On February 22nd, 2008 the landscape of the portable storage industry changed dramatically when the two largest portable storage companies in the US market joined forces. Whether it is the merger as presented in the press release or Mobile Mini (MINI) taking over Mobile Storage (MSG) is irrelevant for the average operator. What’s important that now there is one less competitor as well as one potential buyer of your business.
The transaction was announced almost two years after Mobile Storage Group was offered for sale in Feb 2006. Why did this happen and what does it mean for our market? As of February 2008 time MSG had 86 branches. Their fleet was 117,500 containers, an average of about 1,365 units per location, and it apparently wasn’t enough for MSG to be a strong competitor to MINI. I can’t imagine that MSG when promoting their business to investors in 2006 had in mind a merger or sale to MINI, nor do I think that the buyer of MSG had it in mind. But, it happened and it shows the flexibility and determination of MSG and its owner for finding a solution where one plus one became three by joining forces with their major competitor.
So how large is this new constellation? Eventually we can figure out how many locations there will be and how many units there are in the fleet but the figure that always is a guess is the market share. I’d venture to say that the New Mini still has less than 25% of the market share in the US. Since we don’t have any reliable statistics, that number could also be 15%, but the point is that there is still plenty of room for the rest of the approximately 2,000 portable storage companies in the country.
In places where booth companies having presence, it is likely that either the MINI or the MSG location will close so that only one location remains. Therefore, the local operator has one competitor less to deal with, however, that competitor is bigger. We have seen years of consolidation in the maritime container side and it seems to be good for the small operator.It opens up opportunities for niche players with specialized products and higher service levels. I think it will be the same in the portable storage container business.
So what else does it mean for the average NPSA member? First of all we’ll lose one sponsor. Both MINI and MSG have been contributors to our organization in more than one respect and that will most likely change. Secondly, both companies have been major buyers of portable storage companies nation wide for a number of years. I wouldn’t hesitate to say that there are quite a few NPSA members that, until Feb 22nd, were building their companies with the expectation of selling to MINI or MSG when retirement time came about. You can probably still do so but since the competitiveness of one trying to beat the other to the punch or preventing the other from entering a market has gone away pricing wont’ be the same.
Being so called strategic buyers MINI and MSG could buy a company just to enter a market and pay a premium compared to an investor. An investor would look for a return on his investment while MINI and MSG would look at the acquisition as a way to jump start a new market. Therefore, the pricing of companies will be more traditional. It’s been leaning that way for the last five years, but now it will be more evident. The buyers will look more to the EBIDTA (earnings before interest, depreciation, taxes and amortization) or in simple terms the cash flow the business generates. While currently most transactions have put the container value in focus rather than cash flow the container can generate over time. The reason for the change is that our business is becoming more in tune with the capital sources (read Wall Street) and they are streamlining their evaluation methods. This doesn’t mean that the second hand value of the container is ignored but it will have less of an impact on the price of a going concern.
There are still strategic buyers in our markets but no one is close to the size that MINI and MSG represented as individual companies and none, with the exception of Williams Scotsman, have national coverage. In addition, the race for extended national coverage, which I think existed between the two companies, is gone. None of the other larger companies have claimed to have national coverage as part of their strategy.
So what is the new pricing of companies going to be? As a general rule to price container rental fleets the price per unit has been in the range of $2,500-$5,000. If we tried to establish a similar rule for cash flow pricing this is how it would work. First of all we need to define what the cash flow (EBIDTA) is and is done by taking your annual profit add back depreciation, interest and any income tax you have paid. Now you have a number that represents the cash generated by the business and you apply a multiple to it.
The typical multiple for small businesses is around five, needless to say that isn’t necessarily the level at which the transactions is done but it is a very common starting point.
Most people have an understanding of interest rates and by translating the EBTIDA multiple into an interest rate you can see what level of return a buyer will get. You hear numbers like three, five, eight, twelve times EBITDA and these numbers can be translated into percentage rates. For example a price of five times EBIDTA is the equivalent of 20% return on investment; three times EBITDA is equivalent to 33% and eight times is equivalent to 12.5%. I hear of sellers looking for a multiple of their EBIDTA but they don’t really understand what it means. So by translating the EBITDA into an interest rate you can provide yet another view of the value of the business. A seller just like a buyer must be reasonable in his demands and if the return on investment for a buyer is unattractive there will be no sale.
So how do you prepare yourself for a sale of your business in this new environment? Well its back to cash flow which means increasing the revenue and reducing the expenses. It is quite logical that higher rental revenues brings a higher price so try to increase your rental rates and make the containers stay out longer by offering incentives. In general more marketing will bring more opportunities so look at what your sales staff can do better. If your rental income is $25,000 per month and you can raise it by 5% you’ll make $15,000 more per year which adds $60-80,000 of value to your business if we use and EBITDA multiple of four to six.
On the expense side look at what you’re paying for and do it systematically by setting goals. Everyone can save 5% by just thinking about it and that translates into higher value of your business. If the annual over head is $100,000 and you can save $5,000 the value of your business should increase by $20-30,000 using the same EBIDTA multiple as above.
This little exercise just added a value of $100,000 or $400 per container to a fleet of 250 containers. Obviously it is all theoretical but if you keep better cash flow in mind at all times you’ll see the results.
So the impact of the Mobile Mini Mobile Storage Merger for a prospective seller of a portable storage company is as follows. First of all; the days are gone when both of these companies came to town loaded with cash and outbid each other to get the local business.
Secondly, the way of looking at the value of a portable storage company is changing and becoming more main stream. This sounds like a somewhat dull view of the future in our industry, but I think there are plenty opportunities left created by the ambitious, creative and hard working entrepreneurs in our organization.
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