[Market Watch] On the Block?

In announcing ServiceMaster’s future growth strategy during the company’s November Analyst & Investor Meeting, Chairman and CEO J. Patrick Spainhour dropped a bomb that has reverberated throughout the pest control industry.

Spainhour said that ServiceMaster, parent company of Terminix, had appointed Morgan Stanley and Goldman Sachs Group Inc., to advise it on "strategic alternatives" — including the possible sale of the company — and had hired the law firm Sidley Austin as its legal adviser to facilitate the process. "Our board is open-minded with respect to our future path and committed to maximizing value for our shareholders," he said.

What this announcement means for Terminix, the nation’s largest pest control provider with revenues in excess of $1 billion, remains to be seen. At PCT’s Mergers & Acquisitions Seminar, Katrina Helmkamp, group president of ServiceMaster, expanded on Spainhour’s announcement, noting that the ServiceMaster Board of Directors is "pleased with the company’s three-year plan, but as a responsible Board it is looking at strategic alternatives and if somebody feels they can pay more and create more value than as a clear responsibility to our shareholders, ServiceMaster would have to pursue that."

SPECULATION ENSUES. There are any number of reasons why ServiceMaster is exploring "strategic alternatives." It could mean ServiceMaster will be available for sale; or it is specifically being courted; or it is interested in selling certain business units; or it is simply trying to gauge its market value.

A possible outcome is that the company will be sold, and if that is the case there are several possible players. One such party might be The Home Depot. Rumors have been swirling that the home-improvement company has been "testing the waters" of the pest control industry. Such an acquisition would make sense for The Home Depot which, in recent years, has been pushing more into home services. The Home Depot’s At-Home Services division provides a range of professional services, including flooring installations, fencing, roofing, cabinetry and a host of other interior and exterior services.

PCT’s calls to Home Depot were not immediately returned.

Private investment bankers also have taken a renewed interest in the pest control industry in recent years. These firms usually pursue pest control company acquisitions for one of two reasons: 1) to find a straight-out buyer interested in purchasing a service business or adding a service business to its mix of offerings; or 2) for undertaking a leveraged buy out, in which financial institutions will buy a company, run it with new or existing management and possibly reorganize it to make it more profitable, with the ultimate goal of selling the company outright to a future buyer.

Charlie Hromada, former Terminix executive and current ServiceMaster stockholder, noted that there is "a lot of investment cash out there looking for a home" and there is a fair amount of interest in the ServiceMaster companies. "They’re major trade names, they have good service reputations and they’re good service organizations," he said. In addition, Hromada said, they "are not loaded with a lot of debt — they’re cash cows. They have good cash-flow income, which everybody likes."

Another option is that some of ServiceMaster’s business units will be sold. In addition to Terminix, ServiceMaster is comprised of ServiceMaster Clean, Merry Maids, Rescue Rooter, TruGreen ChemLawn, TruGreen LandCare and other home maintenance services. As with any major corporation, ServiceMaster’s history includes selling certain business segments that either underperform or are not a good corporate fit.

What would this scenario mean for Terminix? It would appear as though Terminix is a good strategic fit for ServiceMaster, but there are some aspects of pest control businesses that larger corporations find difficult, according to Pam Jordan, president of Acquisition Strategies, Tampa, Fla.

"Most pest control companies are a collection of small operating units or branches. Even when you look at a one-billion-dollar-a-year company like Terminix that has grown aggressively through acquisitions, it takes a lot of small transactions and small deals to grow the business. Even inside an individual branch it is a one-customer-at-a-time way to build a business," Jordan said. "Sometimes the large corporations, particularly publicly-traded ones, just don’t have the patience or see enough future growth potential in the industry to hang in there.

"Also, if you are publicly traded, you have to operate in accordance with what is required, particularly as it relates to financial reporting and disclosure. Trying to impose that on very small businesses may not always be the best model."

Still, Jordan believes Terminix is a good fit for ServiceMaster and doesn’t necessarily think it would be sold off. "When they said ‘exploring options’ everyone jumped on that thinking the business was for sale, but I really don’t know. Maybe this is something they want to do to position themselves more aggressively as the suitor rather than the one being acquired."

MANAGEMENT REORGANIZATION. Concurrent with the recent sales rumors, ServiceMaster announced key management changes. Terminix President Katrina Helmkamp was promoted to group president of ServiceMaster, with responsibilities for the Terminix, TruGreen ChemLawn and TruGreen LandCare business units.

Helmkamp joined ServiceMaster in 2005. Previously, she was a vice president and director at the Chicago office of the Boston Consulting Group (BCG). During her tenure at BCG, Helmkamp had a significant, multi-year engagement with several ServiceMaster units, including the TruGreen brands. Helmkamp told PCT that during her Terminix tenure she was pleased that she and her team made progress in the areas of: 1) customer retention; and 2) bringing non-users into the category. "I’m proud of what we did as a team to set up growth not only for Terminix, but hopefully for the whole category," she said.

In her new position, Helmkamp said her primary objectives will be concentrated on the following areas:

Accelerating growth — Looking for opportunities to accelerate growth for all of ServiceMaster’s branch-based businesses.

Sharing best practices — Sharing best practices across those branch-based businesses. "A couple of the key ones I would highlight are best practices around customer retention process and associate retention process. Both of which are important for any branch-based business," she said.

Leveraging positions — Continuing to better leverage the fact that Terminix and the TruGreen businesses are "sister" companies.

Helmkamp said she is looking forward to exploring these new opportunities, working with Dennis Sutton, president of TruGreen Chemlawn, and Rick Ascolese, president of TruGreen LandCare.

Specifically, Helmkamp said TruGreen Chemlawn has been very focused on customer retention. "They have tried some new things, like the lawn quality audits, that have helped with customer retention and there are still additional opportunities to improve in this area," she said. Similarly, Helmkamp believes much can be learned from TruGreen LandCare, which has ramped up its sales capabilities to help drive profitable growth.

Helmkamp says the greatest opportunities and challenges for Terminix remain in the area of customer retention. "That is still the most profitable source of growth in front of Terminix," she said. "Similar to the industry, Terminix also faces the challenge of attracting and retaining associates. There is no way Terminix can grow at the rate it wants to grow without having good, strong associates and without having strong associate retention."

ServiceMaster’s need for improved customer retention also was discussed by Chief Marketing Officer Mitch Engel during the company’s November Analyst & Investor Meeting. Engel noted that in 2006, ServiceMaster’s residential-based businesses — Terminix, TruGreen Chemlawn, American Home Shield and Merry Maids — sold 2.4 million new contracts, but failed to retain 2.3 million existing contracts — meaning the company only netted about 100,000 new contracts. "Retention has been ServiceMaster’s Achilles’ heel," he said.

Replacing Helmkamp as president of Terminix is Tom Brackett, who was promoted from chief operating officer of the company. Brackett joined Terminix in 1992. He served as branch manager, regional sales manager, region manager, and division vice president prior to his promotion to COO. Brackett told PCT he believes his tenure at Terminix has prepared him well for his new position. "I’m looking forward to the opportunity to work with more of the functional areas of our business — accounting, marketing and so forth," he said. "I did have some responsibilities in the functional areas of our business, namely safety. I’m looking forward to being able to create more continuity between the field and the functional teams here and really have everybody on the same page."

Echoing Helmkamp’s sentiment, Brackett said tapping into the non-user segment is key to Terminix’s future growth. "There is all that opportunity out there and it is our responsibility to innovate and create services and mechanisms to really tap into that non-user (segment). It’s astounding if you think about how old the industry is and there is still all that opportunity on the table. That will keep you up at night trying to crack that code."

INDUSTRY IMPLICATIONS. While uncertainty remains regarding Terminix’s future, Helmkamp said she feels positive about the direction of ServiceMaster, including Terminix. "The rumors may be ‘much ado about nothing’ but the part I feel confident about is that under any scenario that is out there it really is hard for me to imagine any ownership structure that would not be asking us to go out and execute our three-year plan and wouldn’t feel really good about the few key investments that are in there for Terminix because they offer such great returns.

"So at the end of the day I think our folks are going to be in great shape because they are going to be getting the same sort of investment to go grow because it is a good industry and the investment is going to make a lot of sense."

The author is managing editor of PCT.