PETITION

Kansas-based Ferrellgas Partners LP ($FGP) is an old school business. For nearly 80 years, it has been a nationwide home and business propane provider with propane demand driven primarily by users of space and water heaters, and large engine operators (i.e., forklifts, mowers, and generators). According to the EIA, “[a]bout 5% of all U.S. households heat primarily with propane, and many of those households are in the Northeast and Midwest.” The market for the product, however, is fairly static, thereby limiting the company’s go-forward growth prospects. Accordingly, a few years back, it sought to supplement its core business and diversify its revenue streams via acquisition.

In 2015, therefore, the company acquired Bridger Logistics, a midstream services business involving the shipping and storage of oil, for approximately $837.5mm. The company paid nearly $563mm in cash (read: issued debt to pay cash) and the rest in stock: this elevated purchase price represented a 8.4x multiple on estimated next twelve months EBITDA of $100mm. The company noted the following at the time of the acquisition:

"The move positions Ferrellgas to significantly expand its midstream platform and is expected to be immediately accretive to Ferrellgas and supportive of future distribution growth.”

Only it wasn’t. Rather than being accretive, the transaction became the epitome of (i) haphazardly reaching beyond a core competency, (ii) stretched economics during a frothy seller’s market, and (iii) bad timing. Shortly after the transaction, the midstream services sectors got napalmed. And never recovered. In 2018, the Company reported that Bridger and other accumulated midstream asset gross margin decreased an astounding 75% to $12.6mm. Burdened by an over-levered capital structure, the company reversed course and rather than attempt to fit a square peg into a round hole, decided to start shedding assets to paydown debt. Indeed, the company sold the same acquired assets for a total of $92mm — which amounts to an absolutely BRUTAL level of value destruction.

Clearly that acquisition didn’t go as planned. After a brutal 18-month failure, the transaction left the most lasting impression on the company’s balance sheet:

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