Chemical distribution giant Brenntag is shifting its North American industry mix to finished lubricants in a big way, with the acquisition of mega-distributors J.A.M. Distributing in Texas and G.H. Berlin-Windward in New Hampshire.

Brenntag pegged its investment for the two target companies at $440 million, and said the acquisitions were expected to close by the end of last month (after this issue went to press), subject to contractually agreed conditions.

According to Brenntag, each of these companies ranks among the top five lubricant distributors in the United States. The deals followed a strategic review and represent a shift in emphasis to counteract structural changes in the North American oil and gas sector, where profits have slumped along with crude prices, Brenntag Group CEO Steven Holland said in a news release. Both acquisitions are a significant investment in rebalancing our industry mix in North America and complement our existing business in the less-volatile lubricants market, he said.

Markus Klahn, member of Brenntag Groups management board and CEO for Brenntag North America, said both acquired companies are valuable additions to Brenntags existing business in the lubricants distribution market, which is attractive in terms of size, growth and profitability. Moreover, the market is still very fragmented. Together, J.A.M. and G.H. Berlin-Windward will be an excellent platform for growth in this consolidating market. They will further diversify our industry portfolio and solidify our strong market position in lubricant distribution in North America.

George Morvey, who manages the Energy Practice at the consultancy Kline & Co., in Parsippany, N.J., said Brenntag faces many challenges in absorbing the two distributors and making them work, the most important of which is keeping the management teams at both in place to the extent it can. Kline recognizes both of these two distributors as having very capable and solid management teams, so this should not be much of a concern.

He pointed out that Brenntags acquisition of the distributors doesnt have a private-equity component as seen with the acquisitions made by investor groups such as PetroChoice and RelaDyne, which have been rolling up lube distributors for a number of years. That could be interpreted as meaning Brenntag is in it for the long haul as opposed to turning the business over in three to five years, he added.

While both distributors support many lubricant brands, in the case of G.H. Berlin-Windward, it also maintains its own product line under the NaviGuard brand name, essentially competing with its major brand partners in certain market segments, such as passenger car motor oil, he said.

Morvey said that G.H. Berlin-Windward, to the best of Klines knowledge, does not formulate and blend NaviGuard, but rather uses third-party blenders to source base stock and additives to formulate the product. Now under the Brenntag umbrella and through J.A.M., it has access to the base stock J.A.M. supplies, creating an effective barrier to entry to merchant suppliers of base stocks across the many API [base oil] Groups, if it chooses to go in that direction, he explained. So in addition to being a lubricant distributor, Brenntag is becoming vertically integrated and a competitor to the major lubricant suppliers.

He noted that the only missing pieces are additives, blending and packaging capabilities. While the major lubricant suppliers should be concerned about this aspect of the acquisition, it should also view Brenntag as a stronger partner with a larger geographic distribution reach, Morvey said. Now a lubricant supplier can confidently grow its national account business knowing that its products can be distributed to multiple customer sites from one or perhaps two distributors across a larger geography.

Ned Zimmerman, Chemicals Group leader for Cleveland-based industry market research firm Freedonia Group, said that for Brenntag, the move makes sense in that it lets them expand further into this business area – lubricants – while remaining focused on the ability to add value as a less-than-truckload chemical distributor. With the chemical distribution market in North America being more concentrated, this allows Brenntag to expand without inviting nearly as much scrutiny from regulators, or complaints from competitors, Zimmerman told LubesnGreases.

More generally, he questioned at what point distributor consolidation begins to impact market access and growth opportunities for smaller brands. I expect these larger distributors to be more focused on their high-volume accounts, with less attention paid to the small guys, Zimmerman said.

Founded in 1874, Brenntag remained in private hands until its initial stock offering in 2010. Its growth trajectory is accelerating and it has made 61 acquisitions since 2007. These transactions averaged around E16 million each however, so these two latest deals are among its largest ever.

Other recent acquisitions by Brenntag have included U.S. lubricant distributor Lubrication Services in 2013; Milan, Italy-based Petrolube, which distributes Infineums fuel and lube additives, in 2012; and Nantwich, U.K.-based Multisol, which distributes base oil and lubricant additives, in 2011. Lubrication Services distributes for several companies, including ExxonMobil, Phillips 66, Citgo, Houghton International, Summit Lubricants and Camco. In Europe, Multisol distributes Group III base oils for Neste Oil and Group II for Chevron, lubricants for Petro-Canada, additives for Infineum and Arkema, and chemicals for ExxonMobil and Oxea, among others.

J.A.M., headquartered at its main Houston terminal, has terminals throughout Texas – in Dallas, Beaumont, Lufkin, Clute and Galveston. The company distributes marine, automotive and industrial products and has distributed ExxonMobil finished lubricants for more than 40 years. In addition, the company distributes Group II base oils for Phillips 66, Group III for S-Oil, and polyalphaolefins and specialties for Exxon­Mobil Chemical throughout Texas and the U.S. Gulf Coast.

As a portfolio company of Ridgemont Equity Partners since 2012, J.A.M. had been busy with its own acquisitions over the years, including Houston-based lube distributors Jones Oil and High Tech Equipment in 2014.

Headquartered in Manchester, N.H., G.H. Berlin-Windward came about in late 2011 after G.H. Berlin Oil and then-Windward executive Stephen Eldred acquired distributor Windward Petroleum, bringing the marketing of several major lubricants lines under one roof. According to the companys website, brands distributed by G.H. Berlin-Windward include Mobil, Conoco, Castrol, Kendall, Valvoline, Petro-Canada, Shell, Pennzoil and Chevron. The company has 10 warehouses in the Northeast United States.

In its quarterly earnings presentation, Brenntag outlined its rationale for the transactions. The company noted that the U.S. lubricant supplier market is dominated by large, multinational oil companies that prefer to work with larger distributors, driving further consolidation.

Brenntag said the two distributors geographic footprints are complementary to its existing businesses. The acquisitions are also expected to strengthen existing supplier relationships.

The combined companies are expected to contribute sales of about $780 million and gross profits of around $127 million in financial year 2016, and Brenntag said its investment in both companies comes to $440 million.

Brenntag Group reported sales of E10 billion (U.S. $10.7 billion) for financial year 2014, up 2.5 percent from 2013. Its after-tax profits in 2014 neared E340 million, up slightly from 2013. For the most recent reporting period, third-quarter 2015, it posted sales of E2.6 billion and said after-tax profits came to E94.7 million.

In its Nov. 5 earnings report to investors, Brenntag estimated that third-party chemical distribution is a E165 billion business worldwide, and claimed to be the largest player, with 5.9 percent of that global market. Its the market leader in Europe and Latin America, and ranks second in North American chemical distribution, behind Univar and ahead of Nexeo (formerly Ashland Distribution).