by Maureen Flanagan
"The combination of two successful storage tank companies - Columbian Steel Tank Company and Engineered Storage Products ("ESP") - creates a new, leading manufacturer of bolted and factory-welded storage tanks for municipal, industrial and agricultural markets. On January 10, 2001, CST Industries, Inc., a newly formed company, acquired the two tank storage companies in a transaction sponsored by George K. Baum Merchant Banc ("GKB"). In support of the acquisition, American Capital Strategies (Nasdaq: ACAS) invested $9 million of senior subordinated debt.
"With its well-respected brand names, CST will dominate the market for bolted storage tanks while offering customers a wide range of storage solutions. The combination of ESP and Columbian is a real winner, enabling synergies and economies of scale in manufacturing, purchasing, and marketing," said Don. Wagner, CST's President and CEO.
ESP, formerly a division of A.O. Smith Corporation (AMEX: SMCA), is based in DeKalb, IL, with facilities in Parsons, KS, and Winchester, TN. ESP focuses on building bolted and factory-welded tanks for the storage of water, wastewater, bulk food, chemicals, plastics, minerals, forage and grain and animal waste. ESP's tanks and silos come in a broad range of configurations -- including liquid reservoirs, air column tanks, gravity blending silos -- and can accommodate a variety of unloading systems. ESP also supplies the agricultural market with unloaders, parts, and rebuild kits that allow structures to be relocated; as well as construction services for erecting its tanks. ESP's products are sold under several brand names: Aquastore® for water and wastewater storage; Peabody TecTank® for liquid and dry storage in municipal and industrial markets; TecStore® for greater capacity in liquid storage solutions; SealWeld®, an aluminum tank developed for the petrochemical market; and Harvestore®, Slurrystore® and Alliance® used in agricultural markets.
ESP distinguishes itself from its competitors with the application of unique epoxy, acrylic, and glass coatings, which are applied in a factory-controlled environment. Several ESP coatings have become industry standards. Interior coatings are used to enhance flow characteristics, comply with regulatory requirements set by agencies such as the Food and Drug Administration and National Sanitation Foundation and to provide superior resistance to corrosion, chemical attack and temperature variations. Exterior coatings are designed for high gloss and color retention even in severe environmental conditions. The company's glass-fused-to-steel process, developed in the 1940s, is used to coat many of the tanks it manufactures.
Columbian manufactures and markets bolted storage tanks made from carbon steel or stainless steel and marketed under the Columbian name. The tanks are designed to store a variety of materials, both dry and liquid, and comply with specific codes such as the American Water Works Association, American Petroleum Institute, and the National Fire Protection Association. Founded in 1893 in Kansas City, MO, Columbian was the first company to manufacture bolted steel tanks with the American Petroleum Institute label.
Columbian tanks are pre-engineered to customer requirements and often require complicated fabrications. Columbian's customers purchase its tanks to store potable water, wastewater, fire protection water, industrial liquid, and oilfield products in addition to dry bulk and agricultural products. The tanks are factory-coated inside and out, providing optimum protection that offer advantages over field-welded tanks. Columbian's tanks compete at the lower end of the storage capacity range. Like ESP, Columbian also erects tanks and provides erection advisory services.
"Combined as CST, the new company's competitive product lines address the storage needs of a variety of end markets and applications. This investment brings a strong company to American Capital's portfolio," said Mark Schindel, American Capital Principal. "The company's management are veterans in the business and will take advantage of market opportunities that realize the full potential of CST's offerings, its proprietary technologies, and the unique processes and applications that have been built over the years."
To accomplish the acquisition, American Capital provided $9 million of senior subordinated debt. GKB and Don Wagner, CST's CEO, provided the equity capital. LaSalle Business Credit, Inc. provided senior term debt and a revolving credit facility.
This financing is American Capital's first investment in 2001. Since 1997, ACAS has invested in middle-market companies in need of capital for growth, acquisitions, management and employee buyouts, or restructurings from a wide range of industries.
Storage tanks are a critical component of today's infrastructure. In 1997, the market size for U.S. and Canadian tanks sold to municipal and industrial markets for water and wastewater applications was $478.5 million. The dry bulk storage market for tanks in industrial applications in 1997 was estimated at $240 million globally.
The types of storage tanks manufactured by CST offer competitive advantages over other storage options, such as field-welded tanks, concrete, or underground tanks. Tanks constructed above the ground are easier to build, cost less and can be built in far larger capacities than underground tanks. Compared to field-welded tanks, tanks welded in the factory are not subject to the environmental problems associated with on-site construction and the higher overall costs of increased labor and more frequent maintenance. Bolted steel tanks are competitive in the medium capacity range from 200,000 to two million gallons. They are resistant to corrosion, require little maintenance, can be quickly erected and relocated, and allow for increases in capacity. Factory coatings add further advantages to accommodate specific uses. The company's glass-lined tanks, for example, are used in various industries and are particularly well suited for storage of potable water, leachate and wastewater applications. The company also manufactures an aluminum seal welded tank, SealWeld®, which competes in the petrochemical industry.
The markets served by Columbian and ESP are robust. Bolted steel tanks are an important component of municipal water systems. Driven by regulation and replacement, this market is expected to grow at a 15% annual rate. 70 percent of this growth will help satisfy storage needs of small to medium waster systems, which is the focus of CST's business. Industry sources cite waterworks as one of the more rapidly growing categories of public construction as a result of antiquated acquaduct systems, the healthy financial profile of most water utilities and requirements of the Safe Drinking Water Act.
Storage tanks for wastewater treatment is also a growing market, spurred by the need to repair, modernize and replace sewage treatment plants built during the 1970's boom. Since the Clean Water Act of 1972, ongoing federal regulation continues to drive the market, in addition to the need to replace older storage tanks. The industrial water and wastewater markets (the third largest storage tank market) are also expected to be strong.
With respect to dry storage tanks, growth will come from the continuing expansion of manufacturing capacity, which, in turn, is driven by industrial construction. This translates into an increased need for storage tanks used for food, minerals, plastics, petrochemicals, and chemical products.
The market for agricultural storage also presents opportunities, particularly for waste storage. Consolidation in the dairy industry, creating fewer and larger dairy operations, is particularly favorable for ESP's Slurrystore® system used for the storage of animal waste on dairy, hog and cattle farms. More stringent EPA and USDA guidelines for storage and handling of animal products are also expected to benefit this segment of ESP's market.
The combination of Columbian and ESP creates the leading manufacturer in its market niche. As storage needs grow, the variety of products and industries served by the two companies will provide plentiful opportunities for further growth. Offering well-respected products that meet customer needs, the new company will provide the silos and storage tanks that form a critical part of our municipal, industrial and agricultural infrastructure.
