Cold Cash In Cold Storage

Private equity unlocking value in fragmented logistics, warehousing and distribution space

By Onofrio Castiglia in Charlottesville, Virginia and Michael Schoeck in New York

After reeling from the sight of empty store shelves and regional shortages of various personal care and food products due to the COVID-19 pandemic, investors see the potential for consolidation and value creation in America’s third-party logistics network.

Both strategic and financial buyers are circling the fragmented cold chain, warehouse and distribution facilities market. Many possible targets are small and regional players in need of technology upgrades, greater access to capital, and solutions to cut down on labor and energy costs, executives told Mergermarket.

The pandemic has exposed inefficiencies in the third-party model that private equity can exploit, according to Christopher Nolan, managing director of Dresner Partners.

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Logistics and wholesale food distribution companies like United Natural Foods UNFI , PFG, and Sysco SYY use a third-party distribution model, as opposed to a company like Walmart WMT , which controls its own distribution.

“How can grocery retailers better see back up the chain and what they’re lacking?” Nolan said. Owning technology, or finding IT solutions, could help distributors coordinate with their retail grocery clients and more accurately predict what they are going to need ahead of time, he added.

Many technology deficient third-party distribution and cold storage companies are owned by entrepreneurs, with a single regional presence, and lack the capital to compete with giant companies like AmeriCold, so this is a target-rich environment, Nolan said.

Consolidation would allow these companies to share facilities – the lack of which has been made apparent by the geographic disparity in product outages during the pandemic.

If a distribution center in Norfolk, Virginia is out of paper towel, for example, it can ask for some of the surplus at a sibling facility in Winston-Salem, North Carolina.

Nolan noted that near his home in New York City, a grocery store started “actually putting out individual rolls” of toilet paper that were destined for an institution, like a hotel or university, because toilet paper packaged for retail wasn’t available. 

“There’s clearly a disconnect between the two distribution channels,” Nolan said.

James Bell, CEO of Viking Cold Solutions, a Houston-based long-duration thermal energy storage company, said his company has a technology that allows decades-old cold storage facilities or newly built facilities to be upgraded into virtual power plants.

“The highest cost in the logistics space is labor and the second highest cost is energy,” Bell said. Its systems can help reduce overall power consumption, he said.

“The frozen food industry’s shift to technology for achieving various efficiencies has been accelerated by the challenges of COVID-19,” Bell said. Long-duration energy storage and efficiency technologies like thermal storage are on the rise as distribution companies and power providers seek to overcome these supply chain and energy challenges.

Warehouse and fulfilment M&A has increased over the last few years, with 64 announced transactions in 2018 compared with 84 announced transactions in 2019, according to a Q12020 report from Capstone Headwaters.

AmeriCold Realty Trust completed more than $1.4 billion in acquisitions in 2019 and grew its portfolio by 17%, according to company filings. In April 2019, it completed the acquisition of Blackstone BX portfolio company Cloverleaf Cold Storage, the fifth largest cold storage provider in the U.S. with 22 facilities totaling 132 million cubic feet, for $1.24 billion.

This year, just prior to the coronavirus pandemic, AmeriCold made two buys through February 2020, acquiring a 15% stake in Brazilian warehouse company SuperFrio Armazens Gerais for $27 million and also acquiring St. Paul Cold Storage, a 6.1 million cubic foot storage facility in Newport, Minnesota, for $56 million.

Several private equity groups have been consolidating regional operators, Bell said. Examples include Oaktree Capital, through AGRO Merchants Group, and Blackstone Group, through Cloverleaf, which sold to AmeriCold. Elliott Management and commercial real estate firm JLL JLL are also active in the space. 

On 23 July, Clayton, Dubilier & Rice invested in Cheney Brothers, a Riviera Beach, Florida-based regional food distributor. The deal size was not disclosed, but Cheney has annual revenues of more than $2 billion.

Meanwhile, Brian Beazer, chairman of the World Food Logistics Organization, said the dominant trend in logistics is for large institutions, more so than financial buyers, to pick up the smaller players.

AmeriCold and Lineage Logistics are the two most active acquirers, but small companies should be able to compete by offering more personalized service to a diverse array of small and mid-sized customers, he said.

Small companies that are not diversified are at risk of financial distress and, potentially, takeover, he said. For example, small companies serving only the poultry industry were hit over the spring as meatpacking plants closed due to COVID-19 infections.

Even large companies have individual facilities, serving only one or two industries, that are struggling amid the pandemic, Beazer said.

At the same time, more logistics floor space is going to be needed in the coming years to handle growing demand and changing consumer habits. A report from business consulting firm Grand View Research estimates the global cold storage market will reach $212.5 billion, expanding at a compound annual rate of 12.2% by 2025.

The USDA reports the U.S. currently has approximately 3.6 billion cubic feet of food-commodity cold storage capacity, making up roughly 214 million square feet of industrial space. JLL estimates the U.S. will need an additional 100 million square feet of cold storage space by 2026 to meet the demands of a growing population.

It’s a need Beazer said companies will meet by building new facilities, not just acquiring those that already exist.

Bell noted that rising rates of online food purchasing will also drive demand for requisite logistics space.

According to CBRE Group CBRE , rising e-commerce use is expected to create additional warehouse demand as social distancing becomes the norm.

Onofrio Castiglia is a reporter covering industrial products and services from Charlottesville, Virginia. He can be reached at onofrio.castiglia@iongroup.com.  Michael Schoeck is a senior reporter covering power, utilities and renewable energy from New York. He can be reached at michael.schoeck@iongroup.com.

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