Lennox/Service Experts: Expect Smooth Transition

September 8, 2000
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RICHARDSON, TX — While the consolidation industry has remained relatively quiet for the past 18 months, one group made headlines and changed hvacr industry dynamics in the process. One of the original Wall Street consolidation companies, Service Experts, was acquired by industry giant Lennox late last year, to form a unique partnership.

The fallout from the new union is still affecting how the giant retailer goes to the market each day.

“We plan on learning a lot about our business as a result of these acquisitions,” said Jim Mishler, president of Lennox Retail. “The acquired contractors have been performing roughly where we think they should, but not as well as they can.”

Mishler cited the reasons for the purchase of Service Experts and what he expects will happen in the near term.

“We saw a significant number of our Lennox dealers in Canada being bought by utilities,” he said. “So we decided to offer our own dealers three levels of involvement in the company.”

The Lennox dealers have three options. They can:

1. Remain totally independent;

2. Become an associate dealer, committing 75% of business to the Lennox brand, which in return brings retirement benefits, special co-op advertising, and gives Lennox the first right of refusal if the contractor decides to sell;

or

3. Become a company-owned dealer under the Service Experts moniker.

“We want all three types of business to thrive and grow in their marketplace,” said Mishler.



LOOKING FOR MORE

There are currently 123 Service Experts centers in the U.S., generating $500 million in revenues. Unlike the other major consolidators, Lennox is not pulling back on its acquisitions. It is looking to acquire at least 10 more companies before the end of the year.

“We are focusing on the top 100-150 metropolitan markets,” Mishler said. “We are looking at areas where we are underrepresented. The pace of our growth will depend on the financial performance of the existing units and the investment funds that are available.”

Despite the continued acquisition plan, Mishler is quick to point out that not all acquired businesses will remain in the Lennox family.

“We have looked at opportunities to shut down centers in areas where it wouldn’t make much sense to keep them,” he said.

One of Mishler’s concerns was in the morale of the former owners, who had seen Service Experts’ stock plunge in the months prior to the acquisition.

“Some of the managers were bitter or discouraged prior to the acquisition,” said Mishler. “When we consummated the deal, the stock price was $6 per share. There was obvious bitterness there because the stock had been selling for as high as $32.

“Lennox stock prices have been a real plus, although they have not been high enough to recoup some of the previous losses.”



DIFFERENT WRINKLE

The unique dynamic of a manufacturer owning contractors who sell competitive products has been a different wrinkle in the company’s plans to build existing markets and expand to new ones. Mishler said that his company’s “Preferred Vendor” program addresses this unique situation.

“We have a Preferred Vendor program that involves manufacturers outside of Lennox International [Trane and Amana],” he said. “We are trying to move all of our volume purchasing to preferred vendors.

“The use of brand name equipment has not changed. If some contractors want to use another company’s brand, we will not change [their purchasing habits]. I don’t expect any of our preferred vendors will see a drop in their business [as a result of the Service Experts acquisition].”

The Lennox Retail division is set up as a totally different entity with no pressure to buy a certain brand. For example, their biggest dealer in Georgia sells Trane equipment. Mishler said that his company does not want to interrupt the relationship built up with Trane in that market.

Mishler added that he believes in the entrepreneurial spirit of independent contractors and Lennox Retail will continue to focus on that aspect.

“I expect Service Experts to be a model of success for the independent contractor,” he said. “Our commitment to the industry is a commitment to the independent contractor.”

For now, Lennox/Service Experts will continue to invest in high-quality businesses and stay in a controlled acquisition mode.

“I don’t see us slowing down in the next few years,” concluded Mishler.

Publication date: 09/11/2000

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