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Columns

Yours Is A Great Business To Be In

By Jim Olsztynski
June 19, 2000
Where do things stand in year four of widespread contractor consolidation? Industry buzz tends to focus on the lackluster stock performance of the public companies building billion-dollar empires. From Wall Street's perspective, PHC consolidation has been pretty much a bust so far. As of this writing, virtually all of the roll-up stocks are selling for below their IPO price. This has caused others to postpone or even rescind planned initial public offerings.

Traditionalists think this is just dandy. They like the industry the way it was for the previous 125 years or so, splintered into as many mom-'n-pop pieces as there are trees in a forest. They love saying, "I told you so," as the big boys stumble.

Except this point of view fails to see the big picture. Consolidation is an inexorable long-term movement in the PHC industry, and it's too soon to count anyone out. Although the public consolidators haven't yet shown the ability to compete in Wall Street's league, none of them is losing money. They will either get their act together or sell their PHC holdings to someone else to take a crack at. But these companies are not going to dissolve back into the hundreds of smaller independent companies from which they were built.

Besides, the public companies are not the only players. Big as they are, none controls dominant market share in any industry sector. Competing consolidators include IPO-wannabees such as BlueDot., AMPAM and at least one other venture in formation.

These companies are biding their time and growing as private entities until they perceive Wall Street to be in the mood for their fluttering eyelids.

Utility Competition

Even more threatening to the traditional industry structure is PHC activity by various utility subsidiaries. Some, like FirstEnergy, PSEG, Conectiv and PP&L, have bought up mechanical contracting firms that represent hundreds of millions of dollars of service and construction volume. Others are partnering with independent mechanical contractors to deliver commercial PHC services, and with home warranty firms to lock in residential PHC service and installation business.

Some are packaging these services with energy sales and a host of other facilities management services, thereby offering homeowners and commercial customers a one-stop shopping source to fill energy and maintenance needs. As one prime example, FirstEnergy Services Group, a subsidiary of Ohio utility giant FirstEnergy Corp., recently signed an agreement with steel producer Republic Technologies International to provide RTI with more than $1 billion worth of energy supplies and related services over a 5-year period. That's billion, with a "B".

Many independent contractors might look at such news with despair. No need for that. There is some cause for concern in that all the partnering and preferred provider agreements are taking a lot of business out of play for the average firm. However, it remains to be seen how profitable this business will turn out to be. Companies such as RTI aren't in the habit of throwing around a billion bucks without some hard negotiating.

Besides, there's plenty of business to go around. The big utilities and roll-up artists wouldn't be targeting our industry if they didn't perceive it to be an attractive business. What makes it so attractive in their eyes?

The market is huge. Plumbing, heating and cooling are required by virtually every home and business. The total market for PHC and related services tops $100 billion by most estimates. Consolidating corporations would be thrilled to capture something approaching 5 percent or so. Independent contractors can sustain themselves even on the table scraps from such a feast.

The business is real. This is not like speculating on Internet stocks. Plumbing, heating and cooling fulfill essential human needs rather than ephemeral whims. These needs will always exist. It's simply a question of who is best positioned to fulfill them.

The market has not been well served. By and large, the PHC field has existed as a trade, not a business. The outsiders perceive customers not to be very happy with the way PHC services have been delivered, and think they can do better over the long haul.

The business fits with others. The commercial-industrial consolidators are parlaying their PHC skills into larger facilities management packages that also cover electrical, security systems and even janitorial services. In the residential arena, some of the players envision a total home services future in which the average home owner will call one company for every household repair and maintenance need. Home warranty insurers are already laying this groundwork.

According to Comfort Systems' CEO Fred Ferreira, 25 or 30 years of waste management consolidation reduced the number of firms in that industry from about 11,000 to 9,000. That still leaves a lot of independents, and he expects something similar to happen in the

PHC industry after consolidation has run its course. There's enough business available for everyone, especially in specialized niches.

The consolidators are transforming the industry in ways that don't necessarily appeal to flag-waving industry patriots - I count myself among them. They don't have the same sense of romance about the trade as we do. They are simply out to make money, period.

Don't let that rub you the wrong way. It's leading the way to good competition, enhanced professionalism and a viable market for contractors looking to exit the business. They are proving that yours is a great business to be in. And there's never been a better time to be in it.

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Jim Olsztynski is the former editorial director of Plumbing & Mechanical.

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