ACHRNEWS

Lennox buys service experts

June 1, 2000
DALLAS — Welcome to the new world of Lennox International, whose innovative approach to buying up its own dealers and becoming a retailer of its hvac brands to the residential-light commercial sector has broken yet another traditional hvac industry mold.

With last week’s bold $157 million buyout of Service Experts, the company threw a giant boulder into the water. The resulting ripples will fan out to affect its distribution, in-house dealers, customers, and even the half-dozen hvac equipment manufacturers it competes with and will buy equipment from.

The purchase gives Lennox another $600 million in sales which, added to the estimated $400 million volume of its 70 company-owned outlets, puts it at about $1 billion. Lennox also sells more than $800 million through its independent dealers.

This acquisition makes it the largest residential dealer in the country, with nearly 200 retail outlets (70 purchased earlier, and 120 from Service Experts).

Only GroupMAC and Comfort Systems USA, consolidated national contractors who sell to both the residential and nonresidential sectors, match Lennox with a $1 billion-plus sales performance.

Selling competitors' products, too

Still more interesting, the company’s retailing operation will sell not only its own Lennox brand, but also competing brands sold by Service Experts’ outlets. These service centers now get one-third of their business from Lennox and the balance from three other “preferred vendors”: Carrier, Trane, and Amana.

The acquisition — and its topsy-turvy consequences — is one more move in the 105-year-old manufacturer’s goal to redefine itself, broadening its international sales and capturing the profits of retail sales by going direct to the customer.

The mix of in-house and independent dealers is unprecedented. So is the manufacturer’s direct-to-homeowner sales circuit. Call it “no-step” distribution.

Lennox’s thousands of independent dealers are concerned about discrimination in pricing, promotional materials, co-op dollars, and other marketing ammunition. However, Service Experts contractors generally welcomed the takeover. (See related article, page 1.)

In an investors’ conference call at mid-week, Lennox chairman and ceo John Norris Jr. stressed that brand cross-selling will be part of the plan, saying the company will “not upset the apple cart” of acquired dealers who successfully sell competitive brands.

“This is a continuation of the retail strategy we first announced over a year ago,” said Norris. “While we remain strongly committed to our independent and associate dealers, our acquisition of Service Experts represents a historic opportunity for Lennox to dramatically accelerate its growth in the retail hvac business segment.

“Service Experts’ network of strategically located service centers, managed and run by its highly skilled employees and managers, fits perfectly with our growing retail business. We expect the transaction to be modestly accretive in 2000 and increasingly thereafter.”

One paradoxical effect is that while Lennox adds hundreds of millions of dollars in new equipment sales, its market share, estimated at 10%, may not grow that spectacularly, since it will be selling its competitors’ equipment.

Whether or not those competitors will be willing to sell their equipment to Lennox — in effect adding to the company’s bottom line — is another question.

'Excellent marriage'

The merger ends months of speculation on the fate of the big, nationally consolidated contractor, which just had its third birthday last August.

Service Experts’ ceo Alan Sielbeck said the deal was an “excellent marriage,” and said his service centers complement the retail outlets Lennox has already developed.

“Lennox is the most recognized brand in the industry and over its more than 100-year history, has focused on the same residential customers as Service Experts,” said Sielbeck. “I believe that this transaction is an exciting one for our stockholders, employees, and customers.”

The company has been rocked by a steep dip in its stock price, which opened at $14 in August 1996. The price went as high as $32, and settled in single-digit territory. Earnings have also been thin, souring the investment community.

Failing to meet its quarterly earnings soured the investment community, but the company wasn’t alone. The three other consolidated contractors have also seen a steep decline in their stock price, and ServiceMaster absorbed one of them, American Residential Service, earlier this year.

Lennox, which went public just three months ago, timed the Service Experts acquisition in conjunction with its first-ever quarterly report, which showed a sharp 26% gain in quarterly sales.

Bob Schjerven, president and ceo of Lennox, said that Jim Mishler will be responsible for integrating the hvac businesses included as part of the Service Experts agreement into the existing Lennox retail organization. Mishler is president of Lennox’s retail operations.