A New Day Dawns in Electrical Contracting :

Although literally happening in slow motion, there are dramatic changes taking place right now in electrical contracting. The sum of these changes could be a dramatically different market, changes affecting all the readers of this magazine, large contractors and small. Where once the only competition came from other electrical contractors, today there are numerous entities - some from within the industry's traditional sector, some coming at it from outside - who are targeting wiring work. There's no "grand conspiracy," no master plan. What has happened is that far more competitors than ever are entering a growing market. In part, it is that the normal work of electrical contractors has become increasingly desirable. Here are some key events of September and October 1999: * Enron signed Owens-Corning to a $1 billion, 10-year contract in September. Enron will provide energy services, including the design and construction of new facilities and retrofits. Under the contract, Enron will buy electricity and gas for the client's plants, build cogeneration facilities, and perform energy-saving retrofits. Three weeks after signing the contract, Enron announced a $1.5 billion, 10-year contract with Simon Property Group, the nation's largest real estate investment trust. This "normal" course of business for Enron brings with it control of how electrical work is done in literally hundreds of buildings. * Exelon, the nonregulated subsidiary of Pennsylvania's PECO Energy, acquired five contractors with total sales of more than $300 million and a workforce topping 4,000. While not all were electrical contractors, the company became a major force in our industry on a single day. One week later, Exelon purchased Fischbach & Moore, an old-line electrical contractor with more than $80 million in annual sales. That took the company's contracting operation from zero to more than 5,200 workers . . . in less than three weeks. * Black Box Corporation, a catalog merchant of voice/data/video products-selling to electrical contractors, among others-has gone into the business of buying cabling contractors. The company's total 1998 sales, including all catalog buys, is $300 million. Black Box says the profitability of its on-site services operation, now 13 percent, should end up closer to 15 percent. * A private equity fund, Brockway Moran & Partners (Boca Raton, Fla.), announced that it was investing in a partnership that would "become a leading nationwide network integration services and structured cabling solutions provider, through the consolidation of established regional network services companies." While the company is not yet named, it does have a "name" player: Carlos Valdes, formerly president of MasTec Network Services. The $200 million fund includes among its principal investors some heavyweights: Goldman, Sachs & Co.; General Electrical Capital; and Donaldson, Lufkin, and Jenrette. Among Brockway Moran's other investments: Gold's Gym International, a printed circuit board manufacturer, and a septic tank maker. * Bracknell, a Canadian facilities service company, purchased ownership of a nonpublic roll-up company, Nationwide Electric, Inc. (NEI), based in Minnesota. Founded by a utility, Kansas City Power & Light, NEI purchased a small number of high-volume electrical contractors. Then, the utility spent much of the past year trying to cash in on the investment - via two initial public offerings of NEI stock. Both attempts failed - which led to the $76.7 million sale to Bracknell of NEI (now reported to have $225 million in annual sales). Bracknell already had some U.S. mechanical and electrical contractor interests, having most recently bought a $22 million Chicago-area contractor, Preferred Electric. With the purchase of NEI, Bracknell doubled its size - and now gets more than half of its sales from the United States. * Quanta Services - the roll-up company built first with four powerline and communication contracting companies - bought 11 companies, bringing it to an anticipated $1 billion in annual sales. It is the fourth roll-up company to hit $1 billion in "annual run rate," the combined annual sales of companies acquired recently plus those already owned. Quanta's scope now embraces work for electric, telecommunications, and gas utilities, as well as other customers. * During this same 60 days, the first dollars of an announced $400 million investment in Quanta by Utilicorp, a large utility, changed hands. According to one report, Utilicorp owns 27 percent of Quanta. Enron owns a smaller percentage of Quanta. * PECO Energy of Pennsylvania and Unicom (parent of Commonwealth Edison of Illinois) announced a merger that would create a combined company with $12.4 billion in annual sales and 5 million customers. PECO has been aggressive in making other acquisitions, including power generating plants - and, of course, contractors. Unicom is also in the contractor-buying game, only it is targeting mechanical contractors. On Nov. 2, it bought V.A. Smith of Wheeling, Ill., a mechanical engineering firm with 100 employees. In July, it purchased Midwest Mechanical, which had 250 employees. "Our customers will continue to receive the same quality service that we have delivered for 90 years. The only difference will be that we can now bring the resources of a $7 billion company to our customers, which will enhance our product and service offerings to them," said Donald A. Smith, president of the acquired company. Local consolidation: The big companies listed above are large enough to notice, and they issue press releases. Their news gets noticed. Yet, there was probably a lot more happening in those two months, beneath the service. Through database searches, Electrical Contractor has become aware of acquisitions on the local level. For example, Bell Electric of the St. Louis area, a company with $30 million in reported sales, is said to have purchased an electrical contractor with sales in the $4 million to $6 million range (St. Louis Business Journal, Aug. 23, 1999). Spokane (Washington) Electrical Services reportedly bought a Pullman, Wash., contractor (Journal of Business - Spokane, Aug. 19, 1999) What's important about that just-two-months-of-news list, aside from the breadth of work and interests and the obvious depth of financial commitment it represents, is that it might represent merely the tip of the iceberg About this series To better inform all participants in the electrical and electronic construction and maintenance marketplace about this ongoing change in competition, this article begins Electrical Contractor magazine's multipart series on the many developments comprising it. In these articles, which will run in selected issues throughout 2000, we will attempt to detail trends and developments in the following areas: The current course and development of "roll-up" companies (consolidators) and the net affect of their acquisitions past, present, and future, in the electrical and mechanical contracting industries. * Utility acquisitions of electrical and mechanical contractors. * Utilities going into the contracting business without acquisitions. * ESCOs and utilities capturing customers and control of work. * Roll-ups and acquisitions in the voice/data/video field. * What effect, if any, we might see from acquisitions of powerline, communications, and CCTV contractors by various companies? * Control of work and related efforts by manufacturers of electrical and voice/data/video equipment * Ongoing efforts to take voice/data/video work away from the electrical contractor. * Acquisitions of contractors by nonpublic entities, including private consolidators. * Affiliation by contractors into federations and organizations such as Mr. Electric and the TEGG franchise - aimed at capturing bigger shares of available work. While this series will not present a lot of good news, times are good for electrical contractors - perhaps better than they ever have been. That is why so many varied interests are interested in capturing a piece of what readers of Electrical Contractor might consider "naturally" theirs. It's the intent of this series to detail the activities, goals, and likely future strategies and tactics of the various participants in this competitive struggle. Can you deem the people barging into your business enemies or potential allies? What, if anything, should you do now? By presenting the trends, developments, and details to you on a regular basis, we hope to help you form an opinion and lay out a course of action. Overview In one of the least-hilarious movies made with Mel Brooks, 1983's remake of To Be Or Not To Be, Brooks' character is in Poland just before the Nazi invasion - on stage in a play . . . playing Hitler. He sings a song which goes something like this: "All I want is Peace . . . Peace . . . Peace! . . . "A little piece of Poland . . . a little piece of France . . ." Similarly, no one entity or group of unindicted co-conspirators wants all of this industry's business. But the number, financial strength, and diversity of companies that just want a little piece - each - of the electrical contracting industry is awesome. A comprehensive overview is just not possible. In connection with this article, Electrical Contractor magazine has identified more than 75 powerful enterprises - many of them subsidiaries of electric utilities - that are targeting a piece of the contractor's business. However, here's a look at the possible threats and competitors on a market-segment basis. Residential What brand name communicates "home electronics" to the average consumer better than Radio Shack? Small contractors will need to beware of the power of that brand, as Radio Shack in 1999 bought a communications contracting company - and made clear its plans are to provide on-site home services. Tandy Corp., which is Radio Shack's parent, purchased Amerilink (known also as Na-Com) in May. The company had boasted of 1,400 people in the field. Radio Shack's press release on this unusual buy, headlined "Tandy Corporation Announces the Next Step in Home Connectivity Strategy," said: "Amerilink's experienced management expertise will help us test various approaches to installation, including franchising, as we bundle installation service with our powerful technology product and service offerings." On the other hand, consider Ameritech. The local telephone company in the Midwest has opened a nationwide security company, SecurityLink - with offices in almost all of the biggest 100 cities. SecurityLink has secured a franchise to install IBM's Home Director hard-wired residential networking line. Services would include telephone, cable TV, Internet access, and, of course, CCTV and monitored security. The company provides business security services, too; thus far, it's not yet promoted companion networking or other services to business users. Florida Progress, a massive utility company whose holdings include Florida Power (not to be confused with Florida Power & Light), has launched a pilot program, working with 20,000 customers. That company is offering a residential electrical wiring "insurance program" for $2.95 per month. Essentially similar to what local telephone companies offer, the "insurance" deal covers up to $500 of on-site electrical contracting work. "Home Wiring Service is a convenient, low-cost service that protects the major wiring systems in the home. And our partnerships with the local electrical contractors help make it work," a company executive said recently. He made that remark while announcing the company has now expanded the program to all customers in its 32-county service area. This could be very good for those electrical contractors that Florida Power has deemed qualified - and not very much fun if your company has been left on the outside looking in. In San Diego, Edison Home, a subsidiary of a unit of the same company that owns powerful Southern California Edison, is now in the residential electrical service business, as well as serving small commercial business owners, via the Edison OnCall name. This utility's service guarantee costs $5.95 a month. For $12.95 a month, they will upgrade service to cover appliances and a house's heating and cooling system. In Philadelphia, a Canadian utility - Enbridge - has been reported to have bought up a number of home-services contractors. Plumbers, roofers, appliance repairers, plasterers, and mechanical contractors, among others, have been targeted by the $1.7 billion firm. "We are fully aware that the general public's interest in energy deregulation is extremely limited. We are going to establish a service company first, wait for the (deregulation) fallout, and then introduce ourselves as an energy company," minimal," an Enbridge executive told the Philadelphia Business Journal. There's more of this going on, although some of it is not directly competitive (yet) with electrical contractors. For example, this reporter, on a drive through Delaware recently, saw a service truck - resembling any contractor's service truck - with Conectiv, the local utility's name, on it. The truck was emblazoned with the services now offered by the power company - plumbing, heating, and air conditioning. For a partial list of Web sites of utilities providing residential services of some sort - including nonelectrical home services - see the Web resources sidebar below. Commercial and industrial If anything, the competition for your residential customers is gentle compared with the fierce pursuit - in some places - of commercial and industrial business. Here competitors include national roll-ups, energy service companies with national designs, and utilities that are after business in specific local areas. Consider PP&L Resources, a Pennsylvania utility that has acquired several large mechanical contractors in the Pennsylvania-Delaware-New Jersey area. On July 27, the company also purchased mechanical contracting companies with a reported $50 million in annual sales that serve the Connecticut and Massachusetts area. Thanks in part to these acquisitions, PP&L EnergyPlus offers business customers a package of services including lighting design, mechanical and HVAC contracting, and financing for energy projects. One cannot downplay such an effort, as PP&L has been accumulating contractors for several years. The combined sales of these operations topped $200 million in 1998. On July 12, United Illuminating - a Connecticut utility - acquired Allan Electric and Allan Datacom, of Totowa, N.J., for its Precision Power, Inc., unregulated subsidiary. This electrical contractor, with $30 million in 1998 sales, reportedly brought total annual sales for UI's subsidiary to more than $50 million; Precision Power is described as "a leading provider of electrical, data cabling, and HVAC equipment and services." This just illustrates how big that approaching iceberg might be, more than just the tip we see when the big companies promote their acquisitions. Over a two-week period in July, a Pennsylvania utility bought a big mechanical contractor in New England and a Connecticut company bought a significant electrical/voice/data/video contractor in New Jersey. Of course, there are more entities targeting your commercial-industrial customer. Consider what some of the roll-up companies are doing: Integrated Electrical Services (IES): In partnerships with suppliers, IES, the sole publicly traded electrical-contracting-only consolidator, is gaining national account business. Presumably, IES is taking this business away from local electrical contractors. Consider this segment from an August earnings report telephone call: Jim Wise, CEO of IES, said, "We're . . . in the process of doing about 400 locations on some IT work that is strategically aligned with GE Capital. AMP brought that deal to us and aligned us with GE Capital and it looks very promising. Hubbell, which is also one of our strategic industry partners, has brought us several deals and I'll tell you one deal is worth, on a three-year basis, about $90 million to us. That [one] we're coming very close to closing." By IT-or information technology-Wise is referring to voice/data/video work. Group Maintenance America and Building One Services: These two companies recently merged under the GroupMac name. Previously, they both teamed up the mechanical and electrical contractors they'd bought to create a "facilities service" approach to capturing the business of commercial and industrial customers. Building One also offered janitorial services, for a three-in-one approach. GroupMAC, as it is now known, has added an integrated systems (including voice/data/video and other systems) component, called Total Site Solutions. This operation, the company says, provides commercial customers with turnkey design and installation work for control facilities, data centers, and other high-tech facilities. TSS is helping to provide the company an entry point into many cities; in the quarter ended June 30, the operation completed projects in Baltimore, Washington, D.C., Philadelphia, Boston, Indianapolis, and South Florida. Maintenance is GroupMAC's center, where it hopes to take your customers away from you, by offering a combination of one-stop-shop HVAC/plumbing/electrical services. Customers added in the quarter ended June 30 include AutoNation USA, Guitar Centers, Aerial Communications, The Hair Cuttery, Organized Living, and Blockbuster Video. Perhaps what electrical (and mechanical) contractors find most scary about GroupMAC and IES is their growth rates, not counting the effect of recent acquisitions. According to recent reports by these companies, the internal growth rates are running at serious double-digits - in the 15 to 30 percent range, depending on the company and the quarter. Residential sales are a relatively small sliver; most growth is taking place in the commercial-industrial arena. Since the overall electrical/mechanical marketplace probably grew at a rate of five to seven percent in 1999, these companies are probably growing at the expense of this magazine's other readers. SALIMANDO is a Vienna, Va.-based freelance writer based in Vienna, Va., specializing in electrical, voice/data/video construction and integrated technology issues. He can be reached by e-mail at JSALI@cris.com. Twice monthly he also writes the "Web Prowler" column on Electrical Contractor magazine's Web site: www.ecmag.com Why Competitors Converge on Electrical Contractors It might seem that companies such as Radio Shack, Florida Power, Group Maintenance America, and Brockway Moran & Partners all woke up the same day and decided to attack your market share. However, that's not how it happened. Essentially, underlying trends have driven these and many other companies to target a piece of the electrical contracting marketplace. Here are snapshots of some of these trends, and how they brought new competition to your front door. Utility deregulation: Pushed by large users of electricity and natural gas since the early 1990s or before, state deregulation of utilities is having unforeseen consequences. Example: Power generating plants coming onto the market are selling at a reported average price of twice book value. One result is that some utilities have more cash in hand than is normal, with "normal" being a great deal of cash. Some utilities are putting this money to work by buying contracting firms, buying other utilities, diversifying into other businesses, buying power plants, and/or financing energy-efficient retrofits for key customers. ESCOs reappear: Energy-service companies were a creation of "the energy crisis." At the beginning of the 1980s, this magazine ran regular reports on how electrical contractors and ESCOs were saving energy for customers. After being driven to the ground by the collapse of oil prices in the mid-1980s, these companies have reappeared as a major force. Drivers here include both utility deregulation (allowing companies such as Enron to provide completed "energy outsourcing" services to large customers) and the prospect of it. Roll-up companies: Spawned by the Wall Street boom, the electrical and electrical/mechanical roll-up companies were assembled and fueled by greed and despair. Most construction contractors despair of getting a fair offer for their companies when it comes time to sell; the roll-ups offered their founders a chance to solve this problem. As it is, a prime reference phrase in the roll-up community is that it offers construction contractors the opportunity to "liquefy their equity." In the typical 50 percent cash, 50 percent stock deals that some contractors have obtained from the consolidators, the 50 percent cash segment - by itself - is probably more than the contractor involved could have hoped to get from almost any other source. What drove these companies? Consider Jon Ledecky, the force behind Building One Services. Having invested all of $126,000 in November 1997, Ledecky took out an estimated $50-million-plus in the April 1999 recapitalization of that company. He is also now part owner (with an America Online executive) of the Washington Capitals hockey team. Voice/data/video acquirers: The reasons why companies like Black Box and Brockway - as well as other companies to be detailed in future issues - are pursuing voice/data/video contractors are pretty easy to find. Just turn to the voice/data/video section of this magazine. The opportunity to expand in this area is obvious, just as Electrical Contractor magazine has been telling you since 1992. "Outside" acquirers: While Quanta Services is referenced in the main article above, it's not the only company trying to consolidate two or more of the following businesses: powerline contracting, communications line contracting, fiber optics (national and regional networks), cable TV, or utility service (including gas contracting). Drivers here include utility deregulation and the growing realization that, while millions of miles of fiber optic cable have been laid in this country, the consumption of bandwidth continually is outpacing supply. - Joe Salimando Web Resource List: Utilities and Others in the Residential Service Business Ameritech's SecurityLink www.ameritech.com/navigation/site/1,1935,220,00.html BG&E Home Service (Baltimore, Md., area) www.bgehome.com/html/homeSer.html Conectiv Service Plan (Delaware, Maryland, Virginia) www.conectiv.com/offerings/services/residential/res_servsol.htm Edison Oncall (sister company to Southern California Edison, California) www.edisononcall.com/ Enbridge Home Services (Canada) www.cgc.enbridge.com/deregulation/dereg_ehs.html Florida Power (News release on program expansion) www.fpc.com/flpower/news/relea121.htm Radio Shack/Tandy Corp. (News release on "home connectivity strategy") www.tandy.com/press/Internet_Html_Pages/footer.asp?URL=TC-1999-010.htm

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