[Cover Story] The British Are Coming

Monday, Jan. 23, began like any other day for Technical Trainer Chris Arne and 1,200 of his colleagues at J.C. Ehrlich Co., the largest family-owned pest control business in North America with more than $100 million in annual sales. He woke up, readied himself for work, jumped into his truck and headed for the office.

Nothing seemed particularly out of the ordinary that day until he was informed there would be a conference call at 3 p.m. for all managers. "That wasn’t typical," he recalls, "so we knew something was up," particularly since the company’s annual meeting was scheduled just two weeks later. When the hastily scheduled conference call was delayed until 4 p.m., speculation about the nature of the call among Arne and his co-workers grew even more intense. "Everyone was nervous," he admits.

They didn’t have long to wait for their answer. Shortly after joining the conference call, J.C. Ehrlich President Victor Hammel announced the 78-year-old company – one of the "crown jewels" of the pest control industry – was being sold to Rentokil Initial, a proud member of the "FTSE 100," Great Britain’s equivalent of the Fortune 500. "You could have heard a pin drop," Arne said. "We were shocked. We didn’t see it coming."

Neither did virtually anybody else in the pest management industry, a close-knit, somewhat incestuous marketplace where it’s virtually impossible to keep a secret, particularly one as large as the impending sale of one of the country’s largest pest control firms. Bob Wanzer, president of HomeTeam Pest Defense, an active player in the mergers and acquisitions market, said he was completely caught off guard by the announcement. "What’s surprising to me is this was a big deal and it didn’t appear to go out to market," he told PCT shortly after the sale. "Normally, if you’re going to test the waters you at least get a couple of bidders going, but that doesn’t appear to be the case with this deal. My guess is somebody went to talk to Victor privately and he said to himself, ‘You know, maybe this is not a bad time to take the money off the table.’"

"It surprised me as well, but it makes eminently good sense if they (Rentokil) want to penetrate the U.S. market," said Tom Moore, president, Copesan Services, a highly regarded alliance of regional pest management companies that are united to service regional and national commercial clients. "Obviously, there was surprise when we first got the phone call," said Alfie Treleven, chairman of the Copesan Board of Directors, "but being brought along in the acquisition process has really made a positive impact in our ability to work through the transition."

A DIFFICULT DECISION. So what would prompt Victor and Bobby Hammel to sell a business that’s been in their family for more than three generations at the height of its power and influence, a company with 42 offices in seven mid-Atlantic states? Like all difficult questions, there’s no simple answer.

While succession issues played a role in the decision, Victor Hammel – the great grandson of company founder Julius Ehrlich – says the primary driver was the timing of the deal, which closed on Feb. 28, and the long-term intentions of the buyer. "What was most important to us was retaining the J.C. Ehrlich culture," Hammel said in an exclusive interview with PCT, and the only way to do that was to serve as a "platform" company for whatever entity ultimately purchased the Reading, Pa.-based firm, much like Sunair’s acquisition of Middleton Pest Control has served as a "platform" for that company’s entrée into the pest control industry (see July 2005 issue of PCT magazine). "The only company in the position to make us their platform company was Rentokil," he said, "and they assured me that those things that are important to us such as corporate culture and co-worker respect would not only not change but be enhanced by the combined resources of J.C. Ehrlich and Rentokil," a sentiment shared by his brother Bobby, co-owner of the business. "They respected the culture we’ve cultivated over the past 78 years and wanted us to continue doing business the way we always have."

Victor Hammel also was heartened by the fact Rentokil agreed to retain Ehrlich’s management and field staff, and keep the company’s headquarters in Pennsylvania, moving Rentokil’s base of U.S. operations from Atlanta to Reading, a community located 65 miles west of Philadelphia that looks like it came straight out of a Norman Rockwell painting. "A very key part of the transaction – and I can’t emphasize this enough – was the ability to retain our staff and institutionalize our culture so that it would continue going forward," Victor Hammel said. "I felt if I was able to run the company, the more likely we would retain that culture not only during the transition but beyond." Hammel has an open-ended contract with Rentokil to serve as Chief Executive Officer of North American Pest Control Operations.

With the significant economic resources and management expertise of a publicly traded, global enterprise, the deal also ensured future growth opportunities for J.C. Ehrlich’s staff, as well as provided financial security for the Hammel family, which had spent 75 years building one of the nation’s most highly regarded pest control businesses. (The business sold for $141.8 million in cash and included Ehrlich Distribution, which generates approximately $16 million in annual sales.)

A student of history, Victor Hammel cited a quote from President Franklin Roosevelt’s longtime economic advisor and Wall Street financier Bernard Baruch who, when asked his secret to success, said, "Selling too soon."

"That quote always stuck with me," Hammel said, "because it shows the value of not waiting until the last minute. He didn’t wait until things were going wrong to make a decision. I felt when this offer came along (from Rentokil) and I discussed it with Bobby that we were in a very strong position as a company. We had achieved a lot of things; our management team was in good shape. I was feeling good. We could have gone along for five or more years without any trouble, but things could change as well and we might not be as attractive to somebody at a later point." So the time seemed right to consider selling the business. Besides, demonstrating a dry wit that is an essential part of his personality, Hammel said his preferred plan for the company – "living forever" – didn’t seem realistic. "A relationship with a global player like Rentokil not only preserved the company for future generations of employees, but takes us to a whole new level in the market. I think we have lots of talented people at every level of the company and I just want to be sure we’re in the position to take the culture forward," he said. "We’ve assured their future through this transaction, and they’re no longer dependent on one family (for their livelihood), which is good for them."

To reinforce that point, Rentokil’s senior management team – including CEO Doug Flynn, President Andy Hobart, Mike Schroeder, president of all Rentokil North American Operations, and Kevin Ward, president of Rentokil Pest Control – traveled to Pennsylvania in early February to attend J.C. Ehrlich’s annual meeting in person, spelling out their shared vision for the organization and assuring management and staff that dramatic changes were not in the offing. After all, why mess with a successful business model? "We wanted to give people comfort that we were not going to come in and change the world," Hobart told PCT in a phone interview from England. "We share the same passion for the industry. We have the same values and aspirations. It was a really uplifting meeting."

"We are excited about this new chapter in Ehrlich history," said Hammel. "Our relationship with Rentokil Initial will be beneficial for both companies. Rentokil Initial has a reputation for quality that is very similar to ours, and we believe there is a great deal we can learn from each other. Over the next few months, we’ll consider how to meld the best practices from each organization so we can better serve our residential and commercial customers."

RENTOKIL REACTION. Rentokil President Andy Hobart says the acquisition of J.C. Ehrlich also was well received by Rentokil’s North American staff, which has been dwarfed by the company’s European operations. "They now see themselves as a very big part of Rentokil Initial, the biggest pest control unit in the company," he said. "I think they feel like they have a chance to be the business they always wanted to be, but never had the scale to be."

But what would prompt Rentokil to make such a surprising purchase, particularly considering the firm’s rather modest presence in the U.S. market, estimated at $26 million in annual sales, less than 7% of its global pest control business? "Rentokil’s earnings and results are not unlike those of ServiceMaster in recent years," observes Centex’s Bob Wanzer. "All of a sudden growth slows, and in some cases goes backwards, and in these businesses that can be very painful. I think they decided to either get out (of the U.S. market) or become a player,"

Hobart said Rentokil had identified the United States market as one in which it would like to have a greater presence. "J.C. Ehrlich was attractive because we felt it was a business that had been built around a consistent and sustainable formula. It was not a business that had been ‘dressed-up’ for selling. It was a business that was financially sound with a strong management team in place."

In addition, he said, the company’s corporate culture was similar to Rentokil’s, a critical factor in the sale. "Our values are very similar. What is important to our business is important to their business. They have a strong relationship with the people that work in the company and a strong focus on customer service. They were people we felt we could do business with."

The acquisition also diversifies Rentokil’s service portfolio, opening up the most lucrative residential market in the world to the British-based firm. "Our U.S. business has been focused on the commercial rather than the residential market," observes Hobart. "With the purchase of J.C. Ehrlich we have an opportunity to learn a great deal about the residential market, which is a great opportunity for us. We are also very interested in learning more about the distribution end of Ehrlich’s business, which will be a continuing part of Rentokil’s plans."

At the same time, J.C. Ehrlich has an opportunity to benefit from Rentokil’s broad commercial market experience.

In addition to gaining a foothold in the residential market, other industry observers speculate Rentokil is interested in dramatically expanding its U.S. footprint through an aggressive acquisitions effort led by Victor Hammel, a man with deep relationships at the top end of the marketplace. "I have no idea what their plans are, but if they spent that much money buying Ehrlich, they’ll spend more money buying other companies," says Bert Dodson, president, Dodson Bros. Pest Control, Lynchburg, Va. "Victor is one of the smartest corporate executives in the industry, and they are few and far between. I see him being a broker (for Rentokil) and going after other companies, managing those companies once they are picked up."

Andy Hobart says Rentokil undoubtedly will be involved in future acquisitions, but for the next six months the company is content to concentrate on incorporating J.C. Ehrlich’s wide-ranging operations into its U.S. business. "We need to be sensible about this going forward," he observed. "While certainly we have the capability to do more acquisitions, we have a very important phase to go through now which will require 100 percent of Vic’s time. We must create a business that gets the best out of both organizations. That’s absolutely critical to us and it’s our prime objective in 2006."

To achieve that goal, Hobart said he expects to visit the U.S. frequently, and also to be in touch with Hammel on a regular basis. "I plan to be a regular visitor," he said. "I’ve grown up in global businesses and traveled extensively, so the U.S. feels very much like home."

Hobart describes his management style as people-focused and customer-oriented. "I’m a strong believer that if you get the people and the customer relationship right, the financials will follow. I try to listen and respond to people on the front lines of the business because they have the answers to the questions we sit in board rooms scratching our heads about." With their help, he said, "I’m interested in creating a clear vision of where we’re trying to get and communicating it to all levels of the organization."

MARKET IMPACT. As with any major transaction, the purchase of J.C. Ehrlich by a prominent international player like Rentokil is sure to have wide-ranging implications for the pest management industry. One of the big questions raised shortly after the deal was announced concerned whether Copesan Services, Menomonee Falls, Wis., would welcome Rentokil into the organization. After all, the organization – which includes such well-known names as Western Exterminator Co., Plunkett’s Pest Control, Waltham Services and Presto-X-Company – had never allowed a publicly traded company to become a part of the group.

The question was answered on Feb. 23, when Copesan issued a press release stating that its board of directors had passed a resolution that would allow J.C. Ehrlich to remain an active part of Copesan and J.C. Ehrlich would "continue to service existing, and new, Copesan accounts in Ehrlich’s current service territory." In addition, Bobby Hammel would continue to serve on Copesan’s Board of Directors and members of the Ehrlich organization would continue to serve on various Copesan committees.

Copesan President Tom Moore said the transaction provides Copesan "with the opportunity to explore new avenues into international markets and additional major corporations," although some question the viability of such a market expansion, at least in the short term. One longtime industry observer familiar with the Copesan organization described such speculation as "wishful thinking" designed to soften the public relations impact of the sale of another major Copesan partner, following so closely on the heels of Orkin’s purchase of Western Pest Services, another Copesan company, in 2004. "Are they serious?" he asked. Apparently so, at least if you talk to past and present leaders of Copesan. "I’m delighted we’re still able to work with Ehrlich," said Larry Treleven, co-owner of Sprague Pest Solutions, a Copesan member company. "It offers huge possibilities for growth. I would be less optimistic if Victor and Bobby were not part of the transition team. I don’t think I’m burying my head in the sand because there will be challenges, but I’m optimistic. For some time, I’ve been a proponent of finding international partners to enhance our position in the marketplace."

It’s a sentiment shared by Treleven’s brother, Alfie, a central figure in the organization. "A number of years ago we began looking at the potential for some sort of worldwide relationship," Alfie Treleven said. "We weren’t sure at the time if we were going to have to develop multiple relationships outside of North America. Our new relationship with Rentokil answers some of those questions since it’s contained in one company. We understand each of their countries operate as a separate organization even though they roll up into one, which will play well into the way we approach business. We think the Copesan structure is very portable to the rest of the world."

In the end, the decision to allow Rentokil to join Copesan Services came down to the fact it was the right thing to do for Copesan’s clients and shareholders, according to Alfie Treleven. "Ultimately, we felt it was in the best interests of our clients," he said. "This was a pretty straightforward move for us and we’re excited about it."

Andy Hobart, for one, is pleased at the outcome. "We wanted very much to be a part of Copesan. It’s something we highly value, and we are committed to continuing to support the aims and objectives of Copesan as we move forward."

While a greater international presence for Copesan may become a reality somewhere down the road, President Tom Moore pointed out that the two organizations are currently in the get-acquainted phase. "We want to approach this on a very measured basis," he says, "and we’ll work our way through this as we become more familiar with each other. There’s a fair amount of getting to know each other and getting to know the subtleties of our cultural differences as we deal in a more worldwide arena."

Regardless, the sale of J.C. Ehrlich so closely on the heels of Orkin’s purchase of Western Pest Services has proved to be a "wake-up" call for the organization, according to Moore. "When these things occur it makes you somewhat introspective and forces you to ask the question, ‘What is the value we bring to the marketplace and what is the value we bring to our shareholders?’" he says. "That value proposition is more important now than it has ever been. We know there are other companies from around the world that are interested in the North American pest control market. Why the heck wouldn’t they come here? Their business opportunities are significant. The key is to make sure Copesan remains a part of that future by adapting to rapidly changing market conditions."

GIVING UP CONTROL. The sale of J.C. Ehrlich shocked Copesan as well as those who know Victor Hammel, one of the most highly regarded executives in the pest management industry, a classic entrepreneur who isn’t afraid to speak his mind. Some openly wonder how such a fiercely independent executive will adapt to no longer being the "top dog" in the organization.

"It’s going to be a different world for him," observes Centex’s Bob Wanzer, a former executive at ServiceMaster and Emery World Wide, who knows what it’s like to work for large, multi-national corporations. "He’ll have to get used to the politics of being a part of a global business, but Victor’s a very bright guy and he’ll adapt." Others aren’t so sure.

"I couldn’t work for anybody else," Bert Dodson says, "and I don’t know if Victor can either. I know whenever we buy companies we very rarely retain the leadership. We say, ‘Go have a nice life.’ They just don’t make the transition."

Nonetheless, Hammel is confident he’ll be able to make it work. "I spent three years in the U.S. Army where I learned to work in a large organization, so I don’t think it will be a problem," he says with a laugh, while admitting "it will require a transition in thinking on my part. Since January, I’ve been involved in the integration plan and I have had to discuss a lot of things with the people from Rentokil, and in almost every case when it comes time to make a decision, they’ve said, ‘You’re the CEO and it’s your decision.’ Let’s hope it continues. We just got married yesterday and we’re still in a honeymoon period. I assume every marriage has some bumps in the road and this will be no different, but I think it will work out for everybody. I have no intentions of retiring any time in the near future."

That’s music to the ears of Technical Trainer Chris Arne and his 1,200 Ehrlich co-workers, who woke up on Jan. 23 thinking it was just another day. But as evidenced by the surprising number of high-profile acquisitions that came out of the blue in the past three years – Western Pest Services, Industrial Fumigant Co., J.C. Ehrlich – there is no such thing as a "typical day" in the pest control industry any more.

"If Ehrlich can be sold, who else can be sold?" asks second-generation PCO Bert Dodson. Who else indeed?

The authors are Internet editor, editor and publisher of PCT magazine.

--------------------------------------------------

J.C. Ehrlich, Rentokil share common bond

J.C. Ehrlich and Rentokil now share more than just a headquarters. Both companies were founded in the mid- to late-1920s — Ehrlich in 1928 and Rentokil in 1925.

Julius C. Ehrlich moved to Reading, Pa., where he became a salesman of insecticides and fogging equipment. When one of his customers, a department store, had no one who could apply the materials, Ehrlich volunteered to help them out and do the work himself. With that single gesture in 1928, Mr. Ehrlich established his new service company using the principles that still guide the company: initiative, ingenuity, and exceeding customer expectations.

From these humble beginnings, Ehrlich has grown to 42 local offices serving seven mid-Atlantic states and the District of Columbia. Protection programs now provide insect, rodent, termite, bat, bird control, industrial vegetation management, and bioremediation for both residential and commercial customers. The current owners, Victor and Bobby Hammel, are Julius Ehrlich’s great grandsons.

And the company’s first customer — the department store — remains a customer today, more than 75 years later.

In the early 1920s, Harold Maxwell-Lefroy, a London-based professor of entomology, was asked by the British government to help cure an infestation of beetles eating the roofing timbers at the famous Great Westminster Hall. Lefroy developed an insecticide that soaked into wood and killed the beetles. In time, people had heard about his work and he began receiving regular orders from architects and antique dealers. In 1924, Lefroy and his assistant Elizabeth Eades started selling bottles of woodworm fluid, which was called Ento-Kill Fluids. In 1925, the pair decided to register a company. The first choice for a company name was "Entokill" — from the words "entomon," the Greek word for insect, and kill. However, trade registration laws prevented them from using Entokill, so they settled on Rentokil — as in "rent to kill."

In 1944, Dr. Norman Hickin joined Rentokil as an entomologist and started a services division that became known as Woodworm and Dry Rot Control Ltd.

In 1957, Rentokil and its services division were acquired by the British Ratan Company, which was a services company founded on killing mice and rats and had expanded its offerings during the 1940s to cover the control of insects. In 1960, Rentokil was selected as the official brand and today it is recognized in more than 40 countries as a leading provider of pest control services.

--------------------------------------------------

The Industry Reacts

ompetitors and casual observers alike seemed surprised at the Rentokil-Ehrlich acquisition. In particular, based on Rentokil’s U.S. track record, most industry observers did not think the UK-based company was poised to make a major acquisition.

Craig Thomas, owner of Craig Thomas Pest Control, Hyde Park, N.Y., said he was surprised both by the sale and buyer — Rentokil — although he had seen signs that the U.K.-based company was looking to expand its U.S. presence in the Northeast. Specifically, Thomas thought Rentokil might have been testing the waters with smaller acquisitions, such as the acquisition of a company in his area — Albany, N.Y.-based Linindoll Pest Control. Does Thomas think the Ehrlich acquisition will give companies like his additional opportunities? "I think the bigger national companies have more challenges controlling their operations, and providing personal service and from my perspective this is an advantage I have in my market," he said. "At the same time, Rentokil is certainly an international force and for them to team up with a company like Ehrlich that is exceptional at customer service and has a skilled management team, I expect them to become a driving force in the industry."

A number of PCOs contacted by PCT noted that the transition may be smoother than others because Ehrlich is such a well run company. Jay Nixon, owner of Takoma Park, Md.-based American Pest Management, said having Victor Hammel on board "will enable (Rentokil) to transition the company in a way that will protect the company and its employees. I would hope that Rentokil would continue with the high level of professionalism that Ehrlich has displayed." Ed Bradbury, president of Viking Termite & Pest Control, Bound Brook, N.J., suggested looking at the industry’s last big acquisition — Orkin’s purchase of Western Industries in 2004 — for clues as to the future of the new Rentokil/Ehrlich organization. "Even though that was a major change there have been no significant changes to the way that company operates. I expect the same with Ehrlich. I expect (management) to pull all their energies into becoming the best at what they do and will continue to be strong competitors under Victor’s direction."

Len Douglen, executive director of the New York State Pest Management Association and New Jersey Pest Management Association, agreed. "It all depends on what Rentokil does," he said. "When Orkin acquired Western they let them operate pretty much as is." From what Douglen has observed, this approach has been successful and has resulted in "new and great growth (for Orkin) in the New York region." Douglen added that Orkin has remained committed to supporting the industry in New York and New Jersey in the same capacity as Western, through speaker participation, serving on boards and sponsorship of programs.

Similarly, Victor Hammel indicated that J.C. Ehrlich will be staying on as a guardian level supporter of the Professional Pest Management Alliance (PPMA) and that Rentokil, which had not previously been financially involved with PPMA, would now also contribute. An active PPMA board member, Hammel has a been a driving force in the development and growth of the Alliance, according to PPMA Executive Director Cindy Mannes. His insights into sending the right message to the consumer have led to tangible programs such as the Pride and Professionalism video as well as PPMA’s children’s Web site, www.pestworldforkids.org. "Victor is a true leader in every sense of the word. I am personally very pleased that he will continue with his leadership, financial support and diligence in continuing to grow the Alliance," Mannes said.

--------------------------------------------------

What about PestSure

In 1980 Victor Hammel, Bob Sameth of Western Pest Services, and Richard Keenan of Waltham Services, served as founders and first board members of PestSure Insurance, a captive insurance cooperative that now insures 93 of the industry’s largest companies that have combined revenues of more than $1 billion. Victor Hammel, current president of PestSure, played a central role in the success of the company.

With the sale of J.C. Ehrlich to Rentokil Initial there was a question whether the company would continue to be insured by PestSure. "I’m hoping our relationship will continue," Hammel said. "PestSure has been a good program for the pest control industry, and I think Rentokil will want to take advantage of it." Although Ehrlich will continue to be insured by PestSure in 2006, no decision has been made if the company will continue the relationship in coming years.

"J.C. Ehrlich is one of our largest insured," says PestSure General Manager Rex Jennings. "We’re hoping they’ll stay in." Regardless of what happens, however, the company plans to move forward aggressively with its growth plans in the future. "We lost Western Pest Services two years ago and we replaced that business," Jennings said. "We can continue to thrive whether they stay or not, although we hope they stay with the organization."

--------------------------------------------------

Over There

When news broke that Rentokil, Europe’s biggest pest management firm, was poised to become a major player in the U.S., it was less of a shock to the Europeans who have been following the ongoing evolution of the UK-based company.

In recent years, Rentokil CEO Doug Flynn and President Andy Hobart have shifted the company’s focus away from its non-core businesses and back to its core businesses — including pest control. (Rentokil also offers other services such as tropical plants, hygiene services and facilities services.)

"This move by Rentokil is very interesting because they had been concentrating on their non-pest control activities over the past few years and the purchase of Ehrlich is a sign that they are now looking to return in a major way to their core business," observes Jonathan Peck, managing director of UK-based Killgerm Group.

Rentokil began restructuring after going through a trying period that culminated in May 2005, when Sir Gerry Robinson, Britain’s colorful businessman-turned-TV producer, threatened a takeover. In 2004, the company ousted Chairman Sir Clive Thompson and Chief Executive James Wilde within two months of each other. Following Thompson’s exit, Brian McGowan assumed chairmanship of the company and he brought in Flynn to restructure the company.

Included in Rentokil’s re-commitment to its pest control business is the company’s efforts to "go global"— and the Ehrlich acquisition gives them a much needed bigger presence in the United States. Richad Strand, executive director of the British Pest Control Association, acknowledges that this acquisition will bring with it the usual challenges in "bedding" two different company cultures, but he said Rentokil benefits from experience making acquisitions throughout the world. "Ehrlich is a family company, and family companies pride themselves on the ‘personal touch’ in business," he said. "I am sure that Rentokil, with their experience at acquiring and running companies all around the world, understands the balance of international business and local culture. This knowledge and experience will undoubtedly be of benefit in the U.S. market."

Peck agrees. "Who was it that said that one person’s challenge is another person’s opportunity? Don’t underestimate the Rentokil management, which is very professional."

Just how this acquisition speeds up the globalization of the pest management industry remains to be seen. "We have seen several American companies, such as Terminix and Ecolab, come to Europe and buy up companies. It didn’t work for Terminix but it seems to be working for Ecolab," Peck said. "Now Rentokil has thrown down the gauntlet and it won’t be a one-way street. Life could get very interesting."

Strand says he thinks Rentokil is well positioned for such a development. "Rentokil, having their strongest market position in Europe, is well placed to defend their current position," he said. "Rentokil understand well the complexity of the European market and the influence that the different cultures, languages and legislative situations create in Europe."