Investor's Business Daily, July 3rd, 2007
It all started with a purchase of a small local gas distributor, Connecticut Oxygen, in 1982.
Peter McCausland, a lawyer at the time, saw his $3-million purchase as a retirement nest egg. But within four years, he left his practice to head up the small gas distributor. He renamed the company, and Airgas was born.
In late 1986, McCausland took Airgas public. In the 20 years since, the CEO has grown Airgas' ARG share price by more than 4,000%.
The Radnor, Pa.-based company buys gases from bulk producers, then puts them into cylinders and resells them to industrial and commercial users.
Its focus has been to deliver packaged gases to the welding industry. It provides acetylene that powers welders' torches and other gases needed for cutting, such as oxygen, nitrogen and argon. It sells safety gear and equipment to this target group as well.
"Welders have been the company's core focus. This market formed one of (the) legs of its three-legged stool," said Mark Gulley, a senior specialty chemicals analyst for Soleil Securities. "It has since moved its services to new industries, but for the first 23 years, this business rested on a one-legged stool of growth."
Today, Airgas supplies oxygen tanks to hospitals, carbon dioxide used in a fountain soft drink, helium for balloons, liquid nitrogen for research labs and gases for various industries and niches.
But metal fabrication, welding and repair work still drive half of Airgas' sales. With its 900-plus locations around the country, business has been good.
Sales in the fiscal year 2007, which ended March 31, rose 13% to $3.2 billion. Full-year earnings hit $2.00 a share, up 24% from 2006. Airgas has posted profit growth of 20% or better in each quarter since June 2005.
It raised its outlook for first-quarter earnings to 52 to 54 cents a share. Analysts polled by Thomson Financial expect 62 cents.
Building Boom
One reason for its current growth is the strength of nonresidential construction, Gulley said. There has been a building boom in roads, highways, energy plants, airports and other infrastructure, he said.
The $9 billion U.S. packaged gas and related hard goods market is highly fragmented. There are 900 small, independent distributors that control half the market. Airgas' top four rivals make up about 20%.
But Airgas is the leader of the pack, controlling a third of the U.S. packaged gas market, Gulley said. It has done this by methodically acquiring smaller distributors, he said.
Airgas' healthy appetite for acquisitions has produced more than 350 buyouts in 25 years.
Airgas put the brakes on its acquisition spree during the economic slowdown earlier this decade. In fact, it made just two acquisitions from 2001 and 2002 after making 267 buyouts in the first decade as a public company.
"It took some time off to invest in its distribution infrastructure due to an industrial slowdown and increased competition," said analyst Laurence Alexander of Jefferies & Co.
But it got back in the saddle by making 35 buyouts since 2004. In the last five years Airgas has gobbled up three of its largest rivals.
In 2002, it bought Air Products' APD packaged gas segment for $220 million. Two years later it acquired the packaged gas business from BOC Group for $240 million.
But the most significant buyout came last year, Gulley said. The purchase moved Airgas into a new market outside of distribution to form a new leg of growth, he said.
In November, it bought the U.S. bulk gas business of Linde, a German firm, for $495 million. The deal included eight air separation units that raked in $176 million in sales last year.
For the first time, Airgas was now a part of the bulk production business. The deal served the company a 10% slice of the bulk market pie.
The regional nature of the gas business coupled with increased demand has led to some gas shortages throughout the U.S. But the Linde deal will allow Airgas to address this problem, Alexander said.
"The timing (of this deal) is very good. Bulk gases are very tightly priced in the U.S. now. These plants give us additional product, taking us from manufacturing 10% of our product to 30%," McCausland said in an interview with Institutional Investor. "If we want to expand our bulk capacity in the future, it will now be much easier."
This was its largest acquisition to date. The deal closed this year in early March. Due to antitrust issues, regulators required Linde to sell its bulk and packaged gas segments after it bought BOC last year.
Twenty days after closing the bulk gas deal, it spent $310 million to acquire Linde's U.S. packaged gas business. The unit generated $346 million in sales last year.
"(Linde's) packaged gas locations would fill in our network in the Pittsburgh to Chicago corridor and in other important geographies in the eastern U.S., helping us serve customers more effectively," McCausland said in a press release.
Delivery Problem
Getting gases to customers isn't easy due to the fact they are packaged in heavy cylinders and shipped in large trucks. You can only haul the cylinders so far because transportation costs are high.
"If trucks have to drive more than 75 miles, the company loses money," Alexander said. "It's a challenge to sell so many gas products to an assortment of industries, but Airgas has done a good job."
Growth through acquisitions has paid off. The strategy has provided Airgas with a solid logistical footprint throughout the U.S.
But one question still remains. What will drive Airgas' growth decades from now?
Gulley said McCausland has been looking to diversify. The Linde deal helps, but those new plants give Airgas a small share of the bulk gas market, he said.
"It started to diversify more by investing in processed compressed gases. The two-year old unit called Airgas Specialty Products sells ammonia, refrigerant and processed chemicals," Gulley said. "This is the company's third leg of that stool and it will support future growth."
