Companies are tempted to engage in anti-competitive practices by the prospect of raking in or locking down high profits. But for packaged-ice giants Arctic Glacier Income Fund and Reddy Ice Holdings, accusations of such actions had the opposite effect; both landed in bankruptcy protection over the past few months. That leaves two players with enviable market share looking for a restructuring plan, the most viable of which, ironically, may be to join forces.
Together, Texas-based Reddy Ice and Winnipeg’s Arctic Glacier command most of the bagged-ice market in North America. Combined, they’d have more control over pricing. In November, Arctic Glacier got court approval to seek sale and investment proposals for its business. Reddy Ice recently announced its intentions to “pursue a strategic acquisition.” Merging the two makes sense geographically, since Arctic Glacier dominates Canada and the northern U.S., and Reddy leads in the Sun Belt.
It’s that same focus on geography and pricing, however, that led to the lawsuits that landed these companies in financial trouble in the first place. “The years of investigation took a horrible toll,” says Sam Yake, a research analyst at BGB Securities, based in Arlington, Va.
The first sign of trouble was in 2007, when Arctic Glacier lost a civil suit over its efforts to freeze a small competitor, Polar Ice Express, out of the business in the Edmonton area. A year later, the U.S. Department of Justice probed Reddy Ice, Arctic Glacier and North America’s third main player, privately held Home City Ice, for an alleged conspiracy to cut rivals out of the supply chain and buoy retail prices. The FBI raided Reddy as part of the federal investigation, and the states of Florida and Arizona began their own antitrust probes. Then Home City pleaded guilty to a conspiracy to divide territories and customers with competitors, including Arctic and Reddy. Three executives at Arctic also pleaded guilty to violating antitrust laws when they attempted to divvy up ice buyers in Michigan.
Through all this, Reddy’s share price melted down from a high of US$31 in 2008 to virtually zero today. Arctic Glacier, which traded at about $14 in 2007, was down to pennies when it dropped off the Toronto Stock Exchange in January. Along with this lost value, the companies racked up huge debt and legal costs. They also faced cooling demand for their product due to the recession.
So how can two companies that have been dogged by anti-competition lawsuits hope to join forces? Yake says that despite the lingering “colossally incompetent” management teams, debt and soured reputations, the firms have mostly resolved their antitrust cases. In 2010, the Securities Exchange Commission ended its informal Reddy Ice inquiry and took no action. The Department of Justice then ended its antitrust criminal investigation and civil fraud investigation. And while Yake thinks the players in the industry will remain few (household spending on ice is only about $7 to $10 per year in the U.S.), he doesn’t see any major hurdles in the way of an Arctic-Reddy merger. “Sure, the government will likely have some concerns to clear up, but not significant ones,” he says.
Yake sees potential for growth if the two firms merge, especially with more business savvy behind them from the likes of Centerbridge Partners, a hedge fund that is a major lender to Reddy. They could also save management and processing costs, and can get back to rebuilding their brands. Those synergies may lead Reddy to top the other offers Arctic says it has on the table.
“A lot of people think the ice business some relic of the past, but my research doesn’t show that,” says Yake. “People used to say, ‘Why would I buy water when I can get it from my tap?’ And now it’s a multimillion-dollar business. I think packaged ice is now where bottled water was 20 to 30 years ago.”