TerraVest's Next Chapter (TVK)
M&A, new markets, the cycle, and a 21% IRR scenario
I was recently at the largest propane tank trade show in the US and spoke with TerraVest’s Chairman, CEO, Chief Investment Officer, distributors, major competitors, mom & pops, and Mexican manufacturers.
Since Hidden Gems Investing published a Special Report on TerraVest the stock has risen from C$45 to C$140, and this article summarizes my latest thinking on the company’s:
M&A runway
Opportunities in new markets
Current cyclical conditions
Future returns on capital
Valuation
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M&A Runway
The key question I tried to understand from the trade show was what TerraVest’s runway to continue making acquisitions was. I believe that the company is increasingly forming into four platforms and while no trade show covers all of the company’s businesses any longer, I was able to get good insights into the Storage Tanks and Transports verticals, which together account for about 60% of TerraVest’s markets.
Storage Tanks (~C$125mm EBITDA)
Led by Highland Tanks, KBK, Simplex, Mississippi Tank, Pro-par.
Traditionally driven by storage of propane and chemicals. Increasingly focused on new markets like data centers, LNG, and convenience stores.
Trailers (~C$80mm EBITDA)
Led by Entrans, Advance, LBT, Tankcon.
Transport of petroleums and chemicals. Driven by industrial cycles.
Water / Services (~C$60mm EBITDA)
Led by GES, LV, Aureus, Wave.
Water for oil & gas.
Legacy businesses (~C$55mm EBITDA)
Led by ECR, Granby, NWP.
Not a platform but a legacy group of businesses across heating oils, boilers, wellhead equipment, and others.
TerraVest does not segment its businesses in this way, but I believe as it continues to scale these platforms will operate with increasing autonomy. While the Storage Tank and Trailers verticals have each made an acquisition in the last year, these were still mostly driven by head office rather than at the platform level.
The result of the last decade of acquisitions is that TerraVest now dominates many of the niches it operates in.
For example, one of the companies I spoke to was Hiltz Propane Systems, a distributor and installer of large propane tanks. Hiltz told me that they source from three of TerraVest’s businesses, Highland Tanks, Mississippi Tank, and Pro-par, and that TerraVest has bought up more than half of the market.
I would categorize the remaining acquisition targets in Storage Tanks into three groups:
Major competitors
Mom & pops
Mexican manufacturers
Major Competitors
TerraVest’s biggest competitor is probably Westmor Industries, which is a comparable size to TerraVest’s Storage Tanks business and makes a wide range of tanks, trucks, and terminals.
Westmor would be an ideal acquisition, offer many synergies, and is probably one of two companies that would move the needle in the propane industry.
Westmor was sold in 2008 to private company Superior Industries (not the same Superior Industries that is publicly listed). However, since Westmor and Superior were both headquartered in a town with a population of 5,000 people it looks to me like this was one family business selling to another, possibly with no intention of the company ever being sold again.
The other major competitor is Triarc Tank, which makes a range of storage tanks and pressure vessels. Triarc was acquired by private equity firm Black Diamond Capital Management in late 2021, and the company was generating around US$250mm in revenues and US$52mm in adjusted EBITDA at the time.
Given the average length of private equity ownership, Triarc may become for sale in the next five years. However, I suspect Black Diamond has loaded the company with debt and would be unlikely to sell at the multiples TerraVest has historically paid.
Mom & Pops
There continue to be a number of mom & pops in the industry, but these by definition are small. TerraVest generated an annualized C$309mm in EBITDA in the last six months, up from C$145mm just in fiscal 2024. That rapid growth means that C$30mm acquisitions buying in around C$6mm in EBITDA no longer move the needle.
The biggest mom & pop was Quality Steel, a family business that has acquired several other family businesses and is trying to replicate what TerraVest has done.
Mexican Manufacturers
I met Tabsa, Ingusa, and Metsa, all Mexican manufacturers that are growing in the US. Tabsa and Ingusa claim to manufacture tanks up to 130,000 gallons, but from the exhibits and people I spoke with I got the impression these were still fairly small businesses that would not move the needle for TerraVest. All of them told me they have been hurt badly by the recent change in Section 232 steel tariffs, which have removed an exemption for imported products made using US steel.
Trailers
My discussions with people in the trailer market were similar. For example, Exosent, a manufacturer of LPG trailers, told me that TerraVest have bought up most of the trailer market and that there were primarily mom & pops left.
The impression I got was similar to my conversations at the Eastern Energy Expo last year. At the expo, I met a company called Tri Tank which provides distribution and aftermarket services for trucks and trailers. They told me that their niche had consolidated down to four major companies. On their banner (below with green arrows) you can see that they stock seven brands, of which three are owned by TerraVest’s acquisition EnTrans (Heil, Jarco, Polar), one was acquired by TerraVest last year (LBT), two are owned by Westmor (Transtech, Westmor), and one is independent (Brenner).
Overall, I think the runway for TerraVest in its traditional storage tank and trailer markets is now fairly limited. I’m sure the company will still acquire mom & pops, and perhaps Westmor or Triarc will be available at some point, but there are not many acquisitions left that still make a big difference.
However, I am impressed every time I speak with TerraVest’s management team: They are great capital allocators, entrepreneurial, realistic, and heavily incentivized. They have done an excellent job taking cash out of slowing or limited end markets for over a decade and successfully redeploying that into acquisitions in adjacent industries, typically at 20%+ incremental returns.
So while TerraVest’s runway in its traditional markets is now mature, I believe management are well aware that the company needs to keep pushing into new markets. Below, I break down the key new markets TerraVest is entering, the next chapter for the company, and lay out the scenario where the stock still generates a 21% IRR from here.
New Markets
In my March update I highlighted that fiscal Q1 included a clue that one of TerraVest’s segments was about to accelerate rapidly: