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While many venture capital firms seek huge returns by chasing the latest high-tech or alternative energy businesses, Trive Capital, a recently formed venture capital firm headquartered in Dallas, is placing its bets elsewhere. Along with San Antonio-based McCombs Partners, Trive has acquired Southern Towing Co. (STC), a Memphis, Tenn.-based barge operator that specializes in barging specialty chemicals on the inland waterways.

Connor Searcy, one of three partners with Trive Capital, says STC’s stability, longevity and its well-developed niche as a shipper of ingredients for the fertilizer industry were key to the company purchasing its first acquisition as a stand-alone firm. But even more impressive, Searcy points out, was the company’s reputation. “We met Bill Stegbauer (then president of STC) earlier this year and were impressed.”

Family-owned STC has been in business for more than 50 years and has grown to become one of the dominant shippers of specialty materials on the Mississippi River and its tributaries.

In a press release issued following the acquisition, Rad Weaver, CEO of McCombs Partners, says, “STC possesses many of the qualities we look for in potential investments: terrific long-term customers, strong asset base, competitive technology advantages and high barriers to entry in the marketplace. We look forward to working with Trive and STC management to find ways to better serve our customers while identifying new growth opportunities.”

A representative of McCombs Partners says, “We respect the entrepreneurial spirit with which Southern Towing’s management team has developed a thoughtful and customer-focused operating philosophy. By maintaining Southern Towing’s commitment to customer service and industry safety, we look forward to the continued development and expansion of our existing customer relationships.”

Weaver adds that many of STC’s customers have worked with the company for as many as 40 years.

“It’s a fascinating business,” he says of STC. “We think it’s a business we can own for a long time and continue to grow.”

Investment Logic
Why would a venture capital firm chose a company in a relatively quiet industry as an acquisition target?

Searcy explains that the initial goal of Trive Capital is to invest in “middle America, bread-and-butter manufacturing and distribution businesses.” He says, “We don’t invest in high tech or alternative energy because there are hundreds of investors in that space. There are not a lot of investors in the maritime space. It creates opportunities for us.”

As for acquiring STC, Searcy says the company met Trive’s criteria, which includes businesses in a complex and/or special situation that are in need of capital and a strategic operating partner. Additionally, STC has a strong market position, albeit in a niche market.

STC is a dominant player in using specialized barges for shipping highly caustic chemicals, including anhydrous ammonia, for the agricultural industry. Stegbauer says the company operates the largest fleet of anhydrous ammonia barges in the United States.

Following Trive’s acquisition of STC, the barge operator will become a portfolio company for Trive and McCombs Partners. Stegbauer, who has been appointed CEO of STC, also will have a financial interest in the barge line as an equity partner.

Stegbauer expresses optimism about the recent transaction that moved STC from a family-owned business to a portfolio company for private equity firms. “We believe this partnership with Trive positions STC to continue its success and growth while maintaining our commitment to customer service and quality,” Stegbauer says. “The future has never been brighter for our company, so the timing of this partnership positions us very well.”

The transportation of anhydrous ammonia by barge may be a niche for STC, but it is an essential market for the farming industry throughout the Midwest. Stegbauer estimates that this segment makes up less than 10 percent of all the commodities that are shipped on the inland waterways, though it is a sector the company says it has been able to capture. STC barges about 60 percent of the ammonia that is transported by boat to make fertilizer.

Along with the anhydrous ammonia, STC also has barged urea ammonia nitrate and other fertilizer products. Unlike some of these chemical fertilizers, the anhydrous ammonia requires a specially-designed barge, limiting competition to transport the material.

The company’s service area encompasses a fairly sizable geographic footprint ranging from the Gulf Coast to the Intracoastal Highway and up through the northern Midwest.

Stegbauer says STC currently operates 22 tow boats and 70 barges. Four additional towboats currently are under construction. The new towboats are expected to help the company capitalize on future opportunities as its own barging needs grow as well as to provide towing services to other companies.

Of the 70 barges STC operates, 58 are used largely to ship standard commodities, while 14 specialized refrigerated barges are used to ship anhydrous ammonia nitrate. The tanks of these specialized barges can be cooled to minus 28 degrees Fahrenheit, which converts the chemical from a gas to a liquid, which is pressurized.

“They are complicated barges,” Searcy says of the refrigerated units.

“The refrigerated barges basically look like thermos bottles,” Stegbauer says.

Because of safety requirements, STC pushes only two refrigerated barges at a time. “We are safer and cheaper than either rail or truck,” Searcy says of barge shipping such chemicals.

Stegbauer estimates that the company can ship 2,500 tons of the specialty fertilizer per refrigerated barge.

While fertilizer may make up only a small portion of the overall commodities shipped on the inland waterways, Searcy says, “We are the ‘corn belt’ of the world and we are transporting a critical component of that piece.”

Expanding on Success
Trive says it does not expect to change STC’s daily operations. Instead, the changes the company implements will be related to using its financial acumen to help expand STC’s operations. Trive plants to take a more acquisitive approach than the somewhat conservative STC previously took.

While expanding STC’s business may include shipping additional commodities, Searcy says the company will continue to focus on shipping specialty chemicals. Even though Trive and McCombs are located in energy-rich Texas, Searcy says he doesn’t expect the company to refocus its business to transporting oil. “We like specialty chemicals. We don’t rule out other commodities, but our focus is on chemicals,” he says.

Trive plans to seek out opportunities that STC was unable to pursue before either because of lack of capital or a desire to avoid risk, Searcy says. “We want to double or triple the business, either through going into new businesses or growing through acquisitions,” he adds.

Looking into the near future, Searcy says STC’s opportunities also may include strengthening its business in adjacent or complementary business segments.

Despite the challenges associated with shipping specialty chemicals, STC “has done a phenomenal job,” Searcy says.

“Southern Towing has an impeccable safety record,” Searcy remarks.

“We have to go through all types of safety and regulatory steps since we are transporting chemicals and our cargo can be [$500,000] to $1 million per barge. What we have to do is more complicated than conventional barging,” Searcy adds.

The company has received a number of safety awards, including the U.S. Coast Guard’s Benkert Award for Environmental Excellence, the Chamber of Shipping’s Environmental Achievement Award and the International WorkBoat Show Significant Boats of 2008 Award.

Challenges Ahead
While Trive sees great opportunities with STC, clouds are on the horizon, at least in the short term. Like other companies operating on the inland waterways system, the decline in water levels affects the company’s bottom line. Lower water levels mean vessels can’t load as much material. It doesn’t matter whether that material is anhydrous ammonia, grain or aggregate, it still translates into higher costs per ton.

“The inland water system is a critical system of transporting goods throughout the country,” Searcy says. “If we didn’t have it, our GDP would come to a screeching halt.”

Currently, the possibility of a blockage developing between Cairo, Ill., and St. Louis is growing, which could cause some significant problems for the barge industry. “We need to work around that,” Stegbauer says.

With this in mind, Searcy calls for the federal government to renew its investment in the inland waterways system to guarantee the steady flow of material, as do many other shippers that rely on these waterways.

“We have to ensure that government and private capital will invest in the infrastructure,” he says.

“Tug and barge is the cheapest form of transportation. When you look at anhydrous ammonia, barging is one-half the cost of rail [and] 25 percent of the cost of trucking; you can imagine it is a huge advantage in the U.S.”

“The lock system, particularly on the Mississippi River, needs investment,” Searcy continues. “The lock system is slow and antiquated. We could increase throughput and money if we invested in the lock system.”

Searcy says the federal government should take the lead in investing in the inland waterway system, he adds that the private sector also should play a key role. “We can make the water system more efficient,” he says of these companies. “The private sector has the best knowledge of the best area to invest.”

While the drought has created a challenging environment in the short term for STC and similar companies, Stegbauer says the fertilizer business has remained fairly resilient. “Each year we see incremental growth,” he says of that sector. “We grow a little bit each year.”

Although the drop in water levels has created transportation-related problems, there also are opportunities for STC and the companies it serves in the specialty chemical industry.

The drought eradicated about 25 percent of crops in the region, Searcy says. This means that farms will have to plant more crops, “which means we will have to ship more fertilizer,” he adds.

Another challenge that could benefit STC is that many smaller competitors do not have the capital to invest in new equipment to keep up to date with new environmental regulations. “That will give us opportunity, as we are [meeting] around 90 percent of the regulations that will be coming down in next five years,” Searcy says. “We will be in front of the curve. Meanwhile, there are a number of smaller competitors who have capital constraints that may not be around or may be acquired.”

Searcy says STC plans to continue to grow, whether organically or through acquisition. “We are ecstatic about investing with the partners at McCombs. Our view is not to sit and wait. We are going to invest in opportunities,” he says.

The author is senior editor of Waterways Today and can be reached at dsandoval@gie.net.