Jumping into the booming oil and gas exploration business, Pasadena’s General Finance Corp. has entered into a $95 million cash and stock deal to buy a pair of affiliated water storage businesses in Texas.
The acquisition of Lone Star Tank Rental and KHM Rentals, which together had 2013 sales of $45 million, is part of a trend in which larger oil and gas companies and the companies that service them have begun to roll up smaller operations that can’t keep pace with the rapidly expanding market.
“The transaction is strategic in nature,” said Ronald Valenta, General Finance’s chief executive. “It gets us more exposure to a high-growth area. We certainly think that’s going to continue for quite some time.”
General Finance, founded by Valenta in 2006, sells and leases portable storage containers for a variety of markets, including construction, manufacturing and even household use. Roughly 10 percent of its business prior to the Texas transaction came from the oil and gas industry, a number that is expected to grow to 35 percent with the new businesses in the fold.
“More diversity is great,” said Ian Corydon, an analyst at West L.A. investment banking firm B. Riley & Co. “And if you look into industries that General Finance can serve in the U.S. and Canada, fracking is growing quite rapidly.”
Fracking, or hydraulic fracturing, is a drilling technique that injects water, sand and chemicals into shale rock to free trapped gas or petroleum. The technique has brought U.S. oil and gas production near a record high. According to an industry-funded report published by energy consulting firm IHS Cambridge Energy Research Associates Inc., the fracking boom supported 2.1 million jobs and contributed $283 billion to the U.S. economy in 2012.
Texas is a top shale oil-producing state, and the companies General Finance is acquiring supply tanks that store the water used in the fracking that has fed the industry’s rise.
The oil and gas boom has spread out to related businesses as well, such as logistics companies, truckers and caterers. And while large and companies are benefiting, the growth has some smaller companies struggling to keep pace.
Mom-and-pop roots
“It worked out as a mom-and-pop when we started,” said Edward Adcock, general counsel for both KHM and Lone Star. “Now that we’ve got 150 employees, the playing field has changed. We need probably to be more corporate, more structured in our way of looking at things and the way we budget.”
Adcock said the decision to sell to a larger firm is a common one in that part of the country.
“A lot of them would likely start to grow for about three to five years and that’s the limit they get into where they just can’t handle personal debt,” he said.
The companies General Finance are buying from George Mitchell and his cousins Bradley, Bobby and Justin Herricks together have 1,500 frack tanks and were not able to keep up with demand, said Adcock.
“So far, we have not turned down any work yet, but we are close to that because of the debt we were incurring and constantly putting on more employees, and buying more trucks and more tanks,” he said.
Valenta has seen the consolidation trend pick up pace.
“The smaller players are getting to a point where either they require more capital or they’ve already built a lot of equity that they want to monetize their investments,” he said. “Going forward, there is just a fair amount of consolidations that are going to go on.”
Brent Thielman, vice president and senior research analyst at investment firm D.A. Davidson & Co. in Lake Oswego, Ore., agreed, adding that the number of small players still in the business provides further opportunity for General Finance to grow by acquisition.
“There is plenty of fragmentation in the market where they can continue to consolidate,” he said.
Long-term opportunity
General Finance will assume the assets and debts of the two companies and keep all employees in place. Mitchell and the Herrickses will become shareholders in General Finance and will have consulting contracts with the company.
Valenta, a former senior vice president of Public Storage Inc., founded General Finance in 2006 after selling another storage business he founded, Mobile Services Group Inc., in 2003 for $700 million.
For the fiscal year ended June 30, General Finance reported revenue of $245 million and net income of $11.4 million (16 cents). The company has more than 600 employees and operates in 20 sectors, including construction, retail, mining and education, in North America, Australia and New Zealand.
General Finance plans to invest $10 million to $12 million in Lone Star and KHM in the first year, focusing on increasing sales in Texas. In the longer term, Valenta said, operations will be expanded across the nation. But he doesn’t want to be too aggressive, as oil and gas industry has its ups and downs.
He also does not want to overemphasize one sector, especially one subject to volatility. The revenue contribution from the oil and gas sector is likely to be kept at 35 percent of the company’s total.
