When Roll-Ups Crumble--Who Picks Up the Pieces?

By Joe Salimando | Sep 15, 2002
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A renewed kind of electricaL contractor has been created—the successful entrepreneur who sold his company into a roll-up and then bought it back. That, and several large utilities that remain important on the contractor scene, is the residue of the 1996-2000 subcontractor roll-up craze.

Exelon Infrastructure Services, perhaps one of the most ambitious efforts ever to roll-up construction companies, is now being unstructured. Encompass Services, which threatened to become the biggest U.S. electrical/mechanical and facilities services combine, seemed (as of early June) on the verge of an unfortunate financial event.

And those are only the headliners. The roll-up trend, which at one time seemed to have its teeth at the throat of mid-size to large electrical contactors (and their suppliers), seems to have—mostly—been defanged by reality.

Roll-ups are companies founded (almost always with stock sold to the public) with the idea of buying up companies in what Wall Streeters describe as “a fragmented industry.” The trend took on serious momentum in the 1970s, after Waste Management Inc. (which went public in 1973) succeeded in agglomerating local waste-hauling companies; waste was a “fragmented industry.”

Following their success, companies were founded to roll-up a variety of industries. Perhaps you’ve heard of Blockbuster, the video-rental chain? It, too, was a roll-up. The magic of these companies, when they work, is that the acquirer buys companies by paying at least half of the purchase price with company stock.

In the last years of the 1990s, companies such as Building One Services, Group Maintenance America, Nationwide Electric, Sunbelt Integrated Trade Services, Quanta Services, and Integrated Electrical Services were founded to do the same thing in the electrical construction industry (or electrical and mechanical). There were other companies, most of them now defunct, that sought to roll up the mechanical contracting sector.

Additionally, some electric utilities—many of them newly able to pursue nonregulated business in the 1990s—took a look at mechanical and electrical contracting and decided to try buying up contractors as well.

The denouement

What happened? Specifics seem to differ in each case, but generally the roll-up companies (and many utility efforts) have not hit pay dirt. Of course, there are still some survivors and, while most seem dead in the water, at this time, there’s no telling when things might change. In fact, many efforts have flopped.

Why? It’s not that easy to roll-up a fragmented industry; and, perhaps, construction is a more ornery beast than waste hauling or videotape rental. What the roll-ups needed to succeed (and did not get) included: (a) a stable stock market; (b) the ability to manage—actually manage, not just buy—a widely disparate flock of companies, and grow them; and (c) an absolute minimum of debt.

Most important, perhaps, is the fact that most construction contracting companies simply cannot be run on a “90-day” basis. Some construction companies have good years and bad years. Wonderfully good quarters, profit-wise, can be followed by awfully putrid periods. Thus, bottom-line results are not “smooth,” which makes them unattractive to those who invest in common stock.


Encompass was formed by the February 2000 merger of two roll-ups: Group Maintenance America and Building One Services. Each of these companies was trying to buy both mechanical and electrical contractors around the U.S., to put together a national “facility management” network.

Shortly after the merger, Encompass seemed as if its sales might hit the $5 billion mark. The company had some problems, including the plummeting in communications work. For the fourth quarter of 2001, sales fell off by 17 percent.

Encompass has not purchased very many companies (and certainly no large new ones) since the merger. Further, thanks to acquisitions by both predecessors, and the merger itself, the company entered 2002 with more than $1 billion of debt on its balance sheet. Add to this mix a financial rule taking effect this year forcing companies to write “goodwill” off their balance sheets.

How this works: Encompass’s predecessors paid high prices for contracting companies. Contracting companies do not have many hard assets. Under accounting rules, the part of the purchase price that exceeds the “real” assets of a purchased company must be recorded as “goodwill.”

Why is this a problem? Entering 2002, a huge proportion of Encompass’s assets was “goodwill”—$1.3 billion of it. Under the new rules, much of this must be written off. When Encompass eventually writes most of that off, its ratio of liabilities to assets will violate debt covenants it signed with various lenders.

As a result, Encompass is widely believed to be headed to a debt reorganization or even a bankruptcy filing. In either event, it is likely that debt-holders will end up owning some significant portion of the company. As a matter of fact, this reporter has received e-mails and phone calls from a number of industry suppliers, questioning when the company might take such an action (“I don’t know” has been my answer).

However, a mid-April check on an Encompass bond issue that is publicly traded showed a price of 55 ($550 for bonds with a face value of $1,000). If that appreciation were added to the dividend payable on these bonds, it would indicate the securities were changing hands deep in junk bond territory with about a 30 percent yield to maturity (the bonds mature in May 2009).

For those who can’t relate to the bond market, note that the price of one share of Encompass stock slipped under $1 earlier in 2002, and as of early June, was going for under 70 cents.


PECO Energy, a utility with its heart in the Philadelphia service area, formed a subsidiary, Exelon. That subsidiary went into the contracting business with another unit, Exelon Infrastructure Services (EIS).

EIS had a marvelous concept: it would buy every type of contractor involved in new home development. In other words, it would buy electrical (and especially line) contractors, CATV contractors, digging and boring companies, telecommunications companies, and even sewerage contractors.

What was the point? Quite simply, whenever a homebuilder created a new housing development, it would have just one call to make—to EIS—and have all of its problems handled by one company. EIS subsidiaries would put in the electrical service, telephone service, Internet access, sewage pipes, CATV, you name it.

While this is quite an attractive concept, it did not get a chance to work. EIS was buying companies hand-over-fist for a while, and—going by comments from company executives printed in local newspapers—it had more acquisitions planned. In our industry, the companies acquired were quite outstanding, including Fischbach & Moore, M.J. Electric, and Syracuse Merit Electric.

But then parent PECO chose to merge with the parent of Chicago’s Commonwealth Edison. Confusing things after the merger, the companies chose to consolidate under the name Exelon.

Suddenly, parent Exelon’s executives confronted new priorities. These did not necessarily include, apparently, growing the EIS subsidiary. Putting a fatal color on this was the fact that the contracting companies together produced some unfortunate financial results (they lost money).

In 2001, this resulted in an about-face. Not only was EIS no longer going to make acquisitions, but it was going to be dissolved, company executives said, over the next 24 months.

What’s happening now

What’s happening in the case of Exelon—and other companies, including some delineated in the accompanying sidebar—is that the search for buyers of the unwanted contracting companies comes at a not—particularly—fortunate time.

No one is rolling up the electrical contracting business right now. Economic prospects are not good in the short-term. Developments in the credit market have not made it easy for those who might be interested in acquisitions to get financing. There are other factors as well.

Bottom line: Companies that have bought contractors and now need to disgorge them can’t find buyers. This gives enormous leverage to the founding contractors. In many cases—according to anecdotal reports—the electrical contractor or the management team who sold the company to the utility or roll-up is able to buy the company back at a steep discount from the price the buyer originally paid the contractor. For one thing, even if the roll-up/utility owner could find another buyer, how much would the company be worth without that in-place management team? As a result, there are a number of contractors making hay while the sun shines in this environment. They are the only interested buyers; if they walk away, the sales price of the contracting company might well plummet anyway.

So the contractors who sold out just a few years ago are, in many cases, buying their companies back—either individually or as part of a management team—at bargain-basement prices. These prices are especially good when related to what the buying roll-up or utility paid just a few years ago.

Only one such fortunate contractor has been quoted—Bruce Henderson, of Henderson Electric of Louisville, Ky. He told the local business newspaper several months ago that there was a huge difference between what he was paid for his company (by a unit of now-bankrupt Bracknell—see accompanying story) and what he paid for it on the back end.

When pressed by the newspaper report, Henderson wouldn’t be more specific—except to say it was “millions” of dollars. EC

SALIMANDO is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at [email protected].


About The Author

Joe Salimando is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at [email protected].





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