Sterling Merges Fuel Transporters –

Sterling Investment Partners, a Westport, Conn.-based private equity firm, late last month merged its portfolio company Advantage Management Group, which provides transportation and logistics services to fuel companies, with a similar Chapel Hill, N.C.-based company called Kenan Transport Co. The new company has been renamed The Kenan Advantage Group.

Advantage, based in Canton, Ohio, acquired Kenan Transport in a transaction valued at approximately $100 million, with equity from Sterling Investment Partners LP and RFE Investment Partners, as well as Massachusetts Mutual Life Insurance Co. and Rice, Sangalis,Toole & Wilson. CIBC World Markets provided senior debt for the deal. Massachusetts Mutual, an affiliate of Aetna Life Insurance Co., and Rice, Sangalis, Toole & Wilson, a Houston-based private equity firm, provided mezzanine debt.

Kenan Advantage transports fuel between pipelines and filling stations and manages the logistics and downstream process for all the major integrated oil companies, such as British Petroleum, Chevron, Exxon and Texaco. Advantage’s geographic focus was the Midwest, while Kenan was a leader in the Southeast. The combined company forms the largest carrier in the country, said Douglas Newhouse, a managing director at Sterling Investment.

When Sterling acquired Advantage two years ago, it identified Kenan Transport as the best match for a merger with Advantage. “Kenan is a mirror image of Advantage but based out of the Southeast,” said Newhouse. “By putting these two companies together we dominate not only the Midwest but through the Southeast as well, and really everything east of the Mississippi.”

Kenan Advantage is now the dominant fuel carrier in the country, approximately five times the No. 2 carrier, said Newhouse.

“Privatizing a public company between November [2000] and the end of the first quarter 2001 is about as bad a six-month window as one could think of to do this kind of buyout from a financing market standpoint,” said Newhouse. “So we were extremely pleased that it went very smoothly.”

Frank Kenan, whose family was the majority shareholder of the company until this deal, founded Kenan Transport in 1946. When Kenan passed away last year the company began discussions with the investor group about changing ownership.

Like many investors these days, Sterling Investment was attracted to the energy sector and identified downstream operations as a compelling area two years ago. With energy companies focusing on their core skill sets and moving toward more outsourced services, companies like Kenan Advantage are expected to see major growth. “Fuel consumption per capita is highly stabilized,” said Newhouse. “But the driving growth is taking place because the energy companies, which have perhaps 30% to 40% of their needs handled by third party carriers today, are looking to move to as much as 100% outsourcing in the future.”

Lee Shaffer, Kenan’s former president and chief executive, is chairman at the new company. Dennis Nash, Advantage’s former president and CEO, will hold the same titles at Kenan Advantage.

The company will mainly look to grow internally, rather than through acquisitions of outside companies, said Newhouse. Although the company may look to acquire in-house fleets, he said.