Upside down and back to normal for acquisitions

October 1, 2003 By    

I’ve never met anybody in acquisitions who wouldn’t tell at least a little fib, to keep you from knowing what was really happening.

Mergers and acquisitions are both a “big” topic and a “small” topic in the propane industry. It’s also a “no good news” topic these days.

The master limited partnerships (MLPs) in the industry have been generating some “big” news. When you talk about the independents in the industry, that is “smaller” news. And when you talk about the outsiders who have recently entered or attempted to enter the business, there is “no good news” at all.

While it seems as if the activity related to the propane mergers and acquisitions might have been turned upside down, with lower prices being paid and big acquisitions becoming the norm, I think it’s all as it should be.

First, the MLPs have been engaging in only “marquee” acquisitions (big news) in the last few years. Ferrellgas acquired Thermogas in 1999 and then shut down. AmeriGas acquired Columbia Propane (who had acquired National Propane a year earlier) in August of 2001 and will most likely shut down for a while. Suburban acquired SCANA in 1999 and has gone to black (at least they have said nothing in their press releases).

Heritage Propane completed a large deal with US Propane last year and has been busy ever since. They have acquired the west coast Pro-Flame, Inc. and the east coast EnergyNorth Propane, Inc., both 20-25 million gallon companies. Meanwhile, Heritage has also been rumored to be giving chase to Cornerstone LP, which now sees itself as a seller instead of a buyer.

Star Gas acquired the nation’s third-largest heating oil retailer, Meenan Oil, along with five other heating oil companies and two propane companies.

So, if you’re a seller and these buyers who have done nothing but call on you for the last few years haven’t returned your phone call recently, don’t feel like it’s something you did wrong. These guys are either doing nothing, have been quite busy, or have become sellers.

On the “small” side, we look at independent sellers, and what I call second-tier buyers. These are the regional and independent companies who are not MLPs and thus cannot afford to pay what MLPs pay. And when I say, “cannot afford,” I mean cannot afford.

The second-tier buyer must borrow from a bank, must repay principal and interest
and must pay income taxes. The MLPs do not have to pay even one of those items. Yes, they have to pay partner distributions, but that’s not the same as paying a bank. And their partners pay the income taxes, not the partnership.

In the past, an MLP would come out swinging, bidding much more than a “small” buyer and would thus acquire the target company. The “small” buyers couldn’t compete.

This year, with the absence of the “big” fellows, I saw quite a few regional buyers acquire some “small” companies. These transactions don’t receive press releases, and the number of transactions isn’t reported by anyone. But my sources tell me quite a few of these transactions took place. This marketplace has the smaller sellers dancing with the smaller buyers, while the other has the large sellers dancing with the large buyers.

The “no good news” topic comes from the Regional Electric Co-Operatives (RECs) and the Electric Membership Co-Operatives (EMCs). These are the recent entrants to the propane industry, and they have had some recent acquisition activity. Some have been heard to cry that they, as a group, have paid too much for the companies they’ve already acquired. This has caused their bank to take another look at lending to propane acquirers.

A couple of “small” fellows in the east recently felt that sting when they were told that the deal was a “no go” just before closing. The buyer did not have the financing. So the RECs and EMCs have slowed their pace – or at least are more cautious – about getting into the propane industry. In this market, the dance has pretty much been called off.

But, in a way, aren’t things as they should be now? The “big” are dealing with the “big.” The luster has worn off the market value of companies, something that makes things a bit more logical.

The “small” are dealing with the “small,” something that hasn’t happened for quite a while and something that is good.

And the new kids are dancing much slower.

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