Article

Winter windfall

The past two heating seasons could be enough to jump-start a sluggish acquisitions market and bring buyers and sellers together

Back-to-back winter heating seasons, including one memorable for record margins, have left positive impacts on many retail propane operations. The question now is: Will the welcome results of consecutive, profitable winter campaigns influence the acquisitions market this year and beyond?

The winter of 2008-09 produced record-high margins due to a sharp drop in wholesale prices during peak heating season. The winter of 2009-10 was known more for cold temperatures (and record snowfall) in certain regions of the country, extending usage and increasing volumes.

Acquisitions are based on factors, and one owner’s decision to sell his retail propane company might differ from the next. But these past two winters – or even one record season, for that matter – could be enough to spur more agreements between buyers and sellers during what many in the industry have called a downtime for acquisitions. Or it could be enough to push some company owners, undecided on whether they should sell, to finally pull the trigger on the always-emotional issue.

“A lot of these companies may have two straight years of fairly good numbers,” says Daniel Dixon, a financial consultant for Propane Resources. “That’s why it may be time to look at selling, because their numbers and company values are going to be a little higher now than two or three years ago. When we value companies, we look at the trailing three years, and the last two have been pretty good.”

So what happened? When the cost of oil plummeted from $147 a barrel to $37 in 2008-09, propane cost followed, and the timing couldn’t have been better for many propane retailers. As a result, margins surged more than 25 cents a gallon higher than the prior year, Dixon says, something he hadn’t seen in his 13-plus years in the business.

“The winter of 2008-09 was a little unusual,” Dixon says. “The market dropped as we were hitting that January-February time frame, when folks delivered a lot of gas, so margins went through the roof.”

This past winter was marked by normal to above normal heating degree-days in many states, Dixon says. According to the National Climatic Data Center, most of the country experienced below normal to “much below normal” temperatures from December 2009 to February 2010. Only spared from these colder temperatures during that span were the West Coast states and Idaho; New England and the Middle Atlantic; and the northern most regions of the Midwest.

“These two winters were very much unique, and they were two good years for different reasons,” says John Robert Mattocks, president and CEO of Williams Energy Group in Pollocksville, N.C. “Weather was present in both, but weather was more of a factor this year whereas margins were a bigger factor the prior year.”

Snapshots
While last year’s lighter acquisitions market could have resulted from many owners staying to reap the benefits of record margins, Dixon foresees more discussions taking place this year during the trade-show season and thereafter, as many acquisitions are made typically between March and October.

“Some marketers will look at two great years and say, ‘Wow, now is the time to sell,’ and there will be others who look at the cash flow generated from the last couple of years and will maybe ride it out for a couple more,” says Mattocks, whose company made two acquisitions in 2008 but none last year.

The bigger companies have held off from buying the smaller ones, a trend Thomas Knauff has seen since October 2008, when “the public markets took a beating,” says the co-founder of Propane Continental and Liberty Propane, where he oversaw a combined 60 acquisitions.

Now managing principal of the investment banking firm Jordan, Knauff & Co., Knauff says valuations haven’t quite recovered, but they remain fair. He believes the pent-up selling demand combined with a couple of good winters might be enough to spur some activity.

Gary Papay, principal of CK Business Consultants Inc., is a professional intermediary and business appraiser specializing in the sale and transfer of petroleum and propane-related, mid-market companies since 1976. He sees things “loosening up financially” as companies look to grow. He’s also gauging a lot of interest from buyers, especially the majors.

“We tell our clients all the time that the best time to sell your company is when things are going good,” Papay says. “If they bought right in ’08, those were super years; ’09 was not as good but pretty good anyway. That might turn the tide for some of them.”

Paul Norris, president and co-founder of South Carolina-based Southeastern Energy Partners, can see the acquisitions market opening as well. His company operates a business model based on acquisitions of retail propane operations, making four since 2003. Norris cites one reason for the recent slowdown in acquisitions and another reason for that trend to change.

“There has been a disconnect between what we as a buyer are willing to pay versus what a seller is willing to take. We haven’t seen a whole lot of acquisitions activity because that disconnect is there,” he says. “Now that we’ve had two decent winters in a row, that disconnect has shrunk some. Buyers might realize maybe we should spend some money and sellers see two good winters in a row with no guarantee for a third.”

Not so fast
Just as potential sellers might find reason in recent winters to divest their businesses, others – especially potential buyers – are skeptical of whether one or two particular heating seasons will actually jump-start the acquisitions market.

“I think it becomes a factor, but it doesn’t become the factor,” says John Armentano, vice president of acquisitions for Paraco Gas Corp. in Rye Brook, N.Y. “From our experience, it’s going to be more timing than anything and developing relationships so when people are ready to sell they have somebody they can trust.”

While the past two winters have been positive in Paraco’s region, Armentano says margins have been tighter compared to other parts of the country. Even so, prior to making an acquisition, Paraco looks at the overall quality of a company instead of one or two winter performances.

“The biggest factors are the quality of the company, the quality of the market and then we look at margins,” says Armentano, whose company seeks to acquire 3 to 5 million gallons annually. “We want to buy a company that we know we can grow and prosper with.”

AmeriGas looks at prospective companies and their value over a long period of time instead of “a one-year anomaly,” says Jeff Kaminski, group director of AmeriGas’ acquisitions program. Buyers will adjust (or normalize) margins and volume over a specific time frame, often the past three years, to learn about a business. This will take into account a margin upswing or downswing, a wave of colder temperatures or warmer temperatures.

“A lot of marketers are really smart. They’ve been in the business a long time, and they know what they saw a year ago is not repeatable,” Kaminski says. “While they may think that now is the time to sell, it’s not necessarily the way a buyer is going to view it. Buyers are not going to look at that one year; it will be adjusted and modified for the long-term performance of the business.”

AmeriGas values a company on reputation, safety and training history, the concentration of its residential heating business, whether the seller owns its equipment, strength of its customer base and the state of its accounts receivable department, Kaminski says. The number of gallons AmeriGas seeks to acquire each year varies, but many of the companies fall in the 1 million to 3 million gallon range, he adds.

“When we evaluate a business, as most MLPs do, we look at the cash flow that business will generate,” Kaminski says. “We assume when we do that the assets are in place. Sometimes the independent marketers tend to think about the business in asset value when in reality we’re looking at cash value.”

Every propane retailer has a different reason for selling his business, says Harold Van Derveer, an acquisitions consultant for Heritage Propane, who sold Van Derveer Gas to Heritage in 2006. But one thing is certain: That decision is always accompanied by strong emotions, especially in a family business that spans multiple generations. Van Derveer Gas had been family run since 1950.

“Your employees are your family, and most of your friends are within the industry. It’s almost like divorcing your family,” says Van Derveer, who sought more time with his family, including his grandchildren. “All the way around, it was the best thing to do for our employees as well as for the family.”