Reddy Ice Holdings, Inc.

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Reddy Ice Holdings, Inc.

8750 North Central Expressway
Suite 1800
Dallas, Texas 75231
U.S.A.
Telephone: (214) 526-6740
Fax: (214) 443-5357
Web site: http://www.reddyice.com

Public Company
Incorporated: 1927 as Southland Ice Company
Employees: 2,100
Sales: $319.8 million
Stock Exchanges: New York
Ticker Symbol: FRZ
NAIC: 312113 Ice Manufacturing

Listed on the New York Stock Exchange under the appropriate ticker symbol FRZ, Reddy Ice Holdings, Inc., is the United States' largest maker of ice and packaged ice, about three times larger than its nearest competitor. The Dallas-based company divides its activities between two business segments: ice products and non-ice products and operation. The former includes the manufacture and delivery of ice (some of which are blocks as large as 300 pounds for commercial use) as well as the installation and operation of The Ice Factory, a self-contained, on-site proprietary system that makes and packages bags of ice for customers of convenience stores, supermarkets, and other retail outlets. Reddy Ice focuses on Sunbelt states where the demand for ice is more consistent, and overall it services some 82,000 customer locations in 31 states and Washington, D.C. The company also maintains 58 manufacturing facilities and 52 distribution centers. The non-ice business includes the operation of five cold storage warehouses, and a bottled water plant.

HERITAGE DATES TO 1927

Reddy Ice shares its origins with the 7-Eleven convenience store chain, a business that actually grew out of the activities of Southland Ice Company. Southland was founded in 1927 by Joseph C. Thompson and a group of investors. The operation included eight ice plants and 21 retail ice docks. The idea behind the company was to sell block ice to customers who owned automobiles. But not only did these customers like the convenience of pulling up to the neighborhood icehouse to buy block ice (needed to keep food cool in the ice boxes in use at the time), they began to ask for bread and milk as well. A manager of one of the ice docks, John Jefferson Green, convinced Thompson to allow him to sell other staples in addition to ice. The icehouse now began to offer a dozen items, including milk, bread, canned goods, and cigarettes. The result was the world's first convenience store. In 1928 another Southland manager, after making a visit to Alaska, planted a souvenir totem pole in from of his store. It proved to be an attraction, and soon the other Southland ice docks added them, and the stores now became known as "Tote'm Stores," a name appropriate on two levels: the stores were known for the totem poles out front and customers toted away their purchases, instead of having them delivered.

In the early 1930s Southland's horse-drawn ice delivery wagons were replaced by trucks. The company struggled at the beginning of the Great Depression that was brought on by the stock market crash of 1929 and was forced into receivership. It soon emerged reorganized, with Thompson serving as president, and the chain of Tote'm Stores resumed its strong growth, especially benefiting from the repeal of Prohibition, which allowed the stores to now sell beer, one of the three staples of the convenience store business along with soda and cigarettes. (A fourth, it might be argued, was gasoline, and in the 1920s Southland first dabbled in the business, building and leasing gas stations at ten of its stores.) It was also not surprising that the sale of ice showed dramatic improvement with the repeal of Prohibition.

By the end of the 1930s Southland owned 60 Tote'm Stores in the Dallas-Fort Worth area. These accounted for most of Southland's revenues. Southland also began to become vertically integrated in the 1930s. It added Oak Farms Dairies to meet the milk needs of the Tote'm Stores. Nevertheless, the ice business remained very important. Demand for ice again surged after America's entry into World War II in late 1941. For example, Southland supplied most of the ice needed for the construction and operation of the U.S. Army's chief training facility, Camp Hood. During this period Southland expanded its ice operations by acquiring City Ice Delivery, Ltd., picking up a pair of modern ice-making plants and 20 retail outlets. Southland was now the largest ice company in Dallas.

POSTWAR INCREASES ICE DEMAND

In the post-World War II years, Tote'm Stores were renamed "7-Eleven," A reference to the stores' hours: 7:00 in the morning until 11:00 at night, seven days a week. While the popularity of the convenience stores continued to grow, demand for Southland ice also increased. Home refrigerators were not yet commonplace and for some time to come ice boxes would still need to be regularly supplied with block ice.

Southland's 7-Eleven stores were introduced outside of the Dallas area in the early 1950s when units opened in Austin, followed by new outlets in Houston. The chain expanded beyond Texas in 1954 with stores in Miami and Jacksonville, Florida. In 1958, the first "northern" 7-Eleven stores were opened in Maryland, Virginia, and Pennsylvania. After Southland was incorporated in 1961, 7-Eleven expanded even more rapidly, as the chain spread to all parts of the country, its growth accomplished in some measure by the acquisition of smaller convenience store chains. By the mid-1960s there were more than 1,500 7-Eleven stores, and by the end of the decade there would be more than 3,500 units in the United States and Canada. The 5,000 mark was reached in 1974, when 7-Eleven began to spread around the world. Southland also became a public company and gained a listing on the New York Stock Exchange in 1972.

By this point Southland's ice business, now called the Reddy Ice Division, was the largest ice operation in the world, but it was just a small part of a large, vertically integrated retail enterprise. The sale of gasoline was a far more important revenue generator than packaged ice, and in 1983 Southland acquired Citgo Petroleum Corp. for $780 million, to ensure a steady supply of gas for 7-Eleven, which had become the largest independent retailer of gasoline in the United States. It was an ill-fated decision, however, that had an impact on Reddy Ice and other Southland units. Just as excess refining capacity came on line, the demand for gas dropped, resulting in a $50 million pre-tax loss for Southland in 1984. To make matters worse, Southland had to contend with a hostile takeover bid in 1987. Joseph Thompson's three sons decided to ward off the attack by Canadian corporate raider Samuel Belzburg by forming a holding company to take Southland private. But in order to finance the $3.7 billion plan, they had to sell off some assets. One of these was Reddy Ice; it was put on the block in July 1987.

COMPANY PERSPECTIVES

Reddy Ice will remain the recognized leader in the packaged ice industry by producing the highest quality of pure, clean and odorless ice products, by maintaining the highest level of customer service and satisfaction, through the relentless pursuit of excellence in technology and merchandising equipment, and by maintaining and growing the broadest geographic distribution network in the ice industry.

In March 1988 Southland sold Reddy Ice to Kaminski/Engles Capital Corporation for $26 million, with the bulk of the financing provided by Citicorp. This was the first non-real estate transaction for the Dallas investment firm headed by former real estate executive Robert Kaminski and lawyer Gregg L. Engles. They took over a company that generated $17 million a year in revenues by producing 156,000 tons of ice each year, operating five plants in Texas as well as facilities in Davie, Florida, and Las Vegas, Nevada. Engles would become the driving force behind Reddy Ice's growth over the next decade. A Yale law school graduate, he had quickly lost interest in a legal career and in the 1980s became involved in Texas real estate with dismal results. He had better success with Reddy Ice, but was not content to just pursue the limited ice business. According to Forbes, Engles soon realized that the ice and dairy businesses were quite similar: "Both were produced in aging, undercapitalized plants; perishability dictated that each had to be shipped directly to stores; both were highly fragmented businesses. In 1993 Engles did a $100 million LBO of a down-and-out Puerto Rican dairy called Suiza (Spanish for Swiss)." With this as a base, Engles began acquiring other dairies in the United States, along the way picking up such venerable brands as Borden and PET. With both his growing dairy and ice assets, Engles strengthened his business interests by reducing redundancy in capacity and distribution routes, and upgraded infrastructure and equipment. In 1996 he made an initial public offering of Suiza Foods Company, which included Reddy Ice. A year later Suiza reached the $1 billion mark in annual sales. That number grew to $2.5 billion in 1997, of which Reddy Ice contributed 4 percent or $66.3 million.

SOLD TO PACKAGED ICE: 1998

Reddy Ice was hardly a major component of Suiza, and so in 1998 Engles recouped his investment in the company by selling it to Houston-based Packaged Ice Inc. for around $180.8 million in cash. In this way Suiza could focus on its diary business and allow Reddy Ice to fulfill its potential as well. Packaged Ice was an up-and-coming company in an industry that was rapidly consolidating. While it recorded sales of just $29 million in 1997, it had completed a number of acquisitions before adding Reddy Ice which would have increased sales to the neighborhood of $90 million.

Packaged Ice was founded in 1990, with backing from a pair of venture capital funds, by James Stuart, a former accountant for the Houston office of Big Five accounting firms. According to Houston Business Journal, "Stuart embarked on his second career after looking around for something new to invest in and coming across a technology that allowed for ice to be manufactured, bagged and sold in the store." Stuart's idea was to modernize the traditional model of ice production by transferring the manufacturing and distribution process from a faraway plant to the point of sale using this new technology. Stuart bought the prototype of what would become The Ice Factory in 1986. After devoting the next five years to refining it for retail operation, he began pitching the idea to supermarket chains, including Randalls Foods Stores and Kroger Stores. Packaged Ice owned the machines and companies paid a usage fee to install one or more of The Ice Factory units onsite.

Soon after The Ice Factory machines began finding their way into the marketplace, Stuart began to buy ice companies from owners who could not compete with his innovative technology. While he was banking on The Ice Factory to become the major source of revenue, and ideally 100 percent of the business, Stuart took advantage of the opportunities presented to him and began acquiring traditional ice manufacturers. These soon accounted for the bulk of Packaged Ice revenues.

KEY DATES

1927:: Southland Ice Company is formed to sell ice directly to customers with cars, during an era when ice is typically still delivered to homes. The convenience store concept is born when ice dock managers begin selling staples such as bread and milk, in response to customer request.
1946:: Southland stores, which had become known as "Tote'm Stores" are renamed "7-Eleven."
1988:: Southland sells Reddy Ice to the Kaminski/Engles Capital Corporation.
1983:: Kaminski/Engles enters the dairy business with the acquisition of Suiza.
1998:: Suiza Foods sells Reddy Ice to Packaged Ice.
2003:: Trimaran Capital Partners acquires Packaged Ice, renamed Reddy Ice.
2005:: Reddy Ice is taken public.

Meanwhile, Packaged Ice was not the only company buying up small to mid-sized ice companies in the 1990s. Reddy Ice had been completing its share of acquisitions, as had Artic Group of Canada, the only public company in the industry until 1999. After its successful 1998 acquisition of Reddy Ice, Packaged Ice took its company public with an initial public offering of stock that netted $91 million. With Reddy Ice in the fold, Packaged Ice was now the undisputed leader, generating sales of $231.7 million in 1999 and $244 million in 2000. The company was not highly valued by Wall Street, however, so in 2001 Packaged Ice began to focus on refining its corporate structure. Since the Reddy Ice acquisition, the company had maintain dual headquarters in Houston and Dallas. In 2001 it initiated plans to shut down the Houston operations and realize some cost savings by bringing everything to Dallas. Moreover, Stuart stepped down as chief executive officer, replaced by William Brick, who had run Reddy Ice for Suiza and had come with the acquisition.

The price of Packaged Ice stock continued to languish, and in 2003 the ownership of the company changed hands when Trimaran Capital Partners, a Bear Stearns & Company private equity unit, agreed to pay $450 million for the outstanding stock to take the business private. In May 2003 Reddy Ice Holdings Inc. was formed to house the assets of Packaged Ice, which was also renamed Reddy Ice Group, Inc. Clearly, the new owners believed the Reddy Ice brand still carried considerable clout in the marketplace. Under Trimaran, Reddy Ice continued to grow through acquisitions, adding a pair of companies in 2003, and another 11 in 2004. As a result sales increased to $285.7 million.

Trimaran was now ready to take Reddy Ice public once again. In August 2005 the company completed an IPO that raised close to $190 million. The offering was well received by investors who paid $18.50 a share, above the $16 to $18 range that had been projected. The stock then climbed in value as it began trading on the New York Stock Exchange. Reddy Ice's proceeds from the offering, $127.9 million, were earmarked, according to the prospectus, for the paying down of debt. However, according to the Dallas Morning News, "The company will probably use its increased capital to expand further in the South and Southeast and push deeper into California, a lucrative area, said Jane McEwen, executive director of the International Packaged Ice Association. 'Expansion is one of the foremost reasons for this IPO,' she said. 'They're positioning themselves to service some very desirable parts of the country—and service them widely."