The COVID Bump

FIRST SEEN IN FUEL OIL NEWS | 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 several other highly seasonal and hotel/restaurant heavy areas 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 we think the assets of the company will sell for.  While we typically exceed our projections, we have found that our projections were being exceeded by a substantial amount of between 9% and 20% over our 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 we received on energy companies we put on the market.  In that time, we averaged 5.2 offers per business.  In 2020, we are averaging 5.9 or a 13.5% increase.

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

1. Interest rates are near record lows and banks are willing to lend. 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 escrow the funds they received on their PPP loan until they received loan forgiveness.  The process is longer, however smart acquirers using leverage are willing to pay higher values for companies due to lower interest rates.
2. 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, however as a general rule we have done very well.  Many people stayed home, invested in home improvements including pool heaters, generators and BBQ’s.  All reports we see on BBQ cylinder refills is that they are very strong and substantially above last year.  The result is strong profits and additional capital to invest.  In our opinion this has helped Buyers who have come in the market looking for acquisitions, as well as increased offers for most buyers with an acquisition program in place.
3. 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.
4. 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.  We recently received two 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 PE groups had investments in a chain of flea markets across the country.  The other was invested in the hospitality industry including hotels, rental cars and restaurants.  Both of the companies explained that their investors wanted to pull back investments in those business lines and instead invest in their already established downstream energy businesses 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 an election year upon us 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

September 2020

First published in Fuel Oil News, September 2020 edition