Hilliard, Ohio-based Advanced Drainage Systems Inc. is acquiring competitor Hancor Inc. of Findlay, Ohio, in a transaction that creates the largest plastic pipe company in North America.
According to ADS President and Chief Executive Officer Joe Chlapaty, combining the two biggest players in large-diameter high density polyethylene corrugated drainage pipe will help ADS compete with manufacturers of pipe made of other materials.
ADS and Hancor face formidable competition from concrete, steel, PVC and solid-wall PE pipe, he said.
``Our collective abilities to compete against alternative materials for storm and sanitary applications will be greatly enhanced and will provide significant opportunities for customers, vendors and employees,'' Chlapaty said in an April 7 telephone interview.
The exact timing of the deal is a bit uncertain, he said. Until the transaction closes, ADS and Hancor will remain separate companies.
Terms were not disclosed. Hancor currently is owned by an investment group that includes Citicorp Venture Capital Ltd. of New York. Officials from Citicorp were not available to comment.
Citicorp has held Hancor for a long time. Typically, private investment groups want to sell a company within three to five years. Citicorp did a leveraged buyout with then-president Fred Kremer Jr. in 1986, acquiring the company from the Child family. Kremer died in a plane crash in 1997; he was replaced by Steve Anderson.
``Steve Anderson's background was in preparing companies for sale,'' said one source, who spoke on the condition of anonymity. ``He made it happen.''
Hancor and ADS have similar histories, working to replace clay tile in drainage applications. Hancor, however, has been known more for its material formulation advances, and ADS for its marketing prowess. Hancor has a supply contract with Lowe's Home Improvement Stores; ADS has a supply deal with Home Depot.
``We're going to do it again with concrete and steel,'' Chlapaty said of replacing alternative materials. ``These are very challenging times for the high density corrugated business. There appears to be a permanent paradigm shift in energy and raw material costs. The combination of ADS and Hancor will allow the [new] company to effectively deal with tremendous cost pressures that have been brought to bear as we attempt to compete with alternative materials.''
ADS plans to keep Hancor's management team in place, Chlapaty said.
``We're going to work together operationally,'' he said. ``The goal here is to grow the company rapidly so there really is no need to cut.''
The acquisition does not change ADS' aggressive expansion plans, which the company announced in January.
Under that plan, ADS will open four new plants by the close of 2005 in Philadelphia; Perry, Ga.; Mexico City; and Puerto Rico.
Still, there is some obvious overlap, including the Ohio headquarters for each company, and multiple plants in locations such as Georgia and Texas. Combined, the companies will have nearly 40 plants and estimated sales of more than $700 million.
According to industry sources, the total North American market for corrugated HDPE pipe is roughly 1.25 billion pounds annually. ADS and Hancor combined will represent about 70 percent of that market.
With such girth, the question of regulation concerns naturally arises.
Still, many industry sources said that passing the regulatory requirements won't be a problem, since ADS and Hancor ultimately are competing in an industry that exceeds $4 billion in total.
``We are confident this will pass all regulatory review,'' Chlapaty said. ``We have strong regional competitors in our business. It doesn't at all impact the competitive nature of the marketplace.''
``As soon as you draw the pie with concrete, steel, aluminum, they're a small piece,'' said another source.
Still, ADS and Hancor are the only two national players in the market for HDPE corrugated pipe, a market dominated by regional firms.
``The little guy, we just get beat up and move on,'' said one regional player. ``We're not in favor of [this deal]. These are the only two national players. The rest of us are mom-and-pop, single-plant operations.''
According to industry sources, a recent change in ASTM standards also may put the ADS-Hancor marriage in a prime position for growth.
Recently approved ASTM standards for storm sewers will allow expansion of corrugated pipe into that market, where there has been comparatively small penetration.
The large-diameter pipe market in the United States is expected to reach $7.6 billion in annual sales by 2007, according to Freedonia Group Inc. of Cleveland.
Concrete pipe still is expected to remain dominant, but plastic pipe is expected to grow the fastest, and storm sewers are expected to be the leading application.