Hi Jim:
Very good questions & comments regarding AGP. I hope this helps.
Right now I think you can call this a growth story, but as you
mentioned, it's the bottom line that eventually tells the tale. I too
like & follow acquisition/consolidation plays. I missed out on
YF-TSE even though I first looked at them about two years ago. I
hope AGP has at least, similar returns over the same time period.
Taken from AGP's initial prospectus in Feb. 97, the co. will select &
evaluate acquisition targets based on the following criteria:
- Profitability
- Proven Management
- Market Shares
- Availability of Control
- Continuing Involvement of Owners/Managers
- Ease of integration into Current Operations
- Compatibility with the Corporation's Growth Strategy
- Above Average Potential to Enhance Return
I think scales of economies can be realized in selected acquisitions,
even though the acq. co.'s will already enjoy near monopolies in their
markets served. Savings should be realized in increased efficiencies
in several areas initially & over time. I think economies of scale
will be seen in general overheads and administration. General
overhead savings coming from better buying discounts through large
volume purchases within the group for materials & equipment related to
the end product, as well as storage & delivery expenses.
Administrative costs should be reduced especially when it counts in
the ice business....the summer time. There should be far less labor
required to process & track invoices, etc. in the peak periods through
centralized & more efficient systems the company has established.
Geographically, I think the co. will continue to look at dominant
markets within a reasonable area from markets they are currently
establishing. I believe the two co.'s being purchased in Oklahoma
will be combined & serviced from one manufacturing facility because of
the similar market area each company served. Instant scale of
economies should be realized in this case, because in some instances
both companies competed directly with each other for customers within
the market served.
Internal growth for the businesses is also possible without scales of
economies. The Canadian ice companies also exclusively distribute
Arctic Glacier bottled water. This only represents a very small
percentage of current revenues, but they may be planning on
introducing the water products to the U.S. market. Having existing
established products already listed with U.S. retailers may help get
the door open for other products. Also I discovered the cost of the
most commonly used refrigerant Freon have skyrocketed over the last
five years. Different types of freon have been introduced which are
supposedly far less harmful to the ozone layer than older versions.
It's now only sold to qualified registered individuals who have the
ability to reclaim or recycle any used freon out of a system that
previously would have been blown out into the atmosphere. I think
this means reasonable price increases can be passed along to their
customers as need be. Especially if there is only one supplier to
choose from, but more importantly if the ice companies continue to
provide a high level of quality & service, which is hopefully one of
the reasons why they were acquired in the first place.
AGP is achieving their acquisitions through a combination of stock &
cash. I was told the details are not being disclosed at the time of
closing because of the fact others within the industry may be
watching. Apparently AGP has developed & is using a formula with
which to base the possibility of higher than average returns in their
potential acquisition candidates. AGP currently generates positive
cash flow. Not enough to maintain their aggressive growth plans, but
even with acquisition expenses already being felt & no summer revenues
from recent acquisitions, it's still positive. I think at this point
we are counting on the management of the company to ensure the numbers
make sense. Management currently has well over half the shares
outstanding so I think they've got alot to lose or gain by their
decisions. My research on management indicated they have been
successful with other private business ventures, besides the ice
business. I think if you can be successful in private business then
your chances of legitimate long term success in the public arena are
greatly increased.
I don't know if the seasonality of the ice business can be evened
out. I know some ice companies used to, or still do distribute
heating oil or fire wood in the winter months, but I don't think it
amounts to much. Maybe the seasonalness of the business, combined
with the enormous capital start up costs keeps any serious new start
up players out of the industry.
I think the main reason I like this play is because it is easy for
someone to understand the nature of the business, if nothing else.
Ice is normally a spontaneous purchase, most people make occassionally
even though we all know the recipe. There's no Coke versus pepsi
scenario here...it's just a bag of ice. Like Peter Lynch says...
the more you understand your investment the less risk you take on.
Good luck in your trading. I think tomorrow spells more carnage for
the markets & the flight to quality has begun...
Markus |
