The Ups And Downs Of Consolidation: Utilities
Consolidation in the mechanical contracting industry can trace its roots back to 1996, when roll-up firms Service Experts, American Residential Services and Group Maintenance America Corp. burst onto the scene. These early consolidators paved the way for Comfort Systems USA, Building One Services Corp., American Plumbing & Mechanical and Blue Dot.
Electric and gas utilities also got into the PHC contracting business in 1996; the first was DelMarva Power & Light Co. (it was known later as Conectiv Services). Many other utilities followed suit, only to start selling off these same contracting firms in 2000.
So why did these utility conglomerates decide to invest in the fragmented PHC business in the first place? And what changed in later years to convince them to divest their mechanical contracting firms?
Michael A. Price, president and founder of First Mergers Group LLC, which provides merger and acquisition and other services to middle-market companies, told PM Editorial Director Jim Olsztynski in a May 2000 interview that, because of deregulation and many utilities' reassessment of their core business strategies, buying mechanical contracting firms enabled them to “quickly acquire the capabilities needed to expand into new product or geographic markets.”
These utility companies could then offer “bundled product offerings” to their customers. Of course, this set in motion an industry outcry over unfair competition from utilities, which was debated in state courts and legislatures across the country.
“We believe that in the '90s, the utilities were rewarded by Wall Street for purchasing related businesses like contracting, and today the utilities are being rewarded by Wall Street for divesting of these related businesses,” Price recently told PM. “We believe that it is simply a function of what 'plays' on Wall Street.”
And there are buyers of mechanical contractors today, he says. Some former owners are buying back their companies from the utilities that acquired them, while others, such as large private companies, buy-and-build contracting companies backed by private equity groups, equity investors and other public companies, believe mechanical contractors will “fit” within their business units.
“Their typical evaluation model looks for a 20 percent-plus return on equity and does not provide for the elevated multiples of EBITDA that were present in the height of the contractor buying around 1999,” Price explains. “Average multiples today are around four times EBITDA, versus seven times EBITDA in 1999.”
Another reason for Wall Street's disenchantment with mechanical contractors is the growth rate of such companies. Mechanical service firms can have modest internal growth rates of 5 percent to 10 percent, Price notes, but Wall Street looks for 15 percent-plus rates for a roll-up or consolidation.
These growth rates and the relative small size of contracting divisions compared to the overall size of most utilities are why these utility companies focused their capital and other resources on their core business units, rather than focusing on the nonregulated contracting businesses.
However, the divesting of new construction contracting businesses may be the result of bonding requirements and the ability to leverage the asset, rather than because of the performance of the company, Price says.
What follows is a brief history of the utility industry's sojourn into the mechanical contracting industry realm.
DelMarva Power & Light Co.DelMarva, which serves electric customers in Delaware, Maryland and Virginia, and gas customers in Delaware, bought five HVAC firms in late 1996: Haley Cos. (Wyndmoor, Pa.); Delcard Associates (Wilmington, Del.); Collier Care (Easton, Md.); Clarke Mechanical (Georgetown, Del.); and John H. Cameron & Sons (Chadds Ford, Pa.).
It merged with Atlantic Energy, a southern New Jersey utility; the new company is called Conectiv.
Over the next four years, it acquired another 16 companies, including HVAC firm Frey Lutz, a $24 million firm in Lancaster, Pa., and Geiger Services of New Castle, Del.
But in early 2000, Conectiv announced it would sell the Conectiv Services unit, which posted 1999 losses of $13.6 million on $135 million in revenues. The division also posted losses of $21.7 million in 1998.
Later that year, Conectiv Services sold its Mechanical Division to the original owners at Delcard Associates and Frey Lutz Corp., which would operate the companies under their original names. Delcard's portion of the business included 211 employees in Wilmington and Milford, Del. The Lancaster, Pa., office sold to Frey Lutz employed 175 people. The Services Division was to be sold separately.
In late 2000, Conectiv sold some of its service units - about $40 million of residential and commercial HVAC businesses in southeastern Pennsylvania and northern Delaware - to UGI Corp., a gas, electric and propane marketer based in Valley Forge, Pa.
KeySpan EnergyKeySpan, a subsidiary of Brooklyn Union Gas Co., got into the contracting business in mid-1997 with R.D. Mortman & Co., a New York mechanical contractor. In late 1998, it bought Philip Fritze & Sons, a $39 million firm located in Whippany, N.J.
The company established the KeySpan Energy Marketing Group, which designed and developed energy plants for large industrial and institutional customers, and KeySpan Energy Solutions, which serviced HVAC systems and a wide range of appliances for residential and light commercial customers.
KeySpan Energy Marketing Group bought Warwick, R.I.-based Delta Mechanical of New England Inc. in late 1999. With $30 million in sales volume, it was the largest HVAC contractor in Rhode Island.
In early 2000, KeySpan bought three companies - WDF Inc. of Mt. Vernon, N.Y.; Roy Kay Inc. of Freehold, N.J.; and Paulus, Sokolowski & Santor Inc. of Warren, N.J., an engineering consulting firm. The three firms had combined annual revenues of $170 million.
Later that year, KeySpan Services acquired Binsky & Snyder of Piscataway, N.J. KeySpan Services included a construction/construction services division and an energy services division that installed and serviced PHC equipment. Binsky & Snyder was a $93 million company.
KeySpan began selling off its mechanical contracting companies in 2004 and completed all sales by February 2005.
FirstEnergy Services Corp.Akron, Ohio-based FirstEnergy, a subsidiary of Ohio Edison Co., purchased Roth Bros. Inc. (Youngstown, Ohio) and RPC Mechanical (Cincinnati) in late 1997. Combined revenues were about $90 million.
Successive purchases included Colonial Mechanical of Richmond, Va. ($72 million in annual sales); Philadelphia's Elliott-Lewis Corp.; Edwards Electrical & Mechanical Inc. of Indianapolis ($52 million in sales); refrigeration contractor The Hattenbach Co. of Cleveland ($15 million in sales); Ancoma Inc. of Rochester, N.Y. (revenues of $36 million); and Spectrum Control Systems based in Cincinnati ($3.5 million in revenue).
By the end of 1998, mechanical contracting revenues for FirstEnergy were $350 million, with more than 2,500 employees.
The beginning of 1999 saw three more purchases - Dunbar Mechanical of Toledo, Ohio (revenues of $36 million); L.H. Cranston & Sons of Timonium, Md. ($41 million); and Webb Technologies of Norfolk, Va. ($14 million). They became part of FirstEnergy Facilities Services Group, the new name chosen for the utility's contracting arm.
By 2003, however, FirstEnergy was unloading its contracting firms. Some were sold to their original owners, including Colonial Mechanical/Webb Technologies and Elliott-Lewis. L.H. Cranston was recently sold to a group of Baltimore-area investors.
The sell-off began in earnest in 2004, but FirstEnergy still retains some companies. It dropped from No. 40 in last year's PM Pipe Trades ranking to No. 82 this year (see page 60 for the 2006 Pipe Trades Giants ranking).
Public Service Enterprise Group (PSEG)PSEG Energy Technologies, an unregulated subsidiary of PSEG, purchased Philadelphia-based Fluidics Inc. ($60 million in sales) in 1998.
In 1999, it purchased Arden Constructors, Engineering Inc. of Pawtucket, R.I. ($34 million); Liber Rich & Sons and Rich Fire Protection Co. of Pleasantville, N.J. (combined sales of $20 million); Struble Air Conditioning, Point Pleasant, N.J. ($6 million); Frank A. McBride Co. of Hawthorne, N.J. ($81.5 million); and East Coast Mechanical of Richmond, Va. ($5 million). Mechanical construction revenues were approximately $300 million.
2000 saw more acquisitions: Thomas H. Barham Co. of Tinton Falls, N.J. ($40 million in sales); Tougher Industries of Albany, N.Y. ($60 million); and Central Plumbing & Heating of Allentown, Pa. ($20 million). Total mechanical contracting revenues were $430 million.
But by the end of 2003, PSEG had divested all of its mechanical contractors. At least two were bought by the original owners - Struble Air Conditioning and Frank A. McBride Co.
In December 2004, PSEG in 2004 merged with Exelon Corp. (formerly Unicom).
Unicom Corp.Unicom's subsidiary, Unicom Enterprises (later called Unicom Mechanical Services), bought $45 million Midwest Mechanical of Willowbrook, Ill., in the summer of 1999. Subsequent purchases included: V.A. Smith Co. of Wheeling, Ill.; Hoekstra Automation/Access Systems of Homewood, Ill.; Metropolitan Mechanical of Eden Prairie, Minn.; Reliance Mechanical Corp. of Cleveland; Rieck Mechanical Electrical Services of Dayton, Ohio; Bumler Heating and Specialties Inc. and Building Automated Systems and Services, both of Warren, Mich.; and The Wenninger Co. of Milwaukee.
In October 2000, Unicom merged with PECO Energy Co.; the resulting entity was Exelon Corp. Exelon Services, an unregulated business under Exelon Enterprises' segment, was the new name for the mechanical contracting arm. (See “A Peek Inside A Utility's Mechanical Subsidiary,” January 2001.)
By the time Exelon had merged with PSEG, it had sold all of its PHC contracting companies.
PPL EnergyPP& L Resources Inc., PPL Energy's subsidiary, started its acquisition frenzy with H.T. Lyons of Allentown, Pa., McClure Co. of Harrisburg, Pa., and McCarl's Inc. of Beaver Falls, Pa. It continued with Burns Mechanical of Exton, Pa.; B-G Mechanical Contractors and B-G Mechanical Services, both of Chicopee, Mass.; Elmsford Sheet Metal Works, Cortlandt Manor, N.Y.; Fred Williams Inc., Weymouth, Mass.; General Mechanical Group, Latham, N.Y.; Titan Mechanical Contractors, Manchester, Conn.; Trystate Mechanical, Yonkers, N.Y.; and Westech International, Fishkill, N.Y.
PPL still owns these contracting companies under its PPL Energy Services Holdings. It is ranked No. 12 in this year's Pipe Trades ranking, down from No. 8 in 2005.
Stay tuned for the history of roll-ups and other consolidators in our industry in an upcoming issue of Plumbing & Mechanical magazine.