Published In September 2000
While the stock market has beaten up on electrical, mechanical, and hybrid roll-up companies, voice/data/video (VDV) specialty companies—focusing on long-haul networks and other “outside” work, or on-site network service work—are thriving. This is evident, because several large VDV companies have emerged within the past two years, targeting both the long-haul fiber optics build and the constant updating of horizontal networks in Corporate America. On the one hand, public companies are heatedly pursuing the build-out of the fiber optics network. Arguss, Dycom, International FiberCom, MasTec, Quanta Services, and TetraTech top this list. On the other hand, the “inside” networking business has found an unexpected leader in Black Box Corp., which also markets VDV products via catalogs and direct mail. Other big names (Encompass Services, EMCOR Group, and Integrated Electrical Services) are also pursuing the VDV market. This article focuses on Quanta Services and Black Box Corp. An accompanying story highlights the other companies, and an additional short box features an electrical contractor who went into the long-haul fiber business—as a provider, not a builder—in 1993. Quanta Services Not three years ago, John Colson of PAR Services in Kansas was a self-described “poles and holes” contractor—in the powerline business. His company, at perhaps $50 million in annual sales, was growing rapidly. He had happy utility customers. But the growth—running at as much as 40 percent per year—was attractive. Colson looked around and figured he could grow even faster, via acquisition. Colson started talking to a few other “large” outside contractors, about a merger. He talked to banks and financial advisors. Thanks to some happy circumstances, he accomplished his plan via the public markets, thanks to an initial public offering (IPO). Today, Colson runs a company that the stock market values at more than $2 billion (as of early May)! Quanta Services (Houston), the company he founded, has grown by leaps and bounds. More than 50 acquisitions have added hundreds of millions of dollars in sales to the nub of four contracting companies (including PAR), with which Colson and Quanta at first set out in 1998. Quanta’s sales might well top $1.5 billion in 2001. What’s impressive about Colson is his flexibility: Initially determined to “roll up” the power line contracting business (the company’s stock symbol, PWR, reflects this), his head was turned by the opportunity in the long-haul telecommunications business. “Gary Tucci, president of one of our initial four companies, talked me into pursuing that business,” Colson admitted, in an interview with Electrical Contractor. It was a great decision: As of 1999, the largest single sales segment for Quanta was telecommunications—outside plant telecommunications—at 35 percent. The power line business is second, at 30 percent. Also included in the mix are cable TV work (13 percent), and commercial and industrial work (7 percent). Beyond its sales success, Quanta has had some incredible backing. Enron, the large energy services company, took an initial slug of company ownership; more recently, Utilicorp pledged to buy as much as $400 million of the company’s stock. As of the most recent update, Utilicorp owns 36 percent of Quanta, having bought out Enron’s interest in April. All of Quanta’s growth hasn’t been by acquisition. “Internal” sales growth in 1999 at units Quanta owned before the year started topped 20 percent (over 1998). “We don’t have to do acquisitions to grow,” Colson said. Recently, the company signed a four-year, $400-million broadband system installations contract with Everest Communications in Kansas; Quanta has the right of first refusal on Everest builds in other areas as well. Other facts about Quanta include the following: * Colson might well be one of the leading organizers for the International Brotherhood of Electrical Workers (IBEW). While not all of Quanta’s operations are union, it has converted several acquired operations from non-union to IBEW affiliation. The result, Colson said, has included 700 new IBEW linemen. * The company does a good deal of local-loop communications cabling, and Colson said more will come, including (perhaps) fiber-to-the-curb. * While UtiliCorp owns a big share of Quanta, the contracting company does not derive much revenue from its biggest shareholder—only $15 million in 1999. * Colson also predicted a great deal of additional outsourcing by utilities, including routine service work, to Quanta and its competitors. While Quanta’s short history and present prospects are, in a word, spectacular, what about its future? As the accompanying story shows, other companies are furiously pursuing the nation’s long-haul and local broadband build-outs. Won’t the communications infrastructure some day be built? And what happens to Quanta on that day? “By that time, there will be a national plan to rebuild the electric utility grid system,” Colson predicted. “The system is aging—much of it was built in the 1950s—and it needs to be rebuilt. There is no incentive right now for the utility companies to rebuild the grid. “There are choke points on the grid right now. Any power engineer will tell you about these problems, if you get him to relax. I hear this time after time after time. You’ll see an increasing number of grid-caused outages in the next three to five years. “As a result, there will be a lot of rebuilding, repair, and maintenance work on transmission lines for companies like ours. Our company can do this work while the system remains energized.” Black Box boom The story of how a catalog seller of VDV equipment mutated into a cabling contractor roll-up is revealing. Black Box Corp. once had one main-line business: selling products to end-users and contractors directly, via catalogs. The company claims that it makes 90 percent of what’s in the catalog. Additionally, the company trumpeted its technical support services. Claiming it had more than 150 knowledgeable individuals on the other end of the telephone, Black Box said you wouldn’t have long to wait to get expert help in installing the products you bought from it. But, the company found out that telephone support wasn’t enough to drive sales growth. Sometime in 1997, it seems, company executives turned on a dime, and decided to add an “on-site services” arm to that telephone support apparatus. In this case, “on-site services”—the installation of VDV equipment—equates, in Electrical Contractor magazine’s normal terminology, to providing cabling contracting services. To grow in the “on-site” category, Black Box began acquiring cabling contractors. Unlike the more well-known electrical roll-ups, such as Integrated Electrical and Building One Services, however, Black Box did not hesitate to buy small firms with as little as $1 million in sales. As of April 2000, the company purchased more than 40 cabling contractors of all sizes over a 28-month period. Here’s a snapshot of the companies absorbed in March alone: - Coast to Coast Communications (Sarasota, Fla.), with $3 million in annual revenues. - Advanced Network Technologies (Victorville, Calif.), $14 million revenues. - Two companies in Belgium, with $9 million in revenues combined. - HL Service, a three-year-old Rayland, Ohio, company with revenues of about $1 million. - American Telephone Service (Huntington, W.Va.), $1 million in revenues. Not all of Black Box’s acquisitions have been small. For example, in January it bought The Delaney Companies, a 15-year-old cabling contractor with $28 million in revenues. An obvious question is: How fast can you grow, chewing up $1 million here and $2 million there, with an occasional larger acquisition thrown in? On April 10, Black Box executives answered that question: -They reported annualized revenues of the on-site support operations had hit $250 million as of March 31st (end of the company’s fiscal year), including 12-month sales of companies only recently acquired. They had earlier projected a $200 million run rate by the date. -They projected the operation hitting a $450 million annualized run rate in March 2001. Black Box obtained 30 percent of its second-quarter revenue (ended December 31, 1999) from on-site support, versus less than 7 percent in the same period one year earlier. What’s important here is that, outside of Lucent and some of the service arms of local telephone companies, it appears that Black Box is en route to become the largest voice/data contractor in the United States. Therefore, stock-market investors have rewarded BBOX stock with high valuations. While the company will top $400 million in annual revenue in the fiscal year that ends June 30, 2000, the stock’s price values the company at approximately $1.4 billion. That price has more than doubled in one year’s time. Others chasing VDV Other large companies are chasing the cabling contractor market, and going beyond cabling to provide “IT” (information technology) services. Here’s a quick look at three of the biggest contracting companies and their situations: Bracknell Corp.: This Canadian company has grown by leaps and bounds in the electrical and mechanical contracting business in the United States. It has purchased Nationwide Electric and Sunbelt Integrated Trade Services within the past year. VDV sales of these acquired companies, or Bracknell as a whole, are not readily available. However, the company recently acquired a wireless service company as well. EMCOR Group: With $2.9 billion in 1999 sales, the company had $150 million in IT work. Chairman Frank MacInnis, in a conference call with stock-market analysts on the results, said his company wanted to make a big acquisition in the IT/cabling field. How big? MacInnis said at his company’s size, he could not impact earnings without making a very big acquisition, at least doubling the size of that operation. So EMCOR has indicated an intention to pursue one or more acquisitions of IT/cabling firms in 2000, with those purchases designed to add at least $150 million in sales in this area to its top line. Encompass Services: Newly created by the merger of Building One Services and Group Maintenance America, this company’s joined 1999 data show roughly $250 million in all sorts of technology revenue out of $3.6 billion in sales. The company has indicated that, thanks to the merger, it no longer needs to fiercely pursue numerous acquisitions of electrical and mechanical contracting companies. However, Encompass executives said they plan to pursue acquisitions in the technology area on a more immediate basis. One problem in the acquisition area is the low valuation (as of early May) of Encompass stock. With ESR stock at $6 per share or less, any acquisition would likely have to be funded by debt. Integrated Electrical Services: the company terminated planned and future acquisitions of electrical contracting companies after its earnings hit a pothole in a recent quarter. It did make one exception, however: the pursuit of VDV contractors. Dave Ramm, the new company president, made it clear from his first moments in the post that straightening out the company’s VDV strategy is a high-priority. Like Encompass, IES suffers from a low stock valuation, which makes acquisitions difficult. Bottom line Real or estimated 1999 VDV contracting sales by Black Box, Bracknell, EMCOR, Encompass, and IES together totaled between $700 and $800 million. Give all of these companies full credit for planned sales increases and acquisitions, and that figure might be about $1 billion for 2000. How does that shape up, viewed nationally? If VDV sales comprise 16 to 17 percent of total electrical contracting sales in 2000, and total EC sales are at $89.5 billion (this magazine’s estimate), then the $1 billion is—in round numbers—about 6 percent of total EC industry VDV sales. In reality, that’s not much different from the big picture. Adding up likely electrical contracting/VDV total sales by those five companies in 2000, you get a figure of perhaps $5.5 billion, which is about 6 percent of that $89.5 billion total. SALIMANDO is a Vienna, Va.-based freelance writer. He can be reached at email@example.com.