Consolidation Carousel in the U.S. Propane Industry: A Historical Perspective & Outlook

April 18, 2022

Spencer P. Cavalier, CFA, Co-Head of Downstream Energy & Convenience Retail Investment Banking, Sean P. Dooley, CFA, Managing Director, M. Vance Saunders, CPA, Managing Director, John C. Duni, CFA, CPA, Vice President and Randy Doyle, Propane Industry Veteran

Click here for a print-friendly PDF version

Introduction
The century old propane industry has been consolidating since the 1970s. Consolidation tends to increase for industries during the mature life cycle phase, as it helps to further establish economies of scale that should, in theory, lower operating cost structure, make operations more efficient, enhance returns for companies remaining in the industry, and improve the customer experience. A few examples of other consolidated industries include auto manufacturing, aircraft manufacturing, car rental, hardware and lumber retailing, office supply distribution, package delivery services, railroad, and steel.

The objectives of this paper are to address the following:

• Has the propane industry consolidated over the 2000 – 2020 period?
• Have select consolidators gained and retained market share based on gallon figures?
• Share insights from past and present industry leaders on consolidation.
• Provide our outlook on future consolidation.

Has the Propane Industry Consolidated from 2000 – 2020?
For purposes of this article, the measure of industry consolidation is the annual percentage of total retail propane gallons sold by the top ten companies reported by LP Gas Magazine (LP Gas). Even though the top ten companies reported by LP Gas may not include all of the top companies due to it being primarily self-reported, it is the most widely recognized ranking. If the percentage sold by the top ten companies is increasing over a longer period of time, we can infer that the industry is consolidating. Further, by analyzing a longer time frame, it can also be reasonably assumed that the impacts of weather are minimized. We define retail/odorized propane on the same basis as the Propane Education & Research Council (PERC), which is propane sold to the following markets: residential, commercial, industrial, agricultural, cylinder, forklift, autogas, and off/non-road.

In Exhibit 2 below is a graph detailing the percentage of total U.S. retail/odorized propane gallons sold by the top ten retailers, as published annually by LP Gas, for each given year.

The top ten retailers sold 33.5% of total U.S. retail/odorized propane in 2000, and that figure remains relatively unchanged at 33.1% two decades later in 2020. As indicated in the above graph (Exhibit 2), there were fluctuations observed over the 20-year period, with market share reaching a high of 43.1% (2011) and low of 31.2% (2019). Over the two-decade period, the average market share was approximately 38%; however, as shown in the graph below (Exhibit 3), since 2010 the percentage of gallons sold by the top ten retailers on average has decreased. Most notably, each year of the 2016 – 2020 period ranks below the approximate 20-year average of 38%.

Have Select Consolidators Gained and Retained Market Share Based on Gallon Figures?
The three largest propane distributors, AmeriGas Propane (AmeriGas), Suburban Propane Partners, L.P. (Suburban), and Ferrellgas Partners, L.P. (Ferrellgas) (collectively referred to as the “Top Three”) have been the most active consolidators on a volume basis during the 2000 – 2020 study period. Having been stand-alone public entities for the majority of that period (AmeriGas became a subsidiary of UGI in April 2019), we will use these Top Three as a proxy for market share growth and retention. We included Ferrellgas’ acquisition of Thermogas Co. in November 1999 due to its materiality.

In Exhibit 5 below, the graph illustrates total retail gallons sold by the Top Three from 2000 to 2020. The approximate 22% increase from 2.1B gallons in 2012 to 2.5B gallons in 2013 was predominantly driven by AmeriGas’ acquisition of Heritage Propane (~500mm gallons) and Suburban’s acquisition of Inergy (~325mm gallons). The volume graph also illustrates, collectively, that the Top Three have not continued to grow market share. In fact, the graph indicates that the Top Three have not retained market share. While all propane retailers, including active acquirers, are affected by varying degree days, conversion to natural gas, electrification and intentionally rationalize gallons down in order to focus on a certain customer subset, this amount of gallon loss is significant. Overall, the Top Three sold approximately 2.5B gallons in 2013 and approximately 2.1B gallons in 2020.

It is important to note that since 2012 there have been notable propane M&A transactions (sellers with propane gallons in excess of 10mm and/or a reported transaction value greater than $50mm). Exhibit 6 below details these select transactions over the last decade.

Insights from Past and Present Industry Leaders on Consolidation
While it is clear the industry has not consolidated from a volume perspective, this point raises several interesting questions. Have consolidators in the industry fully realized the intended benefits of consolidation? Have they achieved economies of scale? Have they reached information technology and capital structure advantages that could or should be correlated to some degree with the size and scale of larger companies? We have seen firsthand that these larger companies in the industry do benefit from a cost of capital advantage, which is partially attributed to more sophisticated and expansive credit facilities and, in general, greater access to capital; be it debt or equity capital.

Other questions that come to mind when considering the goal/success of consolidation (some specific to the propane industry) include:

• Has geographic and degree day diversification increased?
• Has intentional customer rationalization such as focusing on higher margin/sticky customers by buyers potentially influenced the decrease in market share of the top ten propane retailers?
• Has the customer service experience been enhanced?
• Have operations for the larger companies become more efficient (e.g., optimized routing and deliveries, less overhead per gallon/customer, etc.)?
• Have acquirers retained human capital, talented management, etc., from targets after a transaction is consummated?

Based on our detailed research and interviews with notable propane industry leaders, a prevailing theme was propane retailing is a “highly personalized utility” unlike other utilities such as water, electricity, and internet service. While industry consolidation, along with maturity, has led to improved safety, marketing, and technology, consolidators, in general, have not done enough to enhance public perception and the overall customer experience. The following are some of the reasons that cause customer attrition post-acquisition:

• Raising prices significantly to achieve higher margins
• Offering limited payment and hedging programs
• Centralizing pricing versus keeping it at the regional manager level, who are more in-touch with local competition
• Centralizing customer services centers, which ultimately diminishes response times and dependability
• Reducing employee headcount from acquired companies and/or relocating employees post-acquisition who have local ties to the community, especially in rural markets
• Eliminating installation, repair, and other HVAC services, especially in markets that have come to depend on that level of service

With propane being such a personalized utility, it’s clear from these observations that consolidators must adapt to the unique “personality” of each market. If not, customers will switch to a propane retailer who will provide the level of desired service, pricing, and payment programs. However, this is an industry where switching is not always easy for customers, especially if the retailer controls the tanks. But, when frustration reaches a certain point, customers will make a switch, as they have shown.

We previously mentioned how larger consolidators typically enjoy a lower cost of capital and access to capital advantages relative to most propane retailers seeking acquisitions. This is primarily due to the larger companies having structured credit facilities and/or access to public capital markets to position themselves to acquire. However, if not structured properly (i.e., burdensome debt, pressure to increase and fund distributions, etc.) these capital structures can create pressure and cause propane retailers to make decisions that are not customer centric and lead to long-term volume attrition. Further, while propane retailing is an essential industry known for stable cash flow, it is significantly affected by weather and is very capital intensive. These two variables can amplify the issues that are associated with non-optimal capital structure.

Outlook
The U.S. retail/odorized propane industry has proven to be resilient and is essential to the future energy needs of the U.S., regardless of impending alternatives and the associated timelines. Further, PERC and NPGA are doing a great job of promoting propane’s cleanliness on a carbon intensity basis, and its role and importance in our national energy policy. Propane also has the staying power desired by both shareholders and stakeholders throughout the U.S., which is further supported by the increase and reliability of domestic gas production.

Additionally, consolidation and M&A will continue to be active forces in today’s markets, as well as the future, given the following tailwinds:

• Plenty of viable acquirers eager to build and/or grow propane company platforms in the U.S.
• It remains a fragmented industry with a sufficient pool of potential sellers, especially as the shareholder age base rises with family-owned companies
• Propane customers remain loyal, if treated well
• Assuming interest rates remain low relative to long-term historical averages, capital markets remain open, and a neutral to favorable tax code environment exists, acquirers should be able to pay attractive purchase price multiples while still maintaining their required rates of return

In closing, propane retailing is an attractive industry for investors seeking stable and recurring cash flow, and an incredible opportunity exists for consolidators who are structured properly to manage a personalized utility. If consolidators can lead the industry with an enhanced customer service experience, it will help promote the green and clean nature of propane and how it should continue to be a major part of our national energy policy. If effective, industry volumes should grow, enticing more investors to enter the industry.

SOURCES

Perkins, Tucker. Personal Interview. Interview by Randy Doyle and Spencer Cavalier. 28 February 2022

Simcox, John. Personal Interview. Interview by Randy Doyle and Spencer Cavalier. 8 March 2022

Bertelsmeyer, James. Personal Interview. Interview by Randy Doyle and Spencer Cavalier. 8 March 2022

Revere, Carlton. Personal Interview. Interview by Spencer Cavalier and Vance Saunders. 14 March 2022

Richesson, Brian and Kanaba, Brian. Discussions with John Duni, and select data provided for LP Gas Magazine’s Top Propane Retailers and Annual Transaction Summaries. LP Gas Magazine. March 2022

Propane Education & Research Council (PERC). Industry Gallon Data. Years 2009 – 2020

American Petroleum Institute (API). Industry Gallon Data. Years 1999 – 2008

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with an additional office in Baltimore, MD. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve outs, special situations, management buyouts, corporate valuations and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, business services, consumer products, convenience retail, downstream energy, healthcare and industrial products.

Disclaimer
The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.