Free agency comes to contracting ...

Not a week seems to go by that we don’t receive a press release concerning the acquisition of yet another mechanical contractor. Big names, too. Rumors were circulating during February’s MCAA convention on who was going to be the next target. We decided to sit down with Ron Rodgers, president of J.B. Rodgers/Kinetics, and John Yale, vice president, about Rodgers recent acquisition by U.S. Filter. According to our 1998 ranking of the top plumbing and piping contractors, J.B. Rodgers came in at No. 46 with pipe trades revenue of $82.92 million. U.S. Filter also owns two other top mechanical contracting names, the Kinetics Group and Fullman Co., with 1998 pipe trades revenue of $378 million and $130.34, respectively. All three contractors are top providers in process piping — which as we’ll see fits in perfectly with their owner’s objectives.

PM: Tell us about how the sale of your company began?

Ron: It actually started out with the plan to acquire another company. We specialize in the high-tech microelectronics market and, after 20 years, we figured we had saturated the market for this type of work in Arizona. We just weren’t going to get bigger by doing this so we figured we’d expand outside our geographic area.

PM: What were your options to buy someone?

Ron: At the same time we were planning this, it was becoming pretty clear that in order for our Performance Contractor Group to be successful, it needed to align with some utilities. Then, we considered selling the Group to a utility, which would create some capital we could use for an acquisition.

PM: So you’d trim down first, obtain cash and then expand.

Ron: Performance contracting was about 15 percent of the business, so we would have been that much smaller, but able to focus on high-tech work in other parts of the state and the country.

PM: How did the shopping excursion go?

Ron: We talked to several different utilities, but as we talked, we found the utilities were interested in much more than just a division of our company; they were looking for contractors who could actually install, operate and maintain mechanical systems because that’s exactly what the utilities want to do these days.

PM: At what point in time was this?

Ron: This all took place around March of last year.

PM: That’s around the time Kinetics was bought by U.S. Filter. Did you consider talking to other people besides utilities?

Ron: Not quite at that point. But we were contacted by a gentlemen both John and I knew from Kinetics to have a meeting with David Shimmon just to sort through all this. [Editor’s note: Shimmon is the president and chief operating officer of U.S. Filter.]

PM: How did the meeting go?

Ron: It was an interesting meeting since at that point we weren’t quite sure about selling, and they didn’t show their hand that they were interested in buying us. It just turned out to be a nice dinner meeting. It wasn’t until several months later, after we started talking to more utilities that wanted to acquire J.B. Rodgers, when we decided to see what other people would be willing to pay.

PM: Sounds like it became more of an auction at this point, right?

Ron: Yes, we did talk to more utilities and other consolidators — GroupMAC was the only contractor consolidator we talked to seriously. We felt they were more aligned with the type of work we did. Also, Comfort Systems had bought a company in our area so we didn’t think they’d want two companies next door. And we ended up talking again with Kinetics/U.S. Filter.

PM: How did you end up going back to U.S. Filter?

Ron: We actually saw the alignment with U.S. Filter as much better than with other groups. Kinetics was already in the same high purity market that we were in. That’s always been our main focus. U.S. Filter is also keen on offering turnkey solutions for process systems that we knew how to manage.

John: It was a better fit. We weren’t so sure that the other companies we talked to would even understand the business that we were in. So we thought there was a lot more opportunity for us to go with Kinetics and U.S. Filter.

PM: U.S. Filter seems like a different sort of consolidator.

Ron: Well, they are a consolidator in the water industry — and that’s a pretty broad spectrum. The water industry to them is taking it from the ground, treating it for drinking purposes or high purity manufacturing purposes, and also ground water remediation, domestic and chemical waste treatment. They may not be as focused as the contractor consolidators everyone is familiar with, but they are definitely consolidating the water industry.

PM: We can understand why you’d want to sell after hearing so much positive from the market. But it also sounds to us as if you realized that selling would help meet your original objective — make your business grow. Did you also determine there was a limit to how much you could grow independently?

John: There is definitely a limit to growth without risking too much of what you set out years ago to build. We built this company up over 20 years — and 20 years ago this company wasn’t worth very much. We did have a lot of room to grow as J.B. Rodgers capital-wise. We were only using 60 percent of our working capital for volume. We could have done $150 million — we had the money. But we just didn’t know if we had the people or the energy or even wanted to risk going into other states because we had reached the saturation point in Arizona regarding our core competency.

Ron: Business owners start out risking a lot. But then they grow until it’s worth a lot of money and then they’re afraid they’re going to lose it. I did have a succession plan in place; it was going one way, and then this acquisition proved to be another way to go that made more sense.

PM: What are the changes you’re now going through getting used to being a part of a bigger company?

John: Right now, we’re called J.B. Rodgers/Kinetics. But there is a move to make it Kinetics. There really is not too much name awareness to J.B. Rodgers outside of Arizona, and it gets less every day. And we just feel that it will help with the integration process. Being known as Kinetics will probably be done at the end of this year.

PM: Any qualms about not being known as J.B. Rodgers?

Ron: That’s a bit disheartening. It carries my father’s name and it’s a 50 year old company. But it does make sense. [Editor’s note: Ron carries two cards: one identified him as president of J.B. Rodgers/Kinetics, and the other identifies him as the senior vice president of the southwest construction division of Kinetics.]

PM: What about the changes in management styles?

John: That’s been our biggest shift. Decisions that we could make, whether they were right or wrong, is now more bureaucratic. I’m not saying that’s good or bad, I’m just saying we can’t make all the decisions we used to anymore. And after 20 years of us running our own company, it’s big change. We are basically a construction unit for U.S. Filter, that’s out there getting the work done, and they have different way of getting the work than we had.

PM: What are some of the positives that have come from the sale?

John: The good news is Ron and the other construction companies are putting a bigger focus on consistency and operational efficiency and how to make this organization work. That’s pretty exciting for us too. David Shimmon has a favorite phrase: “Create value for your customer through productivity and innovation.” That’s a pretty simple sentence, but if you could do it, you’d own the world.

PM: Ron, can you give us an example of this work?

Ron: U.S. Filter also owns construction companies in Israel and Germany so what we’re doing is identifying the best practices of all these companies and applying them to wherever we’re doing a job, be it in Portland, Boston or overseas. We’ll use the same approach to do the job, the same estimating methods, the same job costing methods, the same scheduling methods.

PM: That sounds like this may make you a better manager, but how does that work turn out to be a plus for the customer?

Ron: If we’re doing a job for Intel, whether that plant is in Arizona or Israel, the work will have the same look. That’s a big plus because a lot of our customers are national and international, but it’s the same people overseeing all these projects worldwide. So they really like to see a consistent look to the work we do.

PM: How has this worked out so far for running J.B. Rodgers?

Ron: The big thing for us now is the tremendous resources available to us. Just the other day we had a customer who made a passing remark that he also had a ground water remediation project he was going to begin work on. Within the space of just one phone call, we had an expert that we could bring to the table and offer a turnkey solution to his problem.

PM: What has propelled the consolidation movement? Why now?

Ron: Let me put it this way: About five or six years ago when EMCOR was buying construction companies, they came to me and offered book value or just a little over. You could almost liquidate and get the same price. Now were talking about being paid 5 or 6 times earnings.

PM: What’s changed in just a short amount of time?

Ron: I think it has to do with the performance of the stock market and that there are just more and more ways to invest money. The whole rollup started years ago for other industries: banks, office supplies, auto supplies. So what happens is that by going public you take earnings that may be worth three or four times multiple if you were to sell in the private market, and all of a sudden as a public company, those earnings are worth 15 times multiples.

PM: Are the investments made in construction going to pan out to justify these premiums?

John: I think it went from being an emotional sale five years ago to a financial sale today. These numbers have to work. It’s a financial play, that’s all it is.

PM: But do such numbers work in contracting and construction?

John: Specialty contractors make more than general contractors as a percentage. And generals aren’t getting rolled up like specialty contractors.

Ron: And most of the companies that are getting acquired are earning higher margins — very profitable profit margins. I don’t think you’re going to find the low-bid mechanical contractors being sought after. John: Having key accounts is vital. Having national customers is important, but I’ve learned that having a national presence is just as important. We had plenty of national customers, and we had solid working relationships with them locally. But an independent, local contractor in such a circumstance would be at risk that some national contractor could walk in at some level of that customer’s company and say, “We’ll sell you this service at this price at this consistency throughout the world.” As good as our relationship was, if Motorola had decided that they were going to reduce its number of contractors to one, we probably wouldn’t have gotten that job.

PM: How do you see the industry shaping up?

Ron: I think there’s still plenty of room in the industry for the small contractor … maybe I shouldn’t say small, as much as independent. From what I understand with all the consolidation that’s happened, it’s still only 10 percent of the construction market that they’re representing. That leaves a lot of room. Those rollups, meanwhile, are going to have to sustain their growth and profits and prove that they can perform or otherwise they’re going to fall out of favor with the stock market. If so, they’re not going to be around.

John: It’s gotten a lot bigger than even just mechanical contracting. You’re talking about utilities getting deregulated who want to buy up 20 companies like us because they have a total captive audience and they want to go out there and start selling service. But even they don’t have the resources we have now through U.S. Filter. U.S. Filter wants to own the world’s water. So it’s a lot different than just thinking, well, we’ve built enough buildings here, we’ll run over there now and build some buildings. This is huge! When you start talking about, “We’re going to own the world’s water,” it’s different! This is huge, huge thinking compared to where we came from. It’s a lot bigger than just mechanical contracting.

Ron: In the big picture, I know I did the right thing. I’m excited about growing the company in a way that I wouldn’t have been able to do personally because I didn’t personally want to own the world’s water! But being a part of it is going to be fun.