Encompass Services Corporation

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Encompass Services Corporation

8 Greenway Plaza, Suite 1500
Houston, Texas 77046
Telephone: (713) 860-0100
Toll Free: (888) 626-4984
Fax: (713) 626-4766
Web site: http://www.groupmac.com

Public Company
Employees: 30,000
Sales: $3.6 billion (2000)
Stock Exchanges: New York
Ticker Symbol: ESR
NAIC: 23531 Electrical Contractors; 23511 Plumbing, Heating, and Air-Conditioning Contractors; 333412 Industrial and Commercial Fan and Blower Manufacturing

Encompass Services Corporation, known as Group Maintenance America Corp. (GroupMAC) until its February 2000 merger with Building One Services Corporation, is the leading provider of mechanical, electrical, janitorial, and related services to residential, commercial, and industrial markets in the United States. Group Maintenances formation in late 1996 marked the beginning of an ambitious acquisition campaign, as it sought to create a national network of plumbing, electrical, heating, ventilation, and air-conditioning service providers from a highly fragmented industry. In November 1999, the company announced a merger agreement with Building One Services Corporation, a Minneapolis-based consolidator in the facilities services industry which had been formed in 1997. Combined pro forma revenues for the newly named Encompass, which after the merger boasted 250 locations nationwide, were $3.6 billion.

GroupMACs Origins

At its formation, GroupMAC latched onto a trend that was beginning to sweep through the electrical and mechanical services industry, a burgeoning movement that drew its protagonists and, arguably, its inspiration from the waste management industry. During the 1980s and early 1990s, the waste management industry was undergoing rapid consolidation, as larger companies swallowed up smaller companies in an effort to realize the benefits of economies of scale. Among the consolidates was Browning-Ferris Industries Inc. (BFI). Three BFI executives who assisted in orchestrating the acquisition campaign later left the company, forming Houston-based American Residential Services to do the same thing to the electrical and mechanical industry. American Residential embarked on an acquisition campaign, purchasing nine companies and completing an initial public offering (IPO) of stock in September 1996 that raised $50 million, which gave the company financial resources to feed its acquisitive appetite. American Residential soon had a crosstown rival.

GroupMAC was quick to join the fray following American Residentials IPO, formally organizing a month later. Also headquartered in Houston, GroupMAC gained its chief architect from the waste management industry as well, a veteran businessman named Richard K. Reiling. In 1989, Reiling and two Houston businessmen formed an investment banking firm named First Financial Alliance Group, which was used to create Republic Waste Industries Inc. Like his counterparts at BFI, Reiling formed Republic Waste to consolidate smaller landfill operators under one corporate banner, which he accomplished in a frenetic rush. During the companys first 18 months of operation, Reiling acquired 13 companies, lifting revenues from nothing to more than $100 million. Not long after Republic Wastes initial surge, Reiling found his opportunities for growth diminishing, primarily because BFI had already consolidated much of the industry, particularly the larger landfill operators. Reiling sold Republic Waste in 1995 and began exploring the possibilities of consolidating the plumbing industry. His research eventually led him in the same direction the former BFI executives had followed, prompting him to form GroupMAC.

In a December 6, 1996 interview with the Houston Business Journal, Reiling explained how his initial interest in the plumbing industry evolved into the more expansive strategy adopted by GroupMAC. A good percentage of those companies [plumbing contractors] are in the heating and electrical business as well, he said, so we began to broaden the types of companies we were interested in. Reiling, along with a group of Houston-based entrepreneurs, created GroupMAC to acquire heating, ventilation, and air-conditioning (HVAC), electrical, and plumbing companies that served residential and commercial markets, endeavoring to create a nationwide network of companies operating under one corporate umbrella. Some consolidation strategies hinged on acquiring financially ill companies, which could then be purchased for a reduced price, but Reiling focused exclusively on financially sound companies, only considering candidates with strong management, respectable profits, and a minimum of $3 million in annual revenues. Further, with each acquisition, Reiling insisted on the acquired company retaining its name and its current management. If a contractor decided to sell to GroupMAC as a way to cash out and exit the business, the owner was expected to sign a three- to five-year employment contract with GroupMAC to ensure there was adequate time to install successor management. Supported by a well-defined business plan, Reiling formally established GroupMAC on October 24, 1996. The staff of ten individuals began meeting with potential acquisition candidates the following week, armed with $30 million in capital earmarked for GroupMACs first wave of acquisitions.

Of intrinsic importance to GroupMACs business strategy was obtaining the financial resources to wage an acquisition campaign. Toward this end, Reiling triumphed by convincing a Houston businessman, Gordon A. Cain, chairman of Sterling Chemicals Inc., to become GroupMACs lead investor and majority owner. With the capital provided by Cain, Reiling did not have to hurriedly file with the Securities and Exchange Commission (SEC) for GroupMACs IPO; instead, Reiling planned to keep GroupMAC private initially so he could pique investor interest. His target date for the companys IPO was during the second half of 1997, by which time he hoped to build GroupMACs revenues to at least $100 million. As the executor of his plan, Reiling selected J. Patrick Millinor, Jr., as GroupMACs president and chief executive officer. Millinor had worked directly for Cain, helping him start two biotechnology companies.

Reiling expressed no concern about running into the same problem with GroupMAC as he had with Republic Waste. Despite the nearby, burgeoning strength of American Residential, whose ex-BFI executives threatened to steal the thunder of GroupMACs acquisition program, Reiling did not fear a dearth of acquisition candidates. He estimated there were more than 180,000 companies that met GroupMACs acquisition criteria, representing a national market of some $64 billion in annual revenues. There was ample room for both American Residential and GroupMAC, Reiling believed, but the bounty of companies available in the highly fragmented electrical and mechanical services industry did not lull him into complacency. GroupMACs management team began canvassing the country in November, searching for the independent contractors to swell the stature of the fledgling company.

1997 Airtron Purchase; Acquisition Spree

GroupMACs first acquisition left little doubt as to the lofty goals of its management team. In late January 1997, the company announced it had agreed to purchase Dayton, Ohio-based Airtron, one of the countrys largest privately owned residential and light commercial HVAC contractors. With more than $80 million in annual revenues, Airtron (which ranked as GroupMACs largest acquisition during its formative years) boasted service offices at 14 locations in Florida, Texas, and the Midwest. The acquisition gave GroupMAC an immediate and appreciable market presence, one that promised to balloon in the subsequent months. At the time of the announcement, GroupMAC was in the midst of negotiations with between 15 and 20 other contractors whose combined revenues totaled approximately $200 million.

The Airtron acquisition was a prime example of the extent of GroupMACs acquisitive might, but with the big came the small. Not long after the company acquired Airtron, it completed a deal whose magnitude fell at the other end of the scale. In May 1997, GroupMAC purchased Costner Brothers Air Conditioning, a Rock Hill, South Carolina, company owned by brothers Roger and Donald Costner with annual sales of $3 million. As the companys acquisition program unfolded, both the big contractors and small contractors were absorbed into the GroupMAC network, creating what the company referred to as a family of GroupMAC companies.

The family adopted a new senior executive in June 1997, when Reiling relinquished his chairmanship to James P. Norris. Norris, executive vice-president of Air Conditioning Contractors of America prior to joining GroupMAC, was put in charge of developing and executing the companys long-range strategic plan, including the implementation of a plan to add more cohesion to the GroupMAC affiliate network. In the wake of the June 1997 executive changes, Reiling became vice-chairman, continuing to play an active role in acquisitions and market development, while Millinor exerted day-to-day control over the organization.

Norris fulfilled an important facet of his duties two months after his appointment as chairman. In August 1997, GroupMAC acquired two national HVAC consulting organizations whose addition to the company would be crucial to its acquisition program. Callahan Roach and United Service Alliance were acquired to help integrate contractors into the GroupMAC system, enabling the company to more easily digest the firms that were joining the fold at an average of two per month. Additionally, the two consulting firms provided internal training, advertising, marketing, and other management services to the subsidiary companies.

Company Perspectives:

Theres a new powerhouse in the facilities services industry-Encompass Services Corporation. Encompass Services Corporation ranks as the largest provider of facilities systems and solutions in the United States.

By the time the two consulting organizations were acquired, GroupMAC senior managers were ready to take the company public. The company had completed 11 acquisitions by the time it filed with the SEC for an IPO, having broadened its market presence to a five-state region and increased its revenues to $139 million. The company expected to gain roughly $100 million from the IPO, which would make it the seventh publicly held, HVAC company in the country. Concurrent with the IPO, GroupMAC was slated to acquire 13 companies, which would extend the companys presence into 37 cities in 21 states. The largest of the 13 companies, Seattle-based MacDonald-Miller Industries, Inc., generated $66 million in annual sales. According to the SEC filing, GroupMAC was focusing much of its growth on the maintenance, repair, and replacement business, which yielded higher profit margins than new equipment installation. The goal was to reach a revenue mix of 60 percent maintenance, repair, and replacement and 40 percent new equipment installation.

On November 6, 1997, GroupMAC made its debut in the public spotlight, issuing 7.5 million shares at $14 per share. Simultaneous with the closing of the IPO, the 13 companies were acquired, lifting annualized sales to $320 million. Counting its most recent additions, GroupMAC ranked as the second largest operating company in the electrical and mechanical services sector, having acquired 23 companies during the year. More was in store, with as many as 60 potential acquisitions waiting in the wings and $100 million set aside for acquisitions in 1998.

The pace of expansion accelerated in 1998, fueled by the proceeds from the IPO and by zeal of GroupMACs management. The company acquired 39 electrical and mechanical contracting companies in 1998, giving it a total of 59 operating companies and pushing sales above $750 million. Significantly, the acquisitions completed in 1998 helped GroupMAC achieve its previously declared revenue mix, as the company focused its acquisitive efforts on absorbing contractors who specialized in maintenance, repair, and replacement services. At the end of 1997, such services accounted for 45 percent of GroupMACs revenues. By the end of 1998, the portion had risen to 60 percent.

Merger Plans with Building One in 2000

GroupMACs pace of expansion slowed somewhat in 1999, but its revenue growth did not. By September 1999, the company had completed its expansion for the year, having acquired 13 more contractors for a total of 72 operating companies that performed services in 64 cities and 28 states. Despite completing a smaller number of acquisitions than it had completed in previous years, GroupMAC realized $365 million in added revenue from the purchased companies, an increase that was consistent with its historical record of growth. The company spent approximately $160 million on acquisitions during the first nine months of 1999, which ignited a more than 100 percent increase in systemwide revenues to an impressive $1.54 billion. Standing firmly entrenched in 44 of the largest 100 markets in the country, GroupMAC next prepared for the beginning of a new era in its short corporate life. The GroupMAC name was set to disappear, its departure caused by a corporate transaction of mammoth proportions. Reiling, Norris, and Millinor were ready to take the family of GroupMAC companies to the next level.

On November 3, 1999, GroupMAC signed a definitive merger agreement with Building One Services Corporation. The merger, which would be completed by the end of February 2000, proposed combining GroupMACs $1.5 billion in revenue with the $1.8 billion in 1999 revenue generated by Building One, which provided many of the products and services required for the routine operation and maintenance of buildings. From the merger of Building One, whose services included electrical, mechanical, janitorial, and maintenance functions, and GroupMAC, a new company was set to be created. Called Encompass Services Corporation, the new company loomed as a domineering force in the electrical and mechanical industry. With much of the consolidation yet to take place at the time of Encompasss formation, optimism pervaded the headquarters of both companies.

Key Dates:

Company is formed in Houston on October 24.
GroupMAC announces its first acquisition, Airtron, Inc., in January; IPO is completed in November.
After acquiring 62 contractors during its first two years, GroupMACs revenues reach $762 million.
Merger with Building One Services Corporation is announced in November.
The merger is completed in February and the combined company is renamed Encompass Services Corporation.

Principal Subsidiaries

A-l Mechanical of Lansing, Inc.; A-abc Appliance & Air Conditioning; AAAdvance Air, Inc.; Air Conditioning, Plumbing & Heating Service Co., Inc.; Air Conditioning Engineers, Inc.; Air Systems, Inc.; Aircon Energy Incorporated; Airtron, Inc.; All-Service Electric, Inc.; Arkansas Mechanical Services, Inc.; Atlantic Industrial Constructors, Inc.; Barr Electric Corp.; Callahan/Roach Products & Publications, Inc.; Central Air Conditioning Contractors, Inc.; Central Carolina Air Conditioning; Charlies Plumbing; Colonial Air Conditioning; Commercial Air, Power & Cable, Inc.; Continental Electrical Construction Co.; Clark Converse Electric Service, Inc.; Costner Brothers, Inc.; DIVCO, Inc.; Evans Services, Inc.; The Fairfield Company; Ferguson Electric Corporation; Gentzler Electrical Contractors, Inc.; Gilbert Mechanical Contractors, Inc.; HPS Plumbing Services, Inc.; Hallmark Air Conditioning, Inc.; Hungerford Mechanical Corporation; J.D. Steward Air Conditioning, Inc.; Jarrell Plumbing; K&N Plumbing, Heating & Air Conditioning, Inc.; Laneys, Inc.; Linford Service Company; MacDonald-Miller Industries, Inc.; Masters, Inc.; Mechanical Interiors, Inc.; Merritt Island Air & Heat, Inc.; New Construction Air Conditioning, Inc.; Noron, Inc.; Pacific Rim Mechanical Contractors, Inc.; Paul E. Smith Co., Inc.; Phoenix Electric Company; Rays Plumbing; Reliable Mechanical, Inc.; Romanoff Electric Corp.; Sibley Services, Incorporated; Southeast Mechanical Service, Inc.; Statewide Heating & Cooling, Inc.; Stephen C. Pomeroy, Inc.; Sterling Air Conditioning, Inc.; Sun Plumbing, Inc.; Team Mechanical, Inc.; Trinity Contractors, Inc.; United Service Alliance; Valley Wide Plumbing & Heating, Inc.; Vans Comfortemp Air Conditioning, Inc.; Wades Heating & Cooling, Inc.

Principal Operating Units

Mechanical; Electrical/Communications; Industrial; Residential; Janitorial and Maintenance Management; National Accounts.

Principal Competitors

American Residential Services, Inc.; Comfort Systems USA, Inc.; Lennox International Inc.

Further Reading

Antosh, Nelson, Houston-Based Building Maintenance Company Buys Eight More Firms, Knight-Ridder/Tribune Business News, September 1, 1998, p. OKRB982440C3.

Beauprez, Jennifer, Newly Formed Dynalink Swiftly Bought, Crains Cleveland Business, July 5, 1999, p. 2.

Building One Services Corporation Announces Meeting to Approve Merger, PR Newswire, January 14, 2000, p. 1994.

Excellence Alliance Acquires GroupMACs United Service Alliance, PR Newswire, January 10, 2000, p. 7813.

Mader, Robert P., Airtron Acquired by GroupMAC, Contractor, March 1997, p. 1.

, GroupMAC Adds Voice and Data, Contractor, October 1999, p. 5.

Mahoney, Thomas A., Aggressive Acquisitions Help GroupMAC Get Closer to $1 Billion Sales Mark, Air Conditioning, Heating & Refrigeration News, November 2, 1998, p. 1.

Perin, Monica, Collection of Roll-Up Consolidators Continues Acquisition Spree, Houston Business Journal, December 19, 1997, p. 8.

, Group Maintenance Follows Fellow HVAC Roll-Ups into Public Markets, Houston Business Journal, September 5, 1997, p. 6A.

Pletz, John, Equipment Installers Newest Buyout Targets, Indianapolis Business Journal, June 7, 1999, p. 5.

Jeffrey L. Covell