(Reprint from Gasworld)
By Nick Parkinson.
Why newly-launched Meritus Gas Partners believes it offers a unique solution for high-quality, independent distributors.
If you are concerned about the succession of your business, the uncertain economic outlook or the possibility of rising taxes under the new administration, then Meritus Gas Partners believes it can help.
Meritus launched in early January with the 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. Backed by a growth investment from New York-based private investment firm AEA Investors’ Small Business Fund, Meritus has big ambitions for the U.S. distributor landscape.
Two respected distributors have already been convinced about the merits of Meritus. La Porte, Texas-based Gas Innovations and Tuscaloosa, Alabama-based Atlas Welding Supply Co., Inc. have already signed up to the new platform for packaged gas distributors, which is led by a team of experienced industry experts who have held executive level roles at Praxair Distribution, Inc. (PDI).
Scott Kaltrider (Chairman) has 37+ years of experience in the industrial gas industry and, since his retirement from Praxair in 2016 after serving for three years as President of PDI, has been advising private equity firms in the industrial gas space. Rob D’Alessandro (Vice-Chairman) worked alongside Kaltrider during a 14-year tenure as PDI’s Vice-President of Corporate Development after leading independent distributor Welco Gases Corp., of Newark, New Jersey, from 1996 until 2006.
That experience, and observations of a ‘fragmented industry’, led to the birth of Meritus and, according to its founders, a platform the industry has lacked.
“Having worked in the industrial gas distribution space for some time and the industry for my whole career, we felt that there was a void,” Kaltrider told gasworld. “The industry lacks a compelling alternative to the major gas suppliers, the ‘strategic’ acquirers. While this is a space that has undergone consolidation for some time, we felt there remained many strong independent organizations which were well-aligned with the value proposition that we are offering more so than what the majors provide. We believe our platform will fill that void nicely.”
D’Alessandro, who was the principal architect of the acquisition and operational integration of approximately 100 independent distributors while at PDI, believes it is the right environment to launch Meritus.
“Despite the consolidation in our industry over the past few decades, the industry remains highly fragmented. There are approximately 1,000 distributors that operate successfully in the industry today. Distributors still comprise nearly 50% of the total U.S. packaged gas market,” D’Alessandro told gasworld.
“Current market dynamics favor continued consolidation. Owners of distributors face increasing regulatory complexities and costs, rising costs of insurance, financing challenges, and vendor consolidation by larger customers. And all typically face succession issues. It’s challenging to transfer equity from generation to generation, and all of those dynamics are in play and create an opportunity for us.”
With all of those dynamics, D’Alessandro expects the industrial gas industry to see continued consolidation, but says by partnering with Meritus a distributor can retain its independence.
“Acquisitional growth is still an essential part of the growth strategies for the major gas suppliers as they seek to vertically integrate and get closer to their customers,” D’Alessandro said.
“They have dual growth strategies – to grow organically and inorganically. Growth through acquisition is the most efficient way to increase their operating profit, as they integrate businesses into existing infrastructure. Our approach is a bit different. We are not combining and integrating these companies to yield synergies; rather, we are looking for companies to partner with us and grow their businesses with us.”
Against this backdrop, Kaltrider says joining a national federation of high performing independent distributors is an attractive proposition. Meritus says it can provide transformational capital while allowing distributors to remain independent and grow to a level the business may not have been able to achieve operating on its own, given limited financial resources and geographic restrictions. Meritus also offers owners an opportunity to roll over or exchange equity into Meritus’ holding company, which potentially allows them to share in the success of the overall platform.
“Our job at the holding company level is to promote growth,” Kaltrider said.
“We want to provide our partners with the tools and support to enhance their growth. For instance, in addition to providing access to financing, we can help them pursue and consummate add-on acquisitions in their respective geographies; they may have great contacts, but have either lacked the wherewithal or expertise – or both – to pursue acquisitions in the past. How we work together is different for each opportunity and we are eager to discuss with our partners where we can add the most value to meet their needs and goals.”
Gas Innovations and Atlas will continue to operate independently under their own local brands after joining Meritus, and more are expected to join this year.
“We think our approach will resonate with sellers because it’s the antithesis of the all-or-nothing approach strategics offer today,” D’Alessandro said.
“Strategics quickly move after closing to integrate the acquired business into their existing infrastructure, rebranding them and often closing locations. Moreover, there’s no continuing equity opportunity for the sellers. The owners in many cases don’t even maintain employment and their legacy and brand end with the sale. We will allow the company to retain its brand, remain independent, operate and continue doing the things they did to succeed previously. And the sellers will be offered the opportunity to stay in the game and invest with us.”
Gas Innovations’ principal owners and co-founders, Ashley Madray and Jason Willingham, have maintained significant equity ownership in Meritus and are President and Vice-President of Gas Innovations respectively, while serving on Meritus’ Board of Directors. Former Gases and Welding Distributors Association (GAWDA) President Bill Visintainer, and founder of the Airco Distributor Association (now known as Messer Distributor Group) and fellow Atlas owner James Cain have significant equity ownership in Meritus and continue to operate in their current capacities at Atlas. Visintainer is also part of the Meritus Board of Directors.
“It’s not for everybody but it’s a recipe for the right sellers who are looking for something different than an outright sale,” D’Alessandro said.
“Some may want the challenge of being part of and building something bigger, broadening their legacy. Some will be attracted to investment diversification. They are committed to the industry but investing in our holding company provides exposure to different geographies and market sectors while providing some wealth realization now. Some like the notion of a second bite at the apple – a second sale, potentially at an extraordinary return. But most will see our approach as a solution to address ownership and succession challenges.”
The issue of succession can prove challenging.
“There are multi-generational family businesses started by grandparents or great-grandparents that populate our industry. Each generation faces the challenge of extracting liquidity while allowing the business to carry on with the next generation,” Kaltrider said.
“Perhaps the parents want to retire and are seeking liquidity but their children are engaged in running the business. Or there are siblings who have joint ownership and the majority of their wealth is tied up in the business. Some may want to monetize their investment and get out while others may want to continue running the business. The liquidity required to buy out shareholders – whether parents or siblings or third parties – can sometimes hamstring the business because it requires borrowing against the collateral of the business without any real return. Our value proposition allows the shareholders who want to stay invested and engaged in the business to stay and partner with us while providing liquidity to those shareholders who want to retire.”
New administration, potential tax hikes
Another reason why businesses are considering Meritus’ platform is the change of administration and what it could mean for the industry. New U.S. President Joe Biden was elected with a promise to reduce net emissions of greenhouse gases to zero no later than 2050. Biden’s priorities include growing the market for renewable, green and alternative energy, which is all good news if you are in the hydrogen space. Hydrogen fuel’s future is brighter under a Biden Presidency than the previous administration, but what about the rest of the industrial gas industry?
“The other backdrop that is driving Meritus is that the change in administration may not be as tax friendly and business friendly,” Kaltrider said. “We’ve already had indications from distributor owners that this could be a good time to join Meritus. They may be looking to take on a partner that is well positioned financially, has a strong industry team and provides support and a bit of stability. As we grow, there will be a network of other distributors and executives in Meritus.
With our combined knowledge, we can find ways to solve some of the challenges that potentially could be coming down the road.”
D’Alessandro added that partnering with Meritus can provide a hedge in a rising tax environment.
“One of the benefits of our offer is that when a seller rolls over some of their equity they do so on a tax deferred basis, so those proceeds aren’t taxed to the seller until there’s an ultimate disposition which might be five or ten years later at the tax rate at that time,” D’Alessandro said.
A busy year ahead?
Some of the larger distributors – Norco, nexAir – have recently made acquisitions themselves, so is Meritus suitable for all distributors?
“It’s not necessarily the size of the distributor, it’s the structure and the challenges they are facing,” Kaltrider said. “You have many more distributors in the $10-30 million a year sales range than you do at the upper end, but some of the larger distributors are facing some of the challenges we have described and could potentially be good partners.”
“The reception to our offering has been positive,” D’Alessandro said.
“We are off to a promising start – Gas Innovations and Atlas are great businesses with exceptional management and will provide an accelerant for our effort. We believe our model will prove compelling to sellers and make us the acquirer of choice in the space.”