The Pipe Trades Giants: Consolidation Shuffles The Deck
Correction: PM erroneously reported that Limbach Facility Services had $91.50 in Pipe Trades revenues last month. Limbach actually has $355 million in Pipe Trades revenues, which would have made it No. 3 in the 1999 annual listing.Does size really matter? It's an underlying assumption by all of the publications that try to keep track of who's who in a given field, but is there any basis to it?
A list of the biggest firms in any business satisfies an innate reflex within American culture to keep score. Maybe it has to do with the influence of baseball as our national sport. Baseball fans cannot resist scanning not only the box scores and standings, but also the daily lists of leaders in batting average, home runs, RBIs and ERA.
Editors of consumer publications all know that lists make for great audience candy, whether it is for best dressed, worst dressed or top salad dressings. People who don't even read books won't pass by the New York Times best seller list without stopping to glance.
In our industry, nowadays size is of particular relevance in order to be in view of Wall Street's telescope. For the first time in history, large public companies are making an impact in the plumbing-heating business and, rightly or wrongly, their size has a lot to do with how the financial community evaluates them.
In keeping score, we must always be mindful of that old adage about there being three kinds of lies: "Lies, damned lies and statistics."
Volume does not correlate with profit, and it can be a grossly misleading measure of business success. Also, the measurements themselves are subject to various imperfections.
Another caveat must be added. It's harder than ever just keeping track of who's who. This year's PM Pipe Trades Giants feature 18 new names, and 28 of last year's participants are no longer on our list. We can only wonder how many others might change ownership in the weeks between the time we go to press and our readers get this magazine in their hands.
None of this coming and going has much to do with business fortunes, which have been pretty darned good across the board. It's just that plumbing and mechanical contracting companies are acquiring new identities faster than popcorn pops.
Out of curiosity I checked our first Pipe Trades Giants list from five years ago. Only one of the 1994 top 10, MMC Corp., remains in this year's top 10. Oh, there are others hidden among them, such as Poole & Kent, now subsumed under the EMCOR Group; Shambaugh & Son, now a Comfort Systems company; and Fullman Co., owned by this year's top-ranked The Kinetics Group, itself a subsidiary of diversified water distribution and treatment giant U.S. Filter Co., which just a few months ago became a unit of the French international conglomerate,Vivendi. Our once sedate industry of closely-held companies is being transformed like Clark Kent in a phone booth.
StrangersThe No. 3 name on this year's list is bound to stump many of you. American Plumbing & Mechanical Inc. (AMPAM), did not even exist until just a few months ago. AMPAM is a roll-up company formed by investors heretofore active in consolidating the electrical contracting field.
They combined nine of the country's largest residential construction plumbing firms, including several that had their own names on our Giants
lists of the past, such as RCR Cos, Keith Riggs Plumbing and J.A. Croson Co.
This new company represents a departure from the other industry consolidators who have zeroed in on relatively stable service work as their mainstay. Can AMPAM make a go of it consolidating companies in the notoriously cyclical construction market? I asked this question of one of its principals a few months ago, and was told they are counting on the offsetting cycles of residential and commercial construction to iron things out. We'll see.
Building One Services is another name that will cause some head scratching. A year ago this facilities management consolidator was involved mainly in electrical and janitorial services. Then, last September, it purchased Ivey Mechanical, No. 54 on last year's Giants list. Following up with several other mechanical purchases, it has vaulted all the way to the No. 9 spot in Pipe Trades volume this year.
Another new name, but not an unfamiliar one, is ServiceMaster, which entered the pipe trades field in a big way with last year's purchase of the West Coast Rescue Rooter chain and this year's fire sale acquisition of troubled American Residential Services (ARS). The ServiceMaster name is dominant in lawn care, pest control and various other service industries.
The huge acquisitions already have made its PHC business one of the largest divisions within ServiceMaster. It may take them some time to digest and straighten out their PHC holdings, but we hear that corporate management is willing to devote plenty of resources to make it work.
This will be an interesting ongoing story in the residential service sector. If ServiceMaster can succeed in the PHC business, it could entice other powerhouses into the field. If it doesn't, others might well be scared away.
It's a sign of our fast-changing times that two-year-old consolidators such as GroupMAC and Comfort Systems USA seem like old-timers.
These two $1 billion plus companies are jostling for overall volume leadership, although most of their revenues come from the air side HVAC field that is outside the scope of our Pipe Trades specialty.
The financial markets have, to date, reacted in ho-hum fashion to these industry giants, whose stock prices have been hovering not much above their IPO levels. That may soon change. In recent months various brokerage houses have given strong buy ratings for GroupMAC and Comfort Systems, feeling they are undervalued.
What's more, industry consolidation is still revving up. PM has gotten wind of another big mechanical-electrical contracting roll-up about to take place. If it goes through as planned, this company will start out of the blocks with some major mechanical contracting names on board and more than $400 million in annual revenues. Target date was Aug. 1. If you haven't heard of it by now, you shortly will.
Some major industry players are missing from our list. These include various utility subsidiaries that have bought out mechanical contracting companies, but, despite repeated entreaties, have ignored our requests for information. With the notable exception of First Energy Facilities Services Group, missing from our list are PP&L Resources (although some of its operating units have responded), Sempra Energy Solutions, PSEG Energy Technologies, PG&E Energy Services, Conectiv, Enron and KeySpan Energy.
PSEG replied to us that "our company policy is not to divulge any line of business details such as volume mix, growth trends, etc." Others may harbor similar paranoia, or perhaps are merely aloof from our industry and unaware of the devoted following of this magazine.
Beyond The NumbersMuch has been written about industry consolidation these past few years, but the analyses tend to be outdated almost as soon as they get printed. Consolidation is an amorphous phenomenon continuously changing shape with new strategies, tactics and acquisitions. Some observations:
- Public consolidators first targeted the residential service sector, but most of today's action is in the commercial-industrial service arena. After starting out with a residential focus, GroupMAC has switched gears to vie with Comfort Systems for commercial-industrial service supremacy. (Kinetics and EMCOR rank as bigger overall, but these companies gain a comparatively large portion of their revenues from construction rather than service.)
- Service work is supposed to be the focal point, but most consolidators have taken on more construction business than originally anticipated in their prospectuses. The explanation is simply that the market is booming, and it makes no sense to shut down money-making operations whatever they might be. If and when the building boom starts to fizzle, watch for some unloading to take place.
- Industry consolidation will take 25 to 30 years to fully run its course, but many of the stalwart companies that can be bought have been bought, and the pickings get slimmer with each acquisition.
Also, some consolidators paid inflated prices for contracting companies in the early stages and are cutting back on what they are willing to offer. A countervailing trend is that many sellers, frightened by the collapse of ARS, are reluctant to part with their companies for iffy stock and negotiating for greater cash payouts instead.
So we are already at the beginning of a different phase of consolidation in which companies will have to rely more on internal growth than acquisitions to impress the financial community.
A focus among the commercial-industrial consolidators now seems to be on gaining national accounts and utility alliances. In a recent letter to investors, GroupMAC CEO J. Patrick Millinor, Jr., identified national accounts and utility alliances to represent a $120 billion potential market. That's with a "b." They hope to tap 15 percent to 20 percent of that business. Yeah, this is a pipe dream, but the arithmetic sure does make one whistle.
- As desirable acquisition targets diminish, a few imaginative entrepreneurs are active with mini-consolidations at the local level. They are buying up small companies that, in themselves, are not attractive to the big boys, but do meet the specs when consolidated into a single entity. Their objective is to build a saleable local empire. Watch for this trend to become more prevalent as the years go by.
- Players in the residential/light commercial sector all dream of establishing themselves as household brand names. Roto-Rooter has a head start in that area. It claims to provide plumbing services to 80 percent of the U.S. population and drain cleaning to 90 percent. An advertising campaign labels it as "America's Neighborhood Plumber."
ServiceMaster seems to be in a strong position to establish itself as a brand name, simply because it is largely there already with other service divisions. (Service Experts, a well-known residential consolidator, is excluded from this analysis because it is predominantly an HVAC firm with little plumbing presence thus far. This may change as years go by.)
Someone else to keep an eye on is Blue Dot. Services, whose strange identity is a product of market research telling that consumers get warm and fuzzy over it. It has been waiting in the wings to launch an IPO, but IPO prospects haven't been good for non-Internet companies lately.
Blue Dot. has bought some very good companies, and the contractors have spoken with whom they've bought out tend to speak well of their corporate parent. Even without going public, Blue Dot. can raise impressive cash for acquisitions thanks to the deep pockets and borrowing clout of corporate parent Northwestern.
Are independent contractors under the gun? Two misconceptions arise over and over about the fate of independent PHC companies in this era of consolidation.
Misconception No. 1The independents are doomed. Nonsense. Look at those numbers being bandied about by the consolidators on Wall Street - $120 billion annually in commercial PHC work, upwards of $40 billion in the residential sector.
Those are rough estimates. Nobody knows for sure. All everybody knows is that every home and building requires plumbing and almost all need heating. The market is unimaginably huge, and there's enough business to go around for everybody from the most humongous consolidators to the humblest mom-'n-pop shop.
Fred Ferreira, CEO of Comfort Systems, has said that in the waste management field where he and most of the other PHC consolidators cut their teeth, there were approximately 11,000 firms doing business when consolidation began 25 or 30 years ago. After consolidation pretty much ran its course, 9,000 remained.
In the plumbing and wet heat field that describes PM's market, there are at least 75,000 companies worthy of the term vying for business in both the commercial and residential sectors, along with maybe 150,000 plus small shops that are barely on anyone's radar screen. Consolidation will not touch more than a few thousand of them. Affinity groups such as Contractors 2000 and Plumbers' Success International will help level the playing field as well.
Misconception No. 2Then it's business as usual! Not exactly. While the number of companies may not diminish much, the big boys are going to skim the cream off the top, just like multi-billion dollar giants Waste Management and BFI did in waste management. Small companies will be shut out of many markets and contracts simply because they won't have the ability to provide what the owners need in the way of diversified services, advanced technology, customer care and technical talent.
Collectively, the national companies and affinity are going to ratchet up people's expectations of how PHC construction and services should be delivered. Competition will heat up even more for technicians and management talent. The big organizations will be paying top dollar in pay and benefits, and smaller companies will be forced to either match or settle for second-raters. Also, the big organizations will have room for people to grow in both income and opportunity that is usually lacking in the small family-owned businesses that heretofore have characterized the plumbing industry.
Let's look at it another way. Any solid independent contractor out there will tell you that they are troubled less by the GroupMACs and ServiceMasters than they are by the seat-of-pants operators who have nothing to sell but a low price. The big boys can't afford to give away their services, nor to schlock themselves to death. In the long run they will raise the bar for the entire industry.
Be fearful only if you are one of those who views that bar from below.