Sunshine State Shocker

For the past nine months – dating back to the November 2004 announcement that Ft. Lauderdale, Fla.-based Sunair Electronics was entering the pest control market – the question on everyone’s mind was how would this well-financed, but largely unknown entity become a "major player" in an industry filled with well-established companies.

The answer to this and other questions came in a stunning announcement in early June that Sunair Electronics, through Sunair Southeast Pest Holdings (SPH), one of its wholly owned subsidiaries, acquired Orlando-based Middleton Lawn & Pest Control for $35 million in cash, $5 million in a promissory note and $10 million of Sunair’s stock (1,084,599 shares).

Under the direction of Owner Chuck Steinmetz and President and CEO Greg Clendenin, Middleton recorded $30 million in revenues in 2004 to rank 20th on PCT’s Top 100 list. Middleton’s network of 22 branches serves more than 68,000 accounts throughout Central Florida and Florida’s northern east coast, making it one of the largest, most recognized companies in the Sunshine State. (And it will stay one of the most recognized companies; Middleton will retain its name.)

Richard C. Rochon, chairman of Sunair, said Middleton will serve as the platform from which the company will expand its pest control operations throughout the country. Sunair also is engaged in the security business and the design, manufacture and sale of high-frequency radio communications equipment. "The acquisition of Middleton marks the entry of Sunair into the structural pest control and lawn care services industry," Rochon said. "We believe that the acquisition of Middleton makes Sunair a marketshare leader in the pest control and lawn care services industries in the Southeastern United States."

HOW IT HAPPENED. To some, the news that Sunair had chosen a company as well-established as Middleton to make its first major foray into the pest control industry came as a surprise. But it’s a deal that makes sense upon closer examination of some of the key figures involved in the transaction.

In November 2004, Sunair announced it entered into an agreement with investment firm Royal Palm Capital Partners with the intent of forming a pest control services division. In so doing, the group continued its strategy of targeting middle-market companies in industries poised for consolidation and growth, and luring away top executives from companies already involved in those markets. Recently, the company successfully used this strategy upon entering the security industry.

In announcing its intent to enter the pest control market, Sunair reported it had tapped a trio of former ServiceMaster senior executives – Donald Karnes, David Slott and John Hayes – to lead its pest control division. (At press time, Slott and Karnes had been barred from joining Sunair because a Memphis court had enforced noncompete agreements that each had signed with ServiceMaster. (See related story on next page.) Hayes, who did not sign a noncompete agreement, served as executive vice president of TruGreen Companies (2000-04). He joined Sunair as CEO, signing a four-year employment agreement with the company.

Rochon relied upon Hayes’ market knowledge in developing a business strategy to launch the new pest control division. The group decided not to target "fixer up" companies but to pursue large, regional businesses that already had the people, infrastructure and operating systems in place so it could hit the ground running and make a powerful statement that Sunair is serious about being a major player in the industry. Middleton was one of the few pest control companies that met that criterion.

"They have had a significant presence in Florida for many years," Hayes told PCT. "One of the things that attracted us to Middleton was the number of offices they had across the heart of Florida. We definitely wanted to be a player in Florida and they’re a premier player in the Florida market."

Sunair execs approached Clendenin with a proposal at the beginning of the year. Although not seeking buyers, Clendenin thought the Sunair offer was a great business opportunity and a good deal for both parties. "Their team, the type of people that they are, they’re all just solid, good people and their vision of what they wanted to do in our industry and how they wanted to use Middleton as a platform company to do it, it just really all came together," he said.

Upon returning from an overseas trip, Steinmetz was informed by Clendenin of Sunair’s interest in Middleton. Steinmetz, who said he had "rejected all offers" to buy Middleton in the past, was intrigued, largely because Middleton would be a platform company for a firm with aggressive plans to develop a national footprint in the pest control industry, aspirations previously expressed by Sears, Waste Management and others.

"When I met with them the first time I told them that Waste Management…and others had basically failed because they would buy a bunch of companies, put them together and didn’t have a plan to run them," Steinmetz told PCT. "Whereas, Middleton already had everything in place, the most state-of-the-art systems you can imagine and great technical ability, a wonderful training program. So, anybody who is purchased from here on will go in and become part of the Middleton model, and that almost assuredly is going to create a path of success for them."

Also of great significance to Steinmetz was keeping the Middleton corporate culture intact. "I didn’t want to sell to Terminix and be absorbed into their organization and lose the identity of the company," he said. "And that could have happened with anybody else who wanted to buy us. But with this particular company, they bought us because of the identity and they wanted to keep it. That was a huge difference."

In early February, Graham Anthony, president of Anthony Advisors and a consultant to Sunair, introduced executives of the two companies at their first meeting in Orlando. "I think the combination will be quite powerful," Graham said.

A LOGICAL MOVE. For Middleton, in many ways the deal is consistent with the company’s aggressive business strategy. Steinmetz and Clendenin have rapidly grown the business with innovative approaches, including its successful once-a-year pest control service, that have led the industry. When Steinmetz purchased Middleton in 1977 it was a $100,000-per year operation.

"If you think about it, they were on a fast track," says Mike Rottler, president of Rottler Pest & Lawn Solutions, St. Louis. "No doubt about it. Greg was building it quickly. He’d done it in the past – built it and sold it. Greg doesn’t waste a lot of time. If you spend any time with (him) you realize that things happen fast."

PCOs contacted by PCT believe it was a good deal for both parties.

Joey Edwards, corporate vice president, Arrow Exterminators, said he believes Sunair successfully accomplished its goal of establishing a platform company. "They’ve got a company that most likely will provide them with the infrastructure they wanted and allow them to continue some type of internal growth and also provide a means for strengthening their position for future acquisitions," he said.

Bob Wanzer, president and CEO of HomeTeam Pest Defense, Dallas, Texas, said that the deal was not shopped around and that Middleton got great value.

"(Sunair) paid a high multiple, but Middleton is a great company," Wanzer said.

Sunair did pay a high multiple. While Middleton generated $30 million in revenues in 2004, according to SEC documents, Steinmetz received $28 million in cash, Clendenin received $7 million in cash and together they received $10 million in Sunair stock (plus a $5 million promissory note).

Glen Rollins, president and COO of Orkin, said he was surprised by the announcement and happy for Steinmetz and Clendenin. "Clearly, Chuck and Greg have created a lot of value," he said. Rollins added he does not think the deal will spark a flurry of acquisition activity; however, "it might cause people to consider selling or think more about their own timelines. Or, it may cause people to think when or how or if they’d like to team up with another company," he told PCT.

Steinmetz said that the deal is good for the staff of Middleton as well. He said Middleton employees will benefit from the added security of a large company with ample resources that can provide additional growth opportunities.

WHAT’S NEXT? A key component of the Sunair acquisition of Middleton was the addition of Steinmetz and Clendenin. Clendenin will join Sunair’s executive management team as CEO for SPH and continue to lead SPH’s expansion through internal growth and acquisition in the Southeast United States, while Steinmetz will serve on Sunair’s Board of Directors.

Their involvement will be critical as the company grows internally and through an aggressive acquisition strategy. Steinmetz said he is looking forward to this challenge.

"Having built All America, you know, I’ve already done it," he said. "That’s why they wanted me to serve in that capacity and I think I can really help that way. I like the guys very much. It will be a lot of fun to work with them."

And the "new" Middleton has its sights set on expanding nationally, Hayes said.

"We’re looking for other strong regional companies that want to join our team. Yes, we would be open to just about anywhere in the country, again, looking for the strong, well run regional companies that are interested in coming to us intact," Hayes said.

Will Sunair be a major player in the pest control industry? Only time will tell, but they’re off to an impressive start. Steinmetz and Clendenin give the company instant market credibility and by all accounts a significant pool of financial resources for future acquisitions is available.

"I just think we’re going to have a lot of fun and build a big company," Steinmetz said. "The effort that they’re going to make is to build a nationwide company. I thought I’d have that opportunity when Sears purchased All America, but unfortunately they messed up the company and it went backwards instead of forwards. This time that’s not going to happen."

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