M&A in the U.S.A.

Editor’s note: This is the third article in a three-part series about industry mergers and acquisitions. It features coverage of what major U.S. firms are doing to counter the entry of global players into the North American pest control market. The first article in this series, in the August issue, focused on Anticimex, the industry’s newest international player. The second article, in September, was about Rentokil North America.

Location, location — you know what they say. You land on an attractive neighborhood — prime spot, great neighbors, quality schools, fantastic city services. Couldn’t ask for better. For-sale signs go up for a minute (or not at all), and the highest bidder gets the keys. Some buyers walk away. Did you overpay? Possibly. But the features and benefits are there — it’s a hot property. Not to mention, it’s a seller’s market, so there’s a price for entry. That explains why owners who thought they’d retire in their homes in this desirable area are saying, “Why not?”

Some might say that the U.S. pest control M&A deal table looks a little bit like this bubble of a neighborhood that’s fetching premium prices. Pest control holds its own in the value department: It’s an attractive investment because of its stability, recurring revenues, low overhead and the sheer demand. Let’s face it, bugs aren’t going anywhere. As for location, the United States is a sweet spot. Half of the global pest control market is here, encompassing roughly 20,000 companies, including the world’s four largest players.

Then, you figure in the overall M&A market today — it’s generally a good time to be a seller if you’re running a family-owned pest control business — or in fact, any business. Some business owners aren’t waiting to sell until they’re 60-plus if they realize their businesses are worth double today compared to a few years ago.

Finally, add global players that are putting a stake in U.S. turf and consequently pushing up prices. They’ll pay to play.

In a way, it’s just like that buyer who had to get the home in the attractive neighborhood.

“At the end of the day, valuations are very subjective,” points out Paul Giannamore, managing director, Potomac Pest Control Group. He tells how in 2015, Rentokil paid $425 million for Steritech — nearly three times its revenue and 17 times EBITA. A couple years before this, pest control was less than half of Rentokil’s business. “If you look at how the public market was valuing Rollins and ServiceMaster from a trading perspective, [pest control cash flow] was more valuable,” Giannamore says. Rentokil recognized that and made a strategic move.

The Steritech acquisition made Rentokil the No. 3 pest control provider in the U.S. and doubled its presence in Canada. Reflecting on the deal today, “They had reasons to pay a higher price,” Giannamore says. “And, with Anticimex coming into the market and buying platforms, it makes sense for them to double down on some of these companies,” he adds, speaking of higher-priced offers.

Now, the pest control market has two assertive global players — Rentokil and Anticimex — that are growing in the U.S. and forcing a riptide in some facets of the pest control market. “Some” is the operative word — because the majority of pest control firms are entrepreneurial, family-owned and not considered platform companies for acquisition. But, this “U.S. invasion” of sorts can’t be ignored. It’s causing lots of buzz. Cash is cheap. Multiples are high. There’s a new large player in the U.S. pest market. “When you introduce a new player to the market, that can draw more people out to sell,” comments Matt Wild, director of finance and business strategies, Truly Nolen.

The power of suggestion to an owner can be, well, powerful. “The high prices and heightened level of M&A activity has pulled some companies into the market that otherwise wouldn’t have thought about it — owners who had succession plans in place, and they’re thinking, ‘If I can get more for my business today than I could two or three years ago…’ then maybe there’s a different outcome for their businesses,” says Matthew Whiting, director of M&A, Rollins Inc.

But what outcomes will the pest control industry see as a result of global players’ influence on M&A activity? What’s the deal with high prices and is this impacting longtime pest control companies’ M&A strategies? PCT reports.

M&A STAGE AND CAST. First, let’s set the stage — describe the set and cast of lead players in today’s dynamic M&A market. The place: United States, which holds about $7.7 billion in the $15 billion global pest control industry. The time is now, when capital cost is low, making it easier for buyers to close deals. Interest rates remain on the historically low side, which creates a welcoming environment for acquirers who will finance deals. Multiples are high — record high. The scene includes more sellers, sensing opportunity; and buyers, recognizing the economic market is ripe for expansion.

About those high multiples — there is a nagging question: At what point will they deflate? How long will this last? This unknown prompts a proceed-with-caution approach for some, says Kemp Anderson, president, Kemp Anderson Consulting. So, that makes for a scene that’s a complex mix of dynamic energy and watchful conservatism. Not every player is jumping into the ring with gloves on.

“The market is hot. Multiples are high. People have never been paid as much as they are now for their businesses,” Anderson says. “But, if you look at how major companies are approaching today’s market, the word I want to say is ‘cautious.’ They certainly recognize as buyers that they do not want to overpay because that has a long-term negative impact.”

This M&A market is not the new normal. Giannamore says, “I would say multiples hit their zenith in the third quarter of 2017, they plateaued and by 2018 we’ll see them slowly start to trail off.” He suspects we are in year three of a four-year bubble. Most bubbles last three to five years, he explains. (Consider the IT bubble, the dot.com bubble and so on.) Then, we might see a shift in who decides to sell. Today, sellers are younger.

In fact, Potomac will complete about $175 million in transactions by year-end, and the oldest shareholder in those deals as of October was 52. The average age of Potomac’s sellers is late-30s. “Up until 2014, if you were to open up PCT magazine and see a news release that a pest control company sold, you’d be wise to bet the owner was 60-plus,” Giannamore points out. “Now, take a look at 2017. We have guys in their 30s and 40s selling.”

He notes the last couple of Anticimex platform acquisitions. There’s Matt Nixon who sold American Pest to Anticimex at age 40. Ryan and Dan Bradbury of Viking Pest are also Gen Xers. None are on the cusp of retirement — in fact, they’re at that building stage of their careers. “Now, they are shareholders,” Giannamore says of their roles as co-investors via Anticimex and its private equity owner, EQT.

Tracking the bubble’s “life cycle” after a flight of young and opportunistic sellers comes a probable race to the deal table from owners and founders fearing a burst of their business value. If they don’t sell now while multiples are up, then what?

Anderson says, “What goes up must come down at some point. I suspect we are very close to that tipping point.”

In other words, these high values aren’t sticking around forever, Giannamore figures. But what is certainly happening is creating a dialogue. “Anticimex is waking a lot of sellers up, I think,” he says. “You can’t go to any pest control meeting without hearing everyone talk about the ridiculous multiples.”

There’s buzz. Lots of it.

And, it’s not just the pest control industry — it’s every industry, really. It’s generally a good time to be a seller. “The M&A market is the busiest I’ve ever seen it — most everything is for sale, and it’s not just pest control,” Giannamore says.

But in the pest control space, there are two global players encroaching on U.S. market share that seem willing to pay more in a competitive sale than would have been traditionally offered. Dollars aren’t necessarily getting thrown at the smaller deals. “We have not seen much in the way of appreciation for smaller transactions, but the larger transactions certainly have experienced price increases,” Whiting says. “It’s clear. There are companies that have decided to expand in the U.S., and they were willing to pay higher prices to affect that expansion. Now, they have come in and are paying similarly high prices.”

That doesn’t mean the old guard is following suit. And by old, we’re talking Rollins (Orkin) and ServiceMaster (Terminix). These public companies have been growing through acquisitions for decades and have concerted strategies for doing so.

Rollins maintains a conservative acquisition philosophy. “It’s simple,” Whiting says. “Build relationships with quality-minded, growth-minded companies.” For Rollins, that theory translated to 34 acquisitions in 2016, and while the company will not quite hit that number in 2017, its revenue acquired will surpass 2016, he says.

“We are continuing to do what we have always done,” Whiting adds. Rollins and its leaders have seen heightened M&A activity over the long-term, Whiting points out. “There is a beginning to those periods — and an end,” he says. Meanwhile, Rollins reached an all-time stock high in October 2017. “We have been successful with all of our mergers and acquisitions without having to borrow money, and at the same time we have continued to generate record earnings,” Whiting says.

Rollins will walk away when the seller and the company’s goals and objectives don’t match up. Otherwise, it could be forced to integrate a business too quickly to capture potential return on investment and to justify a higher price out of the gate, Whiting explains.

As for Terminix, Jason Bailey, vice president of business development, says, “Acquisitions have to make good business sense for us.” The last major transactions made by Terminix were in 2016 — the acquisition of Catseye Pest Control in May and the purchase of Sandwich Isle Pest Solutions in August.

Now, adding to the complicated M&A setting with high multiples and prices, low interest rates and cost of capital, younger/ opportunistic sellers, and a noted increase in sellers, there’s the entry of the world’s fourth-largest pest control player into the U.S. market. It’s another entity sitting at the table with a private equity pocketbook. Anticimex came to America via the acquisition of Bug Doctor in Paramus, N.J., in August 2016. In the PCT August 2017 cover story, Anticimex Group CEO/President Jarl Dahlfors said: “We have the ambition to be the global leader in pest control, and to do that we had to be in the U.S.”

So, what does that mean for M&A and the rest of us?

A IS FOR ANOMALY. Competition is healthy. The players PCT interviewed agreed that the entry of a new, large entity in the U.S. market is creating buzz but it isn’t slowing growth. “There is certainly more activity now, and I can tell you we have more deals on our plate right now than we did at this time a year or two ago,” says Kevin Burns, chief development officer, Atlanta-based Arrow Exterminators.

Does Anticimex’s presence in the U.S. and its acquisitions this year affect Arrow’s position or ability to make the deals it wants? Not really, Burns says. “Maybe we get a few less looks than we might have before, but as an industry with about 20,000 companies, there is always a number of companies that are looking to sell.”

Burns says he “applauds Anticimex for coming in and looking at some really high-quality companies.” He says, “No one can argue with the choice in companies they have purchased to establish a footprint.” Burns sees that footprint as being the Mid-Atlantic states, given Anticimex’s initial acquisitions of Bug Doctor, American Pest and Viking Pest Control. (The fourth company, Modern Pest Services, is in Maine.)

Ian Robinson, vice president of business development at Massey Services, says “the competition [in M&A] isn’t any more or less than what we have faced in the past.” And, he says that global players in the pest control market are nothing new.

This is true considering that major U.S. pest control players have a global presence as well. Orkin is an active acquirer in the United Kingdom and Australia, having acquired U.K.’s Safeguard Pest Control and Environmental Services in 2016; and Statewide All Pest and Murray Pest Control in Australia (in 2014 and 2016 respectively). Truly Nolen International has 217 international franchise locations in 65 countries. Terminix’s global footprint is also mainly franchised.

Anticimex had a global presence throughout the world but not the United States until its acquisition in August 2016. In 2018, the company will make its first appearance on the PCT Top 100 list and undoubtedly continue to move up the list as it continues to make U.S. acquisitions.

But, there are a few things about Anticimex that make it an entirely different competitor than other large players in the U.S. market that are actively pursuing M&A. Anticimex is owned by a private equity firm, EQT. “That cannot be understated,” Anderson says. “EQT boasts that it has held over 170 companies with 84 exits. Why is that important? Because Rentokil, Orkin and Terminix are in pest control to stay. Private equity firms get in and out of businesses and industries all the time. The critical question you have to ask is, how long is Anticimex going to be in pest control?”

Rewind back to the Rentokil purchase of The Steritech Group — a move that significantly grew its pest control portfolio. And, pest control is getting higher EBITA than, say, the textile industry. So, it makes sense for EQT to take interest in Anticimex and to grow it in the world’s dominant pest control market, the United States.

What’s not clear — because there is no crystal ball — is how far-reaching Anticimex’s footprint in the U.S. will be, and how invested EQT is in spending the time, money and resources for Anticimex to mature in the U.S. market, Anderson points out. But, we know from Rentokil’s aggressive growth in the past decade, that you can amass major market share in a short period of time if you buy the right platform companies.

Anderson says he finds it interesting that Anticimex entered the U.S. market through the Mid-Atlantic, given that Florida has roughly 20 percent of the world’s pest control market share. However, the top U.S. pest control markets holding 40 percent of the world’s market share are Florida, Texas, California and New York, he adds. Bug Doctor is based in New Jersey.

Indeed, Anticimex is that anomaly M&A player among the big companies because of its private equity parent, its geographic market entry, and its system of doing business in terms of intelligent pest control and insurance contracts. “I’m interested in seeing how they can execute that in the U.S.,” says Truly Nolen’s Wild. “There is a lot of curiosity around that.”

Robinson notes that being a private equity-backed firm in the pest control industry isn’t all that unusual. (Though, the top three players in the U.S. are not structured this way.) “Venture capitalist-backed buyers are not new,” he says. “We bought a business in Atlanta, BACO Exterminating Services, that was doing $8 million and it was an investor-backed business. What makes [Anticimex] unique is not how they are funding their acquisitions but the fact that they are headquartered in Stockholm and are now coming into the U.S.”

Basically, Robinson is saying the fact that there’s another competitive U.S. player at the deal table is more significant than where the dollars from this player’s acquisitions are coming from.

Anderson’s point: How long will the private equity-backed player last? Five years? Ten years? More? “Private equity firms are agnostic when it comes to industries,” Anderson says. “They are generalists. They are not going to get married to a company or an industry.”

Meanwhile, the longtime largest U.S. pest control firms really have not changed dramatically over the years in terms of their market dominance. “Year in and year out, the tried-and-true companies are always on that PCT Top 100 list. Is anything really changing for them?” Anderson says.

Wild says that he’s “watching with interest” the fact that Anticimex is private-equity backed. “Anticimex definitely stirred things up, but I don’t think that’s necessarily a bad thing,” he says. “Pest control companies have more options out there — other models if they’re looking to sell.”

THE STALWARTS’ STRATEGIES. The M&A strategies of top U.S. pest control firms have remained constant in the last decade. Long before 2014 when the M&A bubble began blowing up with inflating multiples, the industry stalwarts Rollins/Orkin, ServiceMaster/Terminix, Massey Services, Arrow Exterminators and Truly Nolen, were set on their strategy. And, they’re not changing it because there’s a new global player in town.

“Our strategy has not changed — it’s consistent,” Burns says, adding that Arrow (at #6 on the PCT Top 100 list) has a different mindset than even larger players. “We tend to look for those family companies that are more in the top 200,” he says. Arrow is in its eighth year of double-digit growth — averaging 11.5 percent, with 9 percent from organic growth and 2.5 percent from acquisitions, Burns reports. “When you are growing internally, M&A is the icing on top,” he says.

Wild notes that Truly Nolen generally averages one acquisition a year. In 2017, it had not closed a deal as of October. “That speaks to our overall philosophy and view as a family-owned company,” he says. “When we look at acquisitions, we are looking for companies that share those values and fit our culture.”

That said, Wild says Truly Nolen is likely entering a new phase of growth and expansion following the passing of founder Truly Nolen (in April 2017). “We are very much wanting to continue his legacy and, at the same time, expand and grow and develop the brand in his honor.” Wild says the company has been working on systems to become more assertive with M&A. “I think you’ll see us step up from what’s now one deal a year to two to four next year,” he says. “And, maybe we’d do some more on the smaller side.”

At Rollins, Whiting says the company maintains its M&A strategy that has produced positive shareholder return and continues to position the company as a market leader. Whiting reflects on key acquisitions during the past decade: Home-Team Pest Defense, the largest residential pre-treat business in the country; Trutech and Critter Control, capturing the wildlife control market; and platform companies throughout the U.S., including Northwest Exterminating. Rollins also bought PCO Services from Johnson Wax in 1999 and has pursued international acquisitions noted earlier. Of the Australian and U.K. markets, he says, “There is a full pipeline of opportunity there.”

But the M&A stories that don’t always hit the news are the ones that are equally meaningful for the business, Whiting says. These are not the deals with hungry acquirers driving up prices, per se. “Those smaller transactions have been and will continue to be a key part of our acquisition strategy,” he says.

While the record-high multiples and prices sellers are fetching are not the “new normal,” there’s no drought ahead in terms of potential companies to acquire in the foreseeable future.

What industry consultant Anderson sees in terms of M&A trends among the industry stalwarts, or “sophisticated acquirers,” he says, is a tendency toward geographic sensitivity, a focus on sellers’ standards, an emphasis on discipline and eyes on economics. Sellers are jumping on opportunities that make sense geographically and align with their expansion strategies. “If the seller is in an area that the buyer isn’t focused on, the buyer is probably going to pass on the opportunity,” he says.

Sellers’ standards include strong HR practices, IT infrastructure, employee and customer retention, and price increase history. “Sophisticated buyers will increase their prices yearly and want the seller’s customers to be used to that practice,” Anderson says.

Bigger buyers have valuation models, he adds. They have acquisition strategies, integration processes and stick with their plans. And, they’re watching economics, including interest rates, and petroleum and acquisition pricing. “Buyers must make a return on their investments,” he says.

WHAT ABOUT AVERAGE JOE? So, does the current M&A environment and potential price-push from global players in the U.S. market mean that every pest control business can get twice (or more) of its revenue at the time of sale? What does the M&A activity and introduction of big-player global competition here mean for most pest control companies?

Wild says he notices that the M&A market in pest control is more mature now. “There is a higher level of professionalism and more resources, more information out there,” he says. “And, what’s exciting is the opportunity flow. There’s a lot of it out there. We are definitely getting a lot of chances to look at opportunities.”

Whiting says, “We are continuing to do what we have always done.”

And this “as usual” reality is what most pest control firms will feel, even with the M&A buzz. In the high-price M&A game, most pest control firms are spectators, Anderson says. “They’re disciplined. Most pest control companies are fairly conservative and they stick to their strategies.”

Massey’s Robinson adds that pest control has “such great businesses at all stages — one-man shops, small businesses looking to expand, family businesses that are changing generations and making decisions about whether to cash out now or continue growing. It’s just a great time to be in the industry, and as we choose to acquire businesses, we know there will be a wide selection to work with.”

The average pest control firm can position itself for continued profitability and stability by staying focused on its operations: clients, employees, best practices and evolving with technology. That way, when an opportunity arises to sell, they’ll be in a favorable position — they’ll be looked at as a “hot property” worth a higher price.

“Run a great business with high retention, route density and loyal customers,” Anderson says. “Then, when you are ready to sell, in this market you can get paid very well for your business.”

The author is a frequent PCT contributor and can be contacted at khampshire@gie.net.