Forging strong bonds: The propane market attracts investors

Companies in the M&A space are drawn to propane due to its capital-intensive nature and the high barriers of entry. (Photo courtesy of Metsa)

An active market with new interest in propane. The unknowns of a presidential election. Optimism about the industry’s future.

The mergers and acquisitions (M&A) arena is composed of propane retailers weighing decisions about their future – if and when to sell; when and where to grow; and how to begin the respective processes. Their decisions are influenced by a host of factors, many of which remain consistent from year to year. But 2024 offers some twists and turns.

To make sense of it all, LP Gas reached out to companies involved in the M&A space about the issues impacting the market in 2024. Several interviews took place during April’s Southeastern Convention & International Propane Expo in Charlotte, North Carolina.

Here are their responses, segmented by topic.

PARTICIPANTS

John Armentano, partner, Blue Peak Resources
Barrett Conway, managing director, Cetane Associates
Tamera Kovacs, director, Cetane Associates
Daniel Dixon, vice president of corporate development, EDP
David Stroupe, executive vice president of corporate development, EDP
Gena Vasbinder, corporate development analyst, EDP
Richard Mayberry, vice president of business development, Ferrellgas
Marty Kirshner, partner, Gray, Gray & Gray
Chad Pendill, president, Legacy Energy Consulting
JT Tounge, vice president, Tounge Associates

The M&A market in 2024

Summary: The market began as one of the busiest for some and has the potential to be a record year. With the industry coming off an overall mild winter, though, cash flow might be tight for some. Buyers will be more selective.

What they’re saying

“A lot of people are looking to sell more than they ever have, but the buyers’ pool is smaller than it’s been. A lot of those buyers in the past were family businesses that have now gone yonder or are just not in that mode of acquiring. At the end of the day, there’s always been a buyer for a seller. All it takes is one.” – Marty Kirshner

“We’re seeing a lot of companies go on the market, but we’re seeing a lot of buyers stay interested. Three years ago, our average number of offers on businesses was 5.8. That’s come down closer to 5 overall now. But we’re still seeing interest. Multiples have stayed at the same level. We’re getting a few less offers overall, but we’re still seeing strong multiples being paid very similar to three or four years ago.” – Barrett Conway

“We are seeing activity that is to be expected after a soft winter in many areas for the country. Financial performance averages over a period of several years become important to properly value companies.” – Richard Mayberry

“Despite headwinds this year due to high interest rates and concerns about increased regulations, the acquisitions market still looks strong.” – EDP

Economic factors

Summary: High interest rates have not impacted the market to the extent some thought they would.

What they’re saying

“We’re still living in a world where interest rates are pretty high – the cost of borrowing. The fed has come out and said they’re going to do two rate cuts in 2024. Neither have happened yet, and people are waiting for it to happen. Those high interest rates, believe it or not, haven’t necessarily impacted the market, the values that we’ve seen in transactions.” – Marty Kirshner

“We were nervous – is high inflation, high interest rates going to impact [the market]? It’s actually been pretty solid. Bonus depreciation has kept that tempered.” – Barrett Conway

“Multiples and transaction values have softened over the past two to three years due to higher interest rates and less active buyers. Some buyers are pausing on acquisitions until they have fully integrated their previous purchases. However, for a well-run, full-service propane business with strong gross profit margins, there are still active buyers at fair transaction values.” – JT Tounge

Buyer profile and private equity

Summary: New buyers, including private equity groups, are attracted to the propane industry.

What they’re saying

“There’s a lot of new private equity groups wanting into this space. We get four to five equity groups a year reaching out to us specifically wanting propane companies. There’s a lot of new buyers out there, new money. A lot of old money too. There’s a lot of interest in the propane industry right now.” – Chad Pendill

“There’s a certain type of buyer, and private equity right now will only look at companies that sell propane. They won’t look at any other fossil fuel. The obvious is tank control reasons, for recurring revenue. The margins are better. There’s the steel, which is the asset that can appreciate over and above. And propane multiples historically have been higher. Propane still has a very strong presence, and it’s differentiated itself from the other fossil fuels.” – Marty Kirshner

“After COVID, a lot of the private equity money was invested in entertainment; they’re looking now for more recession-resistant lines of business. That’s driven a lot of people to look at this space.” – Tamera Kovacs

“You have a really sticky customer base. One big key point is the propane tank control. If your company owns a lot of the steel at the customer locations and it’s a pretty sticky recurring revenue customer that has strong margins, it is capital intensive – there is a higher barrier of entry. Propane takes quite a bit more money to get started. Higher barriers get private equities interested; people just can’t jump in and steal the customers.” – Barrett Conway

“What makes this year unique is the number of new buyers looking to enter our industry. This is in addition to private equity that was previously looking for a minimum EBITDA threshold and now are open to opportunities that in the past they would have passed on.” – John Armentano

“There are national and super regional acquirers that are expanding into new geographies this year. And some strategic and private equity partners looking to find propane platforms – typically greater than 2 million gallons of propane sales. We do expect a similar level of activity this year, and the first quarter has already been active.” – JT Tounge

November election impact

Summary: 2024 is a pivotal year with November elections determining control of Congress and the White House – and the outlook for businesses in the coming years.

What they’re saying

“November will dictate a lot of what transaction activity you’re going to see in this space. This year will be like last year, and then if it goes red in the White House, it will dramatically increase values for businesses because there’s going to be a lot more swaying of the pendulum. More business friendly, more fossil fuel friendly, pipeline friendly. 2024 is going to be a pivotal year for the fossil fuel industries.” – Marty Kirshner

“There’s an unknown with this election cycle. It’s making people think: Why am I going to wait to see what happens in November? Maybe I should sell now. At the end of the day, Congress takes a long time to change laws. There’s bonus depreciation [rules] being changed; there’s talk about capital gains rates going up, potentially even ordinary income, which means business owners’ taxes going from 23 percent to 40-plus percent, depending on your state. That’s a pretty impactful number on your after-tax dollars. I don’t think that will happen, but that is causing some people to think maybe I should do this now.” – Barrett Conway

“Some buyers might stay on the sideline through the November election to see what happens with a potential change in administration as it impacts regulations and interest rates.” – EDP

“The hope for many as it relates to the upcoming election is that we can get a pro-business administration that will reverse the ‘war on our industry.’ With the capital gains decrease that the previous administration was successful in getting implemented set to expire at the end of 2025, the hope is it will be renewed along with the other policies that are currently in place and set to expire.” – John Armentano

“There is certainly hesitation in an election year to make a big decision. The advice we provide our clients is to consider an exit based on your terms and not on external factors that are out of your control.” – JT Tounge

Motivations to sell

Summary: Retirement and succession-planning challenges are among the consistent reasons that propane retailers sell their businesses.

What they’re saying

“Putting aside typical challenges with succession planning, some issues motivating marketers to sell include increased regulation, elevated costs for trucks [and] tanks and operational expenses such as insurance, challenges in finding and retaining employees, plus high interest rates.” – EDP

“Labor force constraints, burdensome regulations and the desire to retire are still the main drivers.” – JT Tounge

“While every deal has its own unique set of factors driving a desire to sell, owner retirement remains a consistent theme among sellers. Deal time frames tend to not be in a rush. Sellers are showing patience to determine the right set of deal attributes that fit their families’ objectives.” – Richard Mayberry

“Propane marketers definitely have electrification and regulatory issues on their mind. They are also feeling the pressure of attracting and keeping skilled technicians and professional drivers.” – John Armentano

The propane industry and its future

Summary: There will be a need for reliable, versatile propane well into the future.

What they’re saying

“When you’re an investor looking for a business, you want something stable, steady, with a good track record, where the margins are good, the companies are profitable and they’re growing at a high rate. There’s not a lot that can really affect the business. A mild winter obviously affects it, but there’s nothing that’s just going to turn the spigot off tomorrow, and it’s going to be gone like some industries.” – Chad Pendill

“The beauty of propane is there are so many uses for it. It’s not just the heating – there’s fueling, barbecues, pools. There’s such a heavy need and use for it. We all know this world cannot survive on full electrification. I’m very optimistic.” – Marty Kirshner

“I like the people we have in the industry leading the charge. At the end of the day, the math makes no sense to switch everything over to electric, so I think this industry is going to be around for a long time, and that gives me confidence.” – Barrett Conway

“We are firm believers that our industry will be around for another 100-plus years. We always advise our clients not to sell out of fear but sell because you’re ready. And have a plan for what they want to do after they sell the business.” – John Armentano

Helpful tips for retailers

Summary: Retailers should prepare for the unexpected and plan their businesses for sale years before making a final decision.

What they’re saying

“Hopefully when somebody is ready to sell their business, they get some expertise, some help, because buyers have done it so many times, but this is [the sellers’] one chance to sell and maximize their value and sell it to a company that is a good culture fit for their employees and customers going forward.” – Tamera Kovacs

“Get your house in order. Start planning three, four, five years before you’re ready because there are some things you may need to improve on that take time. Life changes; you never know what’s going to happen. As long as you’re continually planning and thinking about it while growing your business – if there’s something that happens that makes somebody say, ‘Now’s the time’ – then they’re ready.” – Tamera Kovacs

“Valuations are changing over time. If you are considering an exit strategy, even in the next two to five years, it is helpful to get a valuation of your business as a benchmark toward your exit plan. This allows you to consider where you are and where you might need to grow or focus in order to exit on your terms.” – JT Tounge