The COVID Bump

When the pandemic first wreaked havoc in the business community, no one could have predicted what it would mean for company profitability and values. Since then we have seen some bumps up and bumps down in value depending on geography and product mix.

Marketers in tourist areas such as Orlando, Atlantic City, Las Vegas, Maine and have seen a reduction in sales and an increase in bad debt and receivables. In our opinion the bump down has been mild as compared to the bump up.

When we put a new energy company on the market, we perform an assessment to let the owner know what amount we think the assets of the company will bring at sale. While we typically exceed our projections, we have found during the Covid-19 pandemic that our projections were being exceeded by 9% to 20% over our pre-pandemic projections.

In addition to seeing higher values, we noticed an uptick in interested purchasers and the number of qualified offers we received on our listings. In 2019, we conducted a five-year study on the average number of offers that we received on energy companies we had put on the market. In that span, we averaged 5.2 offers per business. In 2020, we are averaging 5.9 offers per business, or a 13.5% increase.

So why the increase in value and interest now?  We think there are several reasons.

Interest rates are near record lows and banks are willing to lend. At the same time, there is added paperwork to be completed and banks have been slowing down transactions. In a transaction we recently closed, the bank required the seller to place the funds received from the Paycheck Protection Program loan in escrow until they received loan forgiveness.

The process is longer, but smart acquirers using leverage are willing to pay higher values for companies due to lower interest rates.

PPP loans have brought fresh capital into the market. Most energy marketers we have spoken with have taken advantage of the PPP loans.  The loans have done what they were designed to do and that was to keep people working and keep the economy robust. Our industry may have had some slowdowns, but generally we have done very well. Many people stayed home, invested in home improvements including pool heaters, generators, and barbecue grills. All reports we see indicate a strong cylinder refill market for barbecue grills—substantially above last year. The results are strong profits and additional capital to invest. In our opinion, this has helped buyers looking for acquisitions, and has made for higher-value offers.

Accelerated depreciation remains an attractive tax strategy. Under the current tax laws, the 179 accelerated depreciation expenses have increased limits and can now be applied to used equipment, including vehicles and propane tanks. This is a huge advantage for buyers who can now depreciate assets quickly for a higher after-tax income. 

Essential industry investment is attractive. We have had a surge in calls from private equity groups looking to put their investors’ money in essential industries with consolidation opportunity and strong cash returns. The delivered fuels industry fits this model.

Recently we received calls from two separate private equity firms, already in our industry, who were looking to deploy money into their home energy business. They were looking for more acquisitions. They both explained that their equity fund had several business lines. One of the equity groups had investment in a chain of flea markets across the country. The other was invested in the hospitality industry including hotels, rental cars, and restaurants. Both companies explained that their investors wanted to pull back investments in those business lines and instead invest in their already established downstream energy business due to the recession-resistant nature of energy.

Back in March, no one knew how the pandemic would affect our industry, economy, and business value. This is still a fluid process with changes happening daily. We have a presidential election in November and no vaccine ready to distribute. We can’t say how long the bump up in values will last, but it is certainly here now. — Steven Abbate

Steven Abbate is managing director, principal, at Cetane Associates, Kent, Connecticut, which provides financial advisory services to owners of propane and heating oil distribution businesses.

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