Breaking News: Nov. 1998, A 'Tru' Shock

In February, they were the first ones out of the gate with a plan born out of a futuristic vision of the green industry.

LandCare USA, Houston, Texas, was developed with a clear goal of developing a national commercial landscape company that could grow aggressively by selling stock, raising a tremendous amount of capital and offering contractors an opportunity unlike any other in the industry.

As it turned out, however, LandCare USA was followed out of those gates by TruGreen-ChemLawn, Memphis, Tenn., which spent the 1990s turning under-achieving lawn care companies into a cash producing behemoth. And TruGreen-ChemLawn made it clear from the start that it was serious about having the same type of success in the landscape maintenance industry.

As Dave Slott, TruGreen-ChemLawn president and chief operating officer, said when his company acquired both Orkin Lawn Care and Orkin Plantscaping, its first aggressive move into interior plant care, in the second quarter of 1997, "We don't feel we're number two in anything. We're in this business to compete, and you can read into that what you want."

Indeed, the same philosophy is clearly true for landscape maintenance as TruGreen-ChemLawn's acquisition of LandCare USA put it on a path to be the clear market leader before long, while at the same time leaving many folks wondering what happened to LandCare USA's master plan.

THE DEAL. In the agreement between the two companies, TruGreen-ChemLawn's parent company, ServiceMaster, Downers Grove, Ill., will acquire LandCare USA in a stock for stock swap. This will create a landscape maintenance and installation company with reported annualized revenues in excess of $400 million that services 2,500 customers through more than 100 locations nationwide.

LandCare USA shareholders will receive a fraction of a share of ServiceMaster stock – approximately 0.55 shares, which would be valued at $11 – for each share of LandCare USA stock they own. In essence, LandCare USA shareholders would trade two shares of their stock, which closed at $8 per share on Oct. 30, for one share of ServiceMaster stock, which closed that same day at $21.125. The deal is still subject to approval by the Federal Securities and Exchange Commission and at least 51 percent of the LandCare USA shareholders, and it is expected to close early in the second quarter of 1999.

"Following the merger, TruGreen-ChemLawn will command the number one position in the $20-billion commercial landscape market," noted Carlos Cantu, chief executive officer of ServiceMaster in a press release announcing the deal and confirming that the company is far from done with its plan. "We launched our landscape operations early in 1998 and believe we are off to a tremendous start in a market that is ripe for internal growth and future consolidation."

Although not all of the structural details will be worked out for some time, Bill Murdy, LandCare USA chairman, chief executive officer and president, will be named president of the newly formed division of TruGreen-ChemLawn. Murdy will report directly to Dave Slott, and Paul Anderegg, who has been senior vice president of operations for TruGreen-ChemLawn, will become chief operating officer of the new operation. One individual whose role is suddenly unclear in this organization is Craig Ruppert, founder of Ruppert Landscape Company, Ashton, Md. Upon sale of his $45 million company to TruGreen-ChemLawn in September, Ruppert was named senior vice president of the landscape management division of TruGreen-ChemLawn with responsibilities for the day-to-day operations of the new organization.

"Suffice to say, Craig Ruppert is a very important part of our organization and he will certainly be an important part of this group's upper management," Slott asserted.

THE PLAYERS. At the time it announced its formation and public stock offering plans, LandCare USA consisted of seven founding member companies totaling approximately $118 million in revenues, although $50 million of those revenues came from a line clearing company, Trees Inc., Houston, Texas, that many industry observers felt didn't fit the mold of a landscape maintenance company.

After a briefly delayed and somewhat disappointing stock offering that saw LandCare USA go public at $8 a share (members of the organization had been expecting an opening price between $10 and $14 a share) in June, LandCare USA began making good on its promise to grow rapidly through acquisition. As of press time for this article, the company had acquired a total of 20 additional companies and $237.4 million in revenues to add to those first seven companies' $118 million.

Meanwhile, TruGreen-ChemLawn's foray into landscape maintenance was equally eye-catching, but more because of the individuals it was acquiring along with its companies to run its new division – Rich Akerman, Northwest Landscape Industries, Tigard, Ore.; David Minor, Minor's Landscape Services, Fort Worth, Texas; Joe Skelton and Bill Killmer, Lifescapes, Atlanta, Ga.; and the aforementioned Craig Ruppert are among the most respected names in the industry.

Competition to attract and acquire such successful companies drove acquisition prices skyward with offers commonly between six and 10 times a company's EBITDA (earnings before interest, taxes, depreciation and amortization), according to one contractor who has had conversations about selling his company to LandCare USA and TruGreen-ChemLawn.

A logical question to ask in the aftermath of this deal is what happens now to the market of landscape companies looking to sell. "I would guess the value of my company in a sale went down somewhat with TruGreen-ChemLawn's acquisition of LandCare USA," noted the contractor who had selling conversations with these two organizations. "Also, I have to question how this fits with what TruGreen-ChemLawn has been saying all along is its strategy of creating a national footprint of top-notch leaders in the industry and then a rollup strategy to fill in key areas. This deal was done so quickly that you know they couldn't have done due diligence on each LandCare USA company, so it had to be driven just by numbers."

WHAT THEY'RE SAYING. "We saw this as an opportune time for the benefit of both companies' shareholders," noted Slott. "We felt there was a market opportunity for us and both boards agreed that we are stronger together than apart.

"Ultimately, we're still married to synergies between TruGreen-ChemLawn's infrastructure and our landscape division to benefit our employees and our customers as a single source provider nationwide of services encompassing interior and exterior landscape services," Slott continued.

"Making it work now will be a challenge," said Minor, who is now the vice president for the Southern Division of TruGreen-ChemLawn. "We've had some experience with integration already but it's always a challenge. This deal takes it to a whole different level, and some entrepreneurs will have to learn to work well in a corporate environment."

Some of the challenges of establishing structure may include the departure of some individuals from the organization.

"In all of the markets we both serve we will need to bring people together and consolidate in some cases," Akerman noted.

Just as the announcement of TruGreen-ChemLawn's formation of a landscape division in February was accelerated by the development of LandCare USA, this deal puts TruGreen-ChemLawn on a quicker timetable than it had planned.

While no specific details were offered, Slott expects to continue on this acquisition path.

"We have identified ourselves as a key player that wants to be a national player in the maintenance industry, and we will continue to make acquisitions as they make sense for us strategically," Slott added.

In fact, both companies are expected to continue with acquisitions while working to close this deal. An internal memo from Murdy to all LandCare USA employees that was obtained by Lawn & Landscape said, "The combined landscape operations should have annualized revenues of approximately $500 million at the completion of the merger early next year."

Later in the letter, Murdy wrote, "By the end of 1998 LandCare on its own expects to exceed $300 million in annualized revenues…Given the size of the industry this is just the beginning."

Murdy commented that little will change for his organization in terms of what it is accomplishing.

"We are now simply building a substantial entity inside of another substantial entity, instead of building a substantial entity as a stand alone organization," he explained, adding that LandCare USA was surprised when it was first approached by representatives of ServiceMaster regarding the acquisition possibility.

Akerman, who is now vice president of the Western Division for TruGreen-ChemLawn, said any potential concerns that TruGreen will dominate the industry should be dismissed.

"We're not a Microsoft," Akerman commented. "Yes, we're nearly $500 million in sales, and yes, we'll continue to grow. But we're not a monopoly in an industry this large."

Minor agreed with Akerman. "ServiceMaster is obviously showing tremendous confidence in this industry and I don't see where this hurts smaller companies," he commented. "People can look at it as an opportunity or the end of their business. It all depends on if they have an optimistic or pessimistic attitude."

Much of the initial reaction by those in the industry contacted and informed of the deal by Lawn & Landscape centered around questions regarding LandCare USA's ability to continue financing acquisitions and satisfy its founding members with a lagging stock price. (After opening at $8 a share and soon climbing above $10 a share, the stock fell as low as $5 a share and remained in the $6 range until climbing to $8 in late October.) Murdy was steadfast in his denial that LandCare USA was having difficulty financing the closing of acquisitions, but he didn't hide his disappointment with the stock's performance.

"This deal was not directly tied to stock performance," he said. "Yes, we had hoped to be awarded a higher multiple but we recognized that we had to produce results. Thus far, we've only reported one quarter's results and our second quarter's results will be in line with analysts' estimates.

Both Slott and Murdy expressed a hope that the industry at large will view this development as a positive for contractors in general.

THE BIG PICTURE. What this deal means for the industry is obviously yet to be determined. TruGreen-ChemLawn estimates the revenues for its new landscape division is approximately $430 million with the acquisition of LandCare USA. This would put the company on ground comparably to Environmental Industries, Calabasas, Calif., the parent company for Environmental Care, Valley Crest, Valley Crest Tree, Valley Crest Golf, and U.S. Lawns. According to Burt Sperber, chief executive officer of Environmental Industries, that company's 1998 revenues should be $425 million from its more than 70 operating centers.

Sperber said that the only affects the development of LandCare USA and TruGreen-ChemLawn's landscape division have had on his organization so far have been positive.

"It has really eliminated some competition for us," Sperber noted. "Take the Atlanta market for example. A number of the biggest companies in that market have been acquired now by TruGreen-ChemLawn, but only one of them will be able to bid on a project at one time or else it would be collusion." Sperber added that while he has had various conversations about different consolidation possibilities involving Environmental Industries with representatives from LandCare USA and TruGreen-ChemLawn, he is satisfied to keep the company operating independently for now.

The other organization people are wondering about at this time is the Brickman Group, Long Grove, Ill. After securing venture capital early in 1998 for the purpose of financing acquisition growth the company has been relatively quiet aside from a few acquisitions in the first half of the year.

Scott Brickman, president of the company, could not be reached for comment for this article.

The authors are Group Publisher and Editor of Lawn & Landscape magazine, respectively.