Lennox Divests Service Experts
BY: Betty Stephens of Quest Media
Lennox International, Inc. is known for its design, manufacture and marketing for the heating, ventilation, air conditioning and refrigeration (HVACR) products. Its products and services are sold through multiple distribution channels under brand names, including Lennox, Armstrong Air, Ducane, Bohn, Larkin, Advanced Distributor Products, Service Experts and others. The Company operates in four market segments:
1. Residential Heating & Cooling
2. Commercial Heating & Cooling
3. Service Experts
4. Refrigeration
Lennox International Inc. is a global leader in the heating, air conditioning, and refrigeration markets. Its stock is traded on the New York Stock Exchange under the symbol "LII."
Lennox Divests Service Experts
Lennox International Inc. 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. Service Experts consists of 108 dealer-contractor branches. With the recovery in the North American residential market this year and the interest from potential acquirers Lennox plans to establish a supply agreement for equipment with the future owner of Service Experts.
The company retains the commercial service business called Lennox National Account Services (NAS) that was reported within its Service Experts business segment. Revenue for the Service Experts business segment was $529 million in 2011, $80 million of which was from the NAS business. Lennox International announced the sale of its Service Experts business to a majority-owned entity of American Capital, Ltd. It was an all-cash deal that closed on March 22 and included a two-year equipment supply agreement. Terms of the sale and supply agreement have not been made public.
After seeing its revenue slip amid soft consumer demand and a sluggish market for new residential construction, Lennox reported in July its second-quarter revenue rose 2.2%, although earnings edged down 0.7% as margins shrank on a lower product mix and foreign exchange.
Lennox Original Buyout of Service Experts
Lennox bought Service Experts for $157 million in June of 2000. The purchase gave Lennox an additional $600 million in sales which, added to the estimated $400 million volume which put it at about $1 billion. This acquisition made them the largest residential dealer in the country, with nearly 200 retail outlets. The acquisition ends the three-year life of Service Experts one of four nationally consolidated and publicly traded contractors that sprang up in 1996-97. Service Experts’ stock soared to $35 after opening at $13. However, 18 months after its formation, the contractor’s stock price eroded, and last week it was trading at the $7 range. The company’s 1999 sales were report to be in the $450 million range.
Since its formation, Service Experts acquired more than 300 dealers using a combination of cash and equity. Many of the acquired contractors were members of the Contractor Success Group (CSG). At the time of its sale, Service Experts had 120 service centers in 36 states.
American Capital, Ltd The Buyer
On March 25, 2013, American Capital, Ltd. announced its buyout 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.
Service Experts investment provides AC with a solid opportunity to partner with an industry veteran to strengthen a company with a large installed infrastructure ready for growth. AC has a very talented management team with tremendous industry expertise that is focused on driving value creation. American Capital's complete financing package and operational support make them an ideal owner for Service Experts," said Scott J. Boxer, newly appointed President and CEO of Service Experts.
American Capital, Ltd. is a publicly traded private equity firm and global asset manager. American Capital, both directly and through its asset management business, originates, underwrites and manages investments in middle market private equity, leveraged finance, real estate and structured products.
American Capital's complete financing package and operational support make them an ideal owner for Service Experts," said Scott J. Boxer, newly appointed President and CEO of Service Experts. Mr. Boxer is an internationally recognized leader in the HVAC industry with a three-decade track record of successfully leading businesses through transformations and growth initiatives. After 40 years in the industry, Mr. Boxer retired from Lennox International, Inc. in 2010, where he had spent a decade-long tenure in various executive positions, including President and Chief Operating Officer of Service Experts from 2003 to 2010.
Consolidation of HVAC Contractors
The Mechanical Service Contractors of America organization has expressed concerns about the merger trend in the United States heating, ventilation and air conditioning industries (HVAC). They have express a concern of the pros and cons of consolidation; Skepticism over claims about the size of the HVAC market; and Skepticism over statement that a fragmented industry can be improved by mergers.
Background: The 1990s brought consolidation and excitement to the industry with companies such as Service Experts, GroupMac, and American Residential Services (ARS) to name a few. These companies paid multiples of earnings for prime contracting companies, and the world of HVAC began consolidation.
The first HVAC service consolidators were small groups of contractors who decided to put their companies together, sell some stock, and cash in some of their hard-earned chips. The initial sale of stock for cash was great for the original company owners, but things soon began deteriorating. Some consolidators changed the scope of business by focusing on growth through acquisition. This way they could continue to show Wall Street good revenue and profit numbers. But they needed more cash to keep everything going. When the cash dried up, the acquisitions began offering stock rather than cash for newly acquired companies.
Things seemed to be going OK at first. Then the bottom dropped when Wall Street figured out that growth and fat balance sheets were occurring mostly due to acquisition, not profitability. The largest problems for the consolidators were they didn’t have plans for increasing market share, sales volume, and profitability.
A number of the consolidators of the companies eliminated the reason the companies were successful in the first place: their independent spirit and ability to be flexible. And too, their ability to adapt. There have been successes. Many locations have done well, growing steadily and showing a respectable profit.
Since consolidation’s start, there have been many changes: Service Experts was purchased by Lennox International Inc., and the entity represented a huge part of that company's earnings and now Lennox has sold them; GroupMac became Encompass, and then they were gone; and ARS became ARS Service Express®, a ServiceMaster brand.
