It was predicted. Ever since the consolidation movement hit the PHC industry three years ago, the roll-up artists said, “You ain’t seen nothing yet.” Accumulating billion-dollar empires was the hard part, and the one entailing risk. The joyful part, from their perspective, was reaping the rewards when their rolled-up companies got gobbled up by even bigger fish. This had happened in waste management and other consolidated industries, and was an inevitable consequence of the consolidation movement.
ServiceMaster’s purchase of ARS doesn’t perfectly fit this scenario, simply because it is anything but a success story of consolidation gone according to plan. The founding chieftains of ARS certainly envisioned selling out for more than the pitiful $5.75 price paid by ServiceMaster for each share. But this was not entirely unforeseeable. Like any other business, consolidation has its winners and losers, and the losers tend to go up for sale faster than the winners. That $5.75 price looks a lot better than the sub-$2 slum ARS inhabited a few months ago — although not so delightful to the contractors who exchanged their pride and joy for ARS stock when it was flying in the $20+ rarefied air, or even to the original investors who bought in at $15.
Meanwhile, ServiceMaster executives are having trouble concealing their glee. At $272 million, the ARS purchase seems a bargain to them. It wouldn’t be worth that much to hardly anyone else, but as noted in this magazine’s March cover story about ServiceMaster, these folks are not on the prowl to build up a PHC empire just to sell it. They actually think they can make money operating the acquired ARS companies. I hear through the grapevine that most of the ARS managers and employees are ecstatic about the transaction.
U.S. Filter: At the commercial-industrial end of the consolidation spectrum, many in the industry were stunned by the purchase of U.S. Filter by a French conglomerate. Adding to existing interests in manufacturing and distribution of water treatment and plumbing/piping systems, U.S. Filter in the last year completed the third tier of vertical integration with the purchase of three respected mechanical contractors specializing in high purity piping and other advanced technology systems. The tentative $6.2 billion purchase by a unit of the French conglomerate Vivendi would result in a global water treatment business of some $12 billion in annual revenues.
An assessment by the consulting firm Frost & Sullivan is that the French-American marriage holds great promise. CGE, the Vivendi unit that will own U.S. Filter, has its core competencies on the service side, while U.S. Filter “is very strong on the equipment side, but lacks refinement on the service side.”
“If the two companies can manage to integrate the organizations effectively, it could very well become the world’s leading one-stop shop for water-related services and equipment,” says Frost & Sullivan.
This merger is contingent upon financing and may yet fall through. According to the British new agency Reuters, in addition to the $6.2 billion sale price, Vivendi will assume U.S. Filter’s $1.7 billion in debts. Vivendi said that it had six months to find the money to complete the deal.
Poole & Kent: Shortly before we went to press came the most stunning new of all. Poole & Kent, not only one of the largest but perhaps the industry’s most venerated mechanical contracting name, was bought by Emcor (subject to certain conditions that seem mere formalities by the tone of Emcor’s announcement).
Emcor and Vivendi seem destined to become fierce global competitors. At root of both transactions is the belief that water-related services are undervalued throughout the world.
And although these transactions affect different markets, they mark a watershed in PHC industry consolidation. Collectively they are the first wave of “superconsolidation,” in which the focus of the buyers is not on size for size’s sake, but on the operational clout of their acquisitions.
As I noted in this space last February, the promise of consolidation is that the whole must be greater than the sum of its parts, or else it makes no sense. So far, none of the consolidators has fulfilled that promise, nor even tried.
ServiceMaster, Vivendi and Emcor represent a different mind-set. It is they who will try to take consolidation to a different level by making money off of operations instead of wheeling-dealing on Wall Street.
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