Lennox Sells Service Experts

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February 2, 2024

Lennox International, Inc.: A Global Leader in HVACR

Company Overview

Lennox International, Inc. is a global leader in the design, manufacture, and marketing of heating, ventilation, air conditioning, and refrigeration (HVACR) products. According to the company's website, its products and services are sold through multiple distribution channels under various brand names, including Lennox, Armstrong Air, Ducane, Bohn, Larkin, Advanced Distributor Products, Service Experts, and others. The company operates in four main market segments:

  1. Residential Heating & Cooling
  2. Commercial Heating & Cooling
  3. Service Experts
  4. Refrigeration

Lennox International Inc.'s stock is traded on the New York Stock Exchange under the symbol "LII."

Divestment of Service Experts

In a strategic move, Lennox International Inc. announced plans to divest its Service Experts business, which consists of dealer-contractors providing heating and cooling equipment installation and service primarily to the residential market. According to the company, Service Experts consists of 108 dealer-contractor branches. With the recovery in the North American residential market and interest from potential acquirers, Lennox plans to establish a supply agreement for equipment with the future owner of Service Experts.

The company will retain the commercial service business called Lennox National Account Services (NAS), which was previously reported within its Service Experts business segment. In 2011, revenue for the Service Experts business segment was $529 million, with $80 million coming from the NAS business.

On March 22, Lennox International announced the sale of its Service Experts business to a majority-owned entity of American Capital, Ltd. in an all-cash deal that included a two-year equipment supply agreement. The terms of the sale and supply agreement have not been disclosed.

Despite a slight decline in earnings due to lower product mix and foreign exchange, Lennox reported a 2.2% increase in revenue for the second quarter of the year, following a period of soft consumer demand and a sluggish market for new residential construction.

Lennox's Original Acquisition of Service Experts

In June 2000, Lennox acquired Service Experts for $157 million, adding an estimated $600 million in sales to its existing $400 million volume, bringing the total to approximately $1 billion. This acquisition made Lennox the largest residential dealer in the country, with nearly 200 retail outlets. Service Experts was one of four nationally consolidated and publicly traded contractors that emerged in 1996-97, with its stock initially soaring to $35 after opening at $13. However, the company's stock price eroded over the following 18 months, trading at around $7 at the time of the acquisition. Service Experts' 1999 sales were reported to be in the $450 million range.

During its existence, Service Experts acquired more than 300 dealers using a combination of cash and equity, with many of the acquired contractors being members of the Contractor Success Group (CSG). At the time of its sale to Lennox, Service Experts had 120 service centers in 36 states.

American Capital, Ltd.: The New Owner of Service Experts

On March 25, 2013, American Capital, Ltd. announced its acquisition of Service Experts, a leading provider of sales, installation, maintenance, and repair of HVAC systems for the residential and light commercial markets. American Capital's investment took the form of preferred and common equity and a revolving credit facility.

According to Scott J. Boxer, the newly appointed President and CEO of Service Experts, "American Capital's complete financing package and operational support make them an ideal owner for Service Experts." American Capital, Ltd. is a publicly traded private equity firm and global asset manager that originates, underwrites, and manages investments in middle market private equity, leveraged finance, real estate, and structured products.

Mr. Boxer, an internationally recognized leader in the HVAC industry with a three-decade track record of successfully leading businesses through transformations and growth initiatives, retired from Lennox International, Inc. in 2010 after a decade-long tenure in various executive positions, including President and Chief Operating Officer of Service Experts from 2003 to 2010.

Consolidation in the HVAC Industry

The Mechanical Service Contractors of America organization has expressed concerns about the merger trend in the United States heating, ventilation, and air conditioning (HVAC) industries. They have raised questions about the pros and cons of consolidation, expressed skepticism over claims about the size of the HVAC market, and doubted whether mergers can improve a fragmented industry.

The 1990s brought consolidation and excitement to the industry, with companies such as Service Experts, GroupMac, and American Residential Services (ARS) leading the way. These companies paid multiples of earnings for prime contracting companies, initiating the consolidation of the HVAC world.

Initially, small groups of contractors decided to combine their companies, sell some stock, and cash in on their hard-earned success. While the initial sale of stock for cash benefited the original company owners, things began to deteriorate as some consolidators shifted their focus to growth through acquisition to show Wall Street good revenue and profit numbers. As cash dried up, acquisitions began offering stock rather than cash for newly acquired companies.

The situation seemed stable at first, but problems arose when Wall Street realized that growth and strong balance sheets were primarily due to acquisitions rather than profitability. The consolidators' biggest challenges were the lack of plans for increasing market share, sales volume, and profitability, as well as the elimination of the acquired companies' independent spirit, flexibility, and adaptability, which had been the keys to their success.

Despite these challenges, there have been successes, with many locations growing steadily and showing respectable profits. Since the start of consolidation, the industry has seen many changes: Lennox International Inc. purchased Service Experts, which represented a significant portion of the company's earnings before being sold; GroupMac became Encompass before disappearing; and ARS became ARS Service Express ®, a ServiceMaster brand.

Service ExpertsAcquired by Lennox International Inc., then sold to American Capital, Ltd.
GroupMacBecame Encompass, then disappeared
American Residential Services (ARS)Became ARS Service Express ®, a ServiceMaster brand

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