By Molly Burgess on Sep 05, 2022 | gasworld
Meritus Gas Partners is changing the distributor space as we know it. With uncertainties surrounding succession, economic outlook and rising taxes continuing to cause concern for many businesses across the US, the packaged gas distribution platform is looking to create the first national independent gas distributor – resulting in a potential competitor to the majors.
Although still in its infancy, having been founded in December 2020, it’s fair to say that Meritus has taken the distributor space by storm as it continues to spearhead its goal of assembling a national federation of high-quality independent distributors of industrial, medical and specialty gases and welding and safety supplies across North America.
Unique in its thesis, the firm was born from a working relationship with Rob D’Alessandro, Vice-Chairman, and Scott Kaltrider, Chairman, who first met when serving at Praxair Distribution Inc. Upon retirement, the duo joined forces to fill a gap in the market – and the rest was history.
“Scott and I found each other following our retirements from Praxair Distribution and we shared a common vision. The US industrial gas distribution market is a large market and remains fragmented. By our estimation, approximately 50% is served by 700-800 independent distributors. The majors have been vertically integrating and buying the independent distributors in earnest for the last three decades to augment their own distribution infrastructure,” D’Alessandro told gasworld in an exclusive interview.
“We felt there was a need for an alternative acquirer to the gas majors. We saw a consolidation opportunity to assemble best-in-class distributors who were not looking to ‘sell out’ per se, but who would instead be interested in co-investing with us and building together the industry’s only independent national gas distribution company that could rival the majors.”
”Following our platform acquisitions at the end of 2020, we made a step change in 2021.”Rob D’Alessandro
Already, Meritus is seizing its vision, having built up a company portfolio of eight players in its target markets, with more acquisitions set to be announced throughout the remainder of 2022. When it comes to being part of the Meritus group, each partner brings a source of new expertise, new energy and enhanced creditability, with each and every one boosting momentum and recognition in an ever-growing competitive market.
Gas Innovations, Atlas Welding Supply, Ozarc Gas, Volunteer Welding, Tulsa Gas and Gear, Mitchell Welding Supply, Specialty Products and Leasing and High Precision Gas are currently the eight partners with Meritus.
“Following our platform acquisitions at the end of 2020, we made a step change in 2021. We made four acquisitions in 2021, all in the fourth quarter. In doing so, we gained access to key welding and gas markets of St. Louis, Nashville, Tulsa and Dallas. Then, earlier this year (2022), we acquired two companies in California, bringing our total number of operating companies to eight.”
“We have chosen great partners. The owners of our first platform acquisitions – Gas Innovations and Atlas Welding Supply – are industry leaders with stellar reputations and they brought us, our company and thesis, instant credibility. All of our new partners have also been effective ambassadors for our company. They have been sources of new deals and the best references for prospective targets.”
D’Alessandro continued, “We are continuing to keep our foot on the gas with respect to acquisitions. I can say confidently that we are extremely active on the M&A front and expect 2022 to be a transformative year for Meritus if we are successful in closing the opportunities currently in our funnel.”
Right place, right time
Mertius’ entrance onto the distributor scene couldn’t have come at a better time, with current business trends now favoring continued consolidation more than ever. But, as D’Alessandro explained, distributor owners continue to face a litany of challenges which lead them to considering selling their business, with succession and liquidity needs being the most common catalysts.
D’Alessandro said, “Succession and ownership issues may be the biggest reasons owners consider selling. Our industry is populated with muti-generational family businesses started by grandparents or great grandparents. It is very difficult for businesses to perpetuate generationally. Each generation faces the challenge of extracting liquidity while allow the business to carry on with the next generation.”
“Finding the liquidity required to buy out shareholders can be challenging. It can hamstring the business because it requires borrowing against the collateral of the business without any real return. There are no new sales coming with a buyout of a parent or sibling to help pay the debt. So, at the end of the day, many folks pull the lever of outright sale because they see no other way to get out liquidity to those who want or need it. That’s where Meritus comes in: Our model allows the business to continue on, folks who want to stay to stay, while providing liquidity to those who want to retire.”
The Meritus way
Whilst each distributor that partners with Meritus is fully owned by the platform, they maintain their independence – something that D’Alessandro reaffirmed when speaking to gasworld. “We are assembling a federation of high performing independent distributors, led by like-minded entrepreneurs and excellent management teams, located in growing geographies and that have the infrastructure to scale and support follow-on acquisition,” he explained.
“We are committed to allowing them to remain independent and entrepreneurial to promote growth; we want to leave them largely alone, persevering their culture and their brand. Our pledge is to stay out of their way and let them do what has made them historically successful. Yet, we will support them – through capital investment and our expertise – to turbocharge their growth and profitability.”
To help support the ambitious acquisition approach, Meritus has been backed by a growth investment from private investment firm AEA Investors. Based in New York, AEA Investors studied the industrial gas distribution industry for a long time and evaluated a number of assets to find the right entry point into the space. For many years, the firm had been unsuccessful in its search – until Meritus came along.
Explaining the relationship between the two entities and the overall structure of Meritus, D’Alessandro continued, “Meritus is a holding company structured as a limited partnership. It owns 100% of the equity of the portfolio operating companies. AEA holds the majority of the equity of Meritus, but nearly 50% of the equity is held by Meritus management, operating company employees and the sellers who have elected to roll over some of their sale proceeds. We just closed a unique employee offering, where all of our operating companies’ employees were invited to invest in Meritus. We are proud that nearly 25% of our employees are now owners of Meritus, from drivers to customer service representatives to salespeople and managers.”
“We aim to grow our equity value through pure earnings growth – resulting from both sales growth and better operating profit quality.”Rob D’Alessandro
“Due to our unique ownership structure and so much of the equity being held by individuals involved in the business, we have significant buy-in and excitement around our vision. We have developed a ‘we are in this together’ esprit de corps among the operating companies and our partners, which leads to healthy exchanges of ideas and best practices.”
An antithesis to competitors
Emphasizing why he believes Meritus differs from other acquirers in the industrial gas space, D’Alessandro explained that its model resonates with distributor owners as it is the “antithesis of the majors’ approach”.
Building more on this, D’Alessandro told gasworld, “Selling outright to a strategic is an all or nothing proposition: all owners are out and there is no continuing equity opportunity. Owners may not continue running their business or retain employment at all. Employees and the facilities are likely ‘synergies’, as cost reductions are what primarily drives the strategics’ valuation.”
“Under our model, sellers remain running the business, employees are retained and valued, and the company remains independent, preserving its culture and brand. Sellers co-invest with us and are part of building something bigger, enhancing their own legacies. All of our partners share our vision of building a national business that can compete with the majors,”
“Ultimately, our goal is to grow the equity of Meritus, so our partners ultimately realize a significant return on their investment in Meritus. We aim to grow our equity value through pure earnings growth – resulting from both sales growth and better operating profit quality. We are focused on building an enduring enterprise. We are not building a business to flip it to the majors. We are building a business to compete with them.”