by Maureen Flanagan
In less than a decade, Aeriform Corporation has been transformed from a $10 million subsidiary of the giant conglomerate Union Carbide into a successful employee-owned business with revenues of more than $32 million. Headquartered in Houston, Tex., Aeriform is the largest independent distributor of packaged industrial and specialty gases in the state. Having expanded through internal growth and 17 acquisitions, the company has increased sales to a diversified customer base and refocused towards the most profitable segment of the packaged gas market. When Aeriform needed a financial partner to build on its success, it turned to American Capital (NASDAQ:ACAS), a specialty finance firm with expertise in structuring and financing ESOPs. In July 1999, American Capital invested $7.5 million of senior subordinated debt to support the company and its long-term growth.
"The gas industry is highly fragmented and continues to consolidate," said Aeriform President and CEO Michael Logan. "The winners will be the companies that can capitalize on this change in ways that efficiently and profitably benefit customers. American Capital offered the financial partnership and long-term capital Aeriform needs to accomplish our goals in our growing Texas market," said Logan.
Founded in 1946, Aeriform originally operated as an industrial equipment distributor serving the Texas welding market. In 1970, the company merged into a newly formed corporation, IWECO, Inc., which eventually became a wholly owned subsidiary of Union Carbide Industrial Gases. In 1990 Union Carbide spun off several subsidiaries, including IWECO, and employees acquired the company, later renamed Aeriform, through an ESOP.
The company's two divisions, gas technology and welding technology, provide a broad range of products, logistical services and technical support. Its customer base numbers more than 10,000 companies, from the world's largest industrial corporations and health-care providers to research institutions and independent businesses. The company is a leader and one of the most technically advanced in producing specialty gases which are produced and blended to conform to precise customer specifications. It also manufactures medical gases used in diagnostic, clinical and research applications, industrial gases in all grades and purities, as well as welding equipment and materials. Operating from a network of 16 retail locations and several manufacturing facilities, Aeriform gases are packaged and supplied in a broad range of purities and volumes. The company also produces gases on-site at customer locations and has set up fully staffed facilities at some of the large refineries it serves to further enhance customer service.
The companys excellence in customer service distinguishes Aeriform from its competitors. Highly trained employee-owners provide a superior level of value-added technical expertise to Aeriforms products, and the company regularly measures and monitors its service, as well as product quality and safety. It also promotes education and research through the Aeriform Welding Technology and Training Center.
In the late 1990s, however, Aeriforms financial requirements changed as its ESOP matured and the company made a series of acquisitions in the consolidating packaged gas market. Led by a strong management team, Aeriform looked for a financial partner that had experience with ESOPs, was focused on middle market companies and could support the companys growth strategy over the long-term. With an expertise in structuring and financing employee-owned companies, American Capital proved to be an ideal partner. American Capitals resources exceed $275 million, which the company deploys in the form of senior debt, subordinated debt and equity to middle market companies in need of capital for growth, acquisitions, employee buyouts, management buyouts, liquidity and restructurings.
In addition to its investments in a wide range of industries, American Capital has provided financing to more than 20 employee-owned companies since 1990. Aeriform is the second employee-owned packaged gas distributor in American Capitals portfolio. In 1992, American Capital helped employees of Gas Tech, a distributor in the Midwest, buy 55% of the company from Union Carbides spin off company Praxair. Six years later, when Praxair bought back the company -- which had grown to become one of the ten largest packaged gas distributors in the country -- employee owners sold off their stock for an average gain of $223,000 each. Gas Tech was regarded as one of the most successful medium-sized ESOP transactions ever executed, according to John Hoffmire, American Capital Vice President of Sales and Marketing. Hoffmire represented the seller in the Union Carbide spin-off transactions and later sold his firm to American Capital.
"We have the same high hopes for success at Aeriform," Hoffmire said. "With a management team that has done an excellent job of building this company during the past nine years, Aeriform has achieved strong earnings by focusing on higher-margin, value-added products and services." In addition to structuring and financing ESOPs, Hoffmire added that American Capital can meet the ongoing financial requirements of ESOP companies as they mature. "In the case of Aeriform, we helped fund its repurchase liability and enabled it to meet long-term requirements for growth and other strategic needs," he said. Aeriform is 100% employee-owned, 55% by workers and 45% by management.
Aeriform is in an ideal position to pursue its ambitious acquisition strategy. The fragmentation of the packaged gas distribution system - approximately 1,800 mostly independently owned distributors - opens up abundant opportunities for expansion. Industry consolidation has in fact been driven by the efficiencies of larger operations, increased demands of complying with regulatory requirements and a wave of post World War II owners reaching retirement age. Fewer than 25 of the 1,800 distributors have sales exceeding $25 million. Moreover, only 30 industrial gas suppliers are located in the Houston area, with only 8 of those selling the higher margin specialty gases. The companys location is also an advantage: Texas has a strong economy and growing labor force, in addition to a strategic mid-continental location and excellent transportation system.
Gas is an industry that remains strong and stable. The global industrial gas industry is a $30 billion business that is projected to continue to expand at a 4% to 5% rate through 2002. The U.S. annual demand is estimated to be about $7 billion. The strong U.S. market has been fueled by a robust economy, broad-based demand for these products and continued development of new applications for gas products. The higher priced, high-margin specialty gases have shown particular strength during the past decade as new gases, and new applications of existing gases have emerged. Specialty gases serve important research, quality control and testing roles in a variety of industries including medical, pharmaceutical and petrochemical.
"The Aeriform ESOP represents capitalism at its finest," Logan said. "The employee owners are highly motivated and take pride in their work, resulting in a committed workforce that is dedicated to what they do." With a tight labor market in Houston, this commitment and dedication have set Aeriform apart from the competition, presenting a formidable challenge to competitors when coupled with the companys focus on value-added products and services.
"With a financial partner like American Capital, we are confident that Aeriform can operate as effectively as possible and will continue to do so in the future. The company is poised to become a major player in the industry, setting the highest standards of quality and customer service. With a broad ownership base, all of us at Aeriform are working hard to make that happen," said Logan.
