We prefer acquisitions in industries with a history of regular, moderate growth. Companies in such industries tend to have more pricing power, unlike those in flat or declining markets. Investing to outperform the competition even slightly can increase both margins and market share, resulting in profits that can finance even faster growth, both organically and through add-on acquisitions.

Castle Harlan's acquisition of Universal Compression Holdings illustrates this approach. When Castle Harlan Partners III ("CHPIII") acquired it in February 1998 for $360 million, Universal ranked a distant second in its core business of renting compression equipment to the natural gas industry. The units in its rental fleet totaled just under 540,000 horsepower, revenues were approximately $109 million, and EBITDA was just over $46 million.

William M. Pruellage and John K. Castle

Universal was attractive for several reasons. Domestic production of natural gas had risen steadily, and although oil and gas prices were notoriously volatile, the rents for compression units were much more stable, making cash flows more predictable. The rental industry had been growing year-over-year, driven by increasing gas production, growing needs for field compression because of maturing gas fields, and a trend among gas producers and transporters to rent, rather than own, their compression equipment.

After acquiring Universal Compression, Castle Harlan began a series of nearly a dozen acquisitions, enlarging Universal's rental fleet and geographic scope, expanding its fabrication and service businesses, and building a presence in many foreign markets, especially in Latin America. The acquisitions, which significantly consolidated the industry, were mostly small and financed through debt, but the February 2001 acquisition of Weatherford Global, ranked fourth in the industry, was financed with stock. Weatherford essentially doubled the rental fleet to nearly 1.9 million horsepower, making Universal Compression a strong second in the industry, with fiscal 2001 revenues of $444 million and EBITDA of $142 million.

Castle Harlan did an initial public offering of Universal Compression stock in May 2000 on the New York Stock Exchange and sold additional shares in a June 2001 secondary offering. The divestiture of Universal Compression resulted in a doubling of Castle Harlan's original equity investment.