time is right.’ I have heard more in the last year about burnout and the business not being fun anymore because they are dealing with so many things beyond competition. For a lot of folks, that makes now the right time to sell.”

Others are seeing the same pattern.

Monthly Mont Belvieu, TX Propane Spot Prices FOB

“We have noticed a significant pickup in acquisition opportunities this past spring and summer,” says Daryl McClendon, director of acquisitions for Ferrellgas. “Whether it’s attributable to the high prices of propane and steel or just a matter of people throwing their hands up over everything else that make it tougher and tougher to earn a living, I’m not sure. It’s likely a combination of those factors.”

Liberty Propane President Kent Misemer says his company started seeing the impact of high prices a year ago, when spot market propane climbed past $1.50. Coupled with steel prices that have more than tripled since 2004, retailers paying $16,000 and up per transport load are being squeezed in ways they have never seen.

“With tank prices so much higher than they were three or four years ago, it makes it tough for a retail business to grow. All their cash flow is consumed by propane inventory. There’s just not much to put into growth. And if they can’t grow, more (retailers) are interested in selling,” Misemer says.

“It’s a different game today; it’s much more costly just to run the business.”

Meanwhile, the banking crisis surrounding the nationwide collapse of the mortgage industry has tightened lines of credit just when cash-strapped family businesses need them most.

“It’s certainly influencing how smaller dealers are able to run their businesses,” Misemer acknowledges. “We saw a great increase in the number of inquiries from smaller companies wanting to know what kind of liquidity they can get.”

JUST SHOPPING

Heightened interest from companies considering a sale does not always equate to more acquisitions, however. Many retailers are disappointed to hear that valuations of their businesses are not as high as they were several years ago when the economy was stronger and interest rates low.

Unlike the late 1990s when some buyers were paying double-digit multiples for certain operations, healthy independents in desirable locations today can expect offers in the 4 to 7 range, according to Dixon. Retailers in the middle of the country – sometimes referred to as the “fly-over zone” – continue to see lower offers due to smaller margins and a higher rate of customer-owned tanks in the field.

“We are talking to more companies, but potential sellers who are shopping around are expecting more from their previous valuations,” McClendon reports. “We are getting some who decide they may hang in a little longer, waiting for energy and steel prices to soften in hopes that better times lie ahead for whatever reason and their business will be worth more again.”

Misemer concurs. “There are still deals being done, but probably not to the point that they were the last couple of years,” he says.

Eastern Propane & Oil last month announced its first acquisition in recent years. But the 76-year-old New England marketer has an eye on the many fuel oil dealerships that have been moving to propane.

“What we are finding as we bid on purchases is that the smaller marketers are having trouble managing these swings in product cost and the frustration of customers wanting to make changes. That’s understandable, due to all the volatility,” explains Executive Vice President Jeff Taylor.

“There is a lot of frustration and concern among small marketers right now. A lot of oil guys are moving to propane because of better margins. The first few years they are tough competition, but then they find that the training and steel costs just eat up those margins.”

NEW RULES

The calendar used to dictate when acquisitions got hammered out. Independents were sold and bought from March through October – the backside of the seasonal prime selling season. Not anymore.

Dixon says the burnout factor was primarily responsible for driving five company sales he was involved in between October and March last year.

“You can’t run a business like you used to and make the same money. For folks who want to be profitable today, you have to invest in technology, to embrace the fact that things are changing. You either wrap your arms around it and stop complaining, or you fold,” he explains.

“It’s not just a matter of raising the margin anymore. You have got to get more efficient in your operation and deliver more gallons per mile. You’ve got to do things with the computer that you haven’t had to do before.”

Dixon says companies that are hanging on just a few short years before selling don’t want to spend the money to make those operational adjustments. Those who view the long-term changes can justify the investment, which can improve the company’s bottom-line value come sales time.

Taylor insists that Eastern looks for prospects that understand the value of peak operations.

“The business that is moderately well run is who we target. Those on the chopping block are there due to poor operations,” he says.

“If a company is managed properly, regardless of consumer conservation or winter temperatures, it should be reasonably profitable. But managing the business is critical.”