Key Takeaways
- The recent sale of Tech Air to Airgas demonstrates strong ongoing strategic and financial buyer interest in specialized industrial distribution assets.
- As Tech Air exemplifies, leading specialized industrial distributors become indispensable partners to their customers, building strong, profitable, cycle-resistant relationships.
- Additional opportunities remain to consolidate industrial distribution segments and create market-leading platforms with substantial growth potential.
Strong interest continues in specialized industrial distribution
There are a host of reasons why strategic buyers and private equity investors continue to show strong interest in specialized industrial distribution, according to Bob Baltimore, a managing director in the Harris Williams Specialty Distribution Group. “These distributors keep a wide range of global industries running at full speed,” he says, “supplying essential inputs to a wide range of processes. The expertise they bring, coupled with a high level of service, is key to the daily operations of their clients.”
Industrials Group Managing Director Giles Tucker adds that the most valuable industrial distributors deliver far more than material goods, bringing superior service, deeper expertise, and greater scale and scope than the competition. As he explains, “Those that can combine all of those characteristics create sticky customer relationships, protect their margins—and attract the attention of strategic buyers and private equity investors alike.”
Most recently, Harris Williams’ experience with Tech Air demonstrates the potential value of such a distributor. Founded in 1935, Tech Air is a leading packager and distributor of industrial, medical, and specialty gases, welding equipment and supplies. One factor boosting the company’s appeal is its market position: Within a strategically important, recession-resistant industry, the company occupies a unique and valuable spot.
“The industrial gas segment provides significant opportunities for specialized distributors seeking steady, cycle-resistant growth,” says Eric Logue, a director in the Industrials Group. Indeed, as shown in Figure 1, the global gases market has experienced such growth for several years despite challenging trends in terms of U.S. GDP and industrial production.
Figure 1: Global Industrial Gases Market Demonstrates Resilience
Source: Scope Ratings, Eurostat
A number of key factors enable industrial gas distributors to perform well through economic cycles. “For one thing,” says Tucker, “their products are critical inputs to their end customers, driving both quality and productivity, and yet generally represent less than 2% of those companies’ cost of goods sold (COGS).”
Likewise, industrial gas customers are highly diverse in terms of end markets, including manufacturing, healthcare, pharmaceuticals and food and beverage, which provides a degree of protection against downturns in industrial production. Logue explains that this protection is bolstered by the prevalence of long-term customer contracts, which are driven by customers’ desire to ensure reliable access to essential gases and related products.
Industrial gas distributors also benefit from the nature of gas production. Major gas suppliers are able to produce significant volumes of gas at very low incremental cost. As such, it benefits these suppliers to produce more gas than they themselves have the capacity to distribute, which creates steady demand for independent distribution.
An essential industry, and an enviable position
Within the $20 billion U.S. industrial gas industry, Tech Air competes in the highly fragmented $8 billion packaged gas distribution segment, of which 800 to 900 independent distributors make up 50% of the market (Figure 2). In addition to packaged gas, these distributors also serve the $8 billion hard goods market, supplying items for use with gases, such as welding equipment. The other half of the market is composed of fewer than 10 global companies that produce and distribute around half of the world’s supply of industrial gases.
Figure 2: An Industry of Major Producers and Small Distributors
Source: Harris Williams Analysis
“In terms of scale and scope, Tech Air is among a few distributors occupying a middle ground between the major producer/distributors and the smaller distributors,” says Baltimore. Tech Air has achieved this position by establishing a reputation for delivering superior service and a wide range of gases and related hard goods to mid-sized and small companies, which typically are not the focus of the major suppliers. And because Tech Air has a larger footprint and more comprehensive products and services than other independent industrial gas suppliers, it has been able to solidify its leading position and create strong, growing customer relationships.
This valuable niche, plus the potential to expand its footprint and product offerings, as well as a history of successful acquisitions and ongoing operational improvements, meant Tech Air provided potential buyers with a rare and valuable opportunity to achieve growth in this important and recession-resistant industry.
In fact, at the time of its sale Tech Air had closed 28 acquisitions and made contact with hundreds of potential acquisition targets, enabling it to build scale and route density while penetrating attractive adjacent markets. The company had also achieved attractive organic growth since inception. It had also begun shifting its revenue mix toward higher-margin business lines, including a five-year specialty gas contract with significant long-term revenue potential.
To make the most of this potential, Harris Williams assembled a cross-industry team with deep expertise and relationships in specialty distribution and industrial processes and technology. As Logue explains, “Having this wealth of experience helped us both tell the story of this company as effectively as possible, and identify the specific strategic buyers and financial investors that would appreciate everything Tech Air had to offer.”
Baltimore was confident Tech Air could generate strong interest among a targeted group of buyers. “Tech Air has many of the qualities we’ve seen in winning branch-based distribution companies,” he says. “It’s built a business on service, and has developed the scope and scale required to be a leader in the markets where it plays.”
Tucker saw equal value from an industrial point of view: “What really stands out about Tech Air is the fact that it’s providing these essential inputs to some of the world’s biggest and most resilient industry sectors. And it hits the sweet spot in terms of size, giving its buyer an ideal growth platform.”
Following a targeted sale process, Tech Air was acquired by Airgas, a leading U.S. supplier of industrial, medical, and specialty gases and related products, and a subsidiary of Paris-based Air Liquide.
Finding the next opportunity
Baltimore, Tucker and Logue agree that substantial consolidation and growth opportunities remain for companies that share Tech Air’s strengths.
“The market remains fragmented, with very strong fundamentals,” says Tucker. “Distributors with enough scale, professional management and strong brands have significant potential to develop into major platforms. It’s a great industry for strategic buyers and private equity investors looking for resilience and growth.”
Published May 2019