<font color=red>From March 1998:</font> Lightning Strikes Twice: Exclusive Report on Consolidation

This story appeared in the March 1998 issue of Lawn & Landscape

In two unrelated and equally stunning moves, the announcement of two new national landscape maintenance companies was announced in February one via the merger of several million-dollar firms and one through acquisition by the industry’s lawn care giant.

The firm born out of a merger unlike any other in the industry’s history, LandCare USA, Inc., comprises seven privately held landscape companies whose annual revenues totalled approximately $120 million in 1997, thereby making the company the largest landscape maintenance firm in the industry.

But the merger is just the beginning of this group’s ambitious plans, which include an initial public common stock offering to take place in May once approval has been granted by the Securities and Exchange Commission later this spring.

The second group, which represents the genesis of the new landscape management division of TruGreen-ChemLawn, included Northwest Landscape Industries, Tigard, Ore.; Environmental Landscape Services, Houston, Texas; Minor’s Landscape Services, Fort Worth, Texas; and Otey Brothers, Boston, Mass. No additional TruGreen-ChemLawn acquisitions could be confirmed at press time, but a source close to the company indicated that as many as six more deals for landscape firms could be announced in the first half of 1998. These two announcements are expected to represent just the start of what has been a long-rumored and debated trend in the industry the development of national landscape companies pursuing national accounts growth.

In addition to the announcements by LandCare USA and TruGreen-ChemLawn, sources close to The Brickman Group have confirmed that the company has sold 51 percent of the company’s stock to venture capitalists. Although the deal was structured so that the Brickman family retained controlling interest in the company, the deal has fueled industry speculation that the $100 million firm is poised to become very aggressive in the acquisition game.

LANDCARE USA. The original founders of LandCare USA are: David Luse, Arteka Corp., Eden Prairie, Minn.; Bruce Church, D.R. Church Landscape Co., Inc., Lombard, Ill.; Roger Braswell, Southern Tree & Landscape Companies, Charlotte, N.C.; Mark Yahn, Ground Control Landscape, Inc., Orlando, Fla.; Linda Benge, Trees, Inc., Houston, Texas; Jeff Meyer, Desert Care Landscaping, Inc., Phoenix, Ariz.; and Jim Marcus and Hal Cranston, Four Seasons Landscape & Maintenance, San Jose, Calif. (See sidebar, page 25)

LandCare USA is backed by the Notre Capital Ventures Group, II, L.L.C., of Houston, an organization with extensive experience putting together this type of deal in similarly fragmented industries. Among the public offerings Notre has initiated are Coach USA and ComfortSystems USA. (See sidebar, page 29)

Letters of intent and due diligence are complete in the LandCare USA deal, and it will follow a typical initial public offering path. The prospectus, which represents the business plan of the group, is expected to be filed with the SEC in early to mid-March. That will be followed by a 30- to 45-day review process by the SEC. Following the review, LandCare USA representatives will visit between 20 and 25 cities over a three-week period in order to make presentations to various institutional investors before the stock begins trading on the New York Stock Exchange in May.

Due to SEC regulations, the group declined to reveal what price-per-share it hopes to offer the stock.

As for the company’s operations, LandCare USA’s goal is to maintain a business mix of about 75 percent maintenance and 25 percent installation revenues. More than 95 percent of its client base will be commercial.

After the initial stock offering, each company will continue to operate under its existing name in its individual market for an unspecified period of time but as a wholly-owned subsidiary of a highly decentralized corporate office.

Those close to the blockbuster deal noted there is significant value in the names of the original founders in their current markets, and that those names will be used indefinitely because a strong name identity is of utmost importance to the customers.

Every founding company represents one director on the board of directors for LandCare USA. Although other individuals may be appointed to the board, plans are for representatives of the founding companies to hold a majority of the seats.

The entire organization will, however, be run by an individual new to the landscape business. Bill Murdy, 55, was named chief executive officer, and is expected to draw upon his considerable experience growing organizations and his familiarity with the challenging issues facing publicly traded companies to complement the founders’ lack of experience in this area. (See sidebar, above) Hal Cranston, president of Four Seasons Landscape & Maintenance, will serve as chief operating officer.

According to those involved in the LandCare USA deal, there are three key components to the company’s future growth: internal growth, corporate tuck-ins (the merger of additional companies in markets already being served by he company), and beachheads (mergers of companies in markets not already being served).

Although the company acknowledged it has aggressive growth plans in place, it is prohibited by the SEC from releasing such forecasts at this time.

The key driving force behind the deal is the more profitable commercial client base that exists across the country and the increasing demands of these clients for contractors to serve multiple locations regardless of their own locations.

LandCare USA will give us the ability to offer national accounts business to our clients, said Luse. The key components are the ability to offer installation, maintenance and arboriculture services, and the chance give our employees increased advancement opportunities.

Other founding members identified various benefits to joining the organization.

The decentralized approach to ongoing operations, including the retention of our company’s identity and personality, were key factors in the decision, noted Yahn. LandCare USA’s strength in providing capital and purchasing power will allow us to partner with employees and other industry leaders to grow at a pace well above previous expectations.

Deregulation and consolidation is escalating in our customers’ industries, and we felt it held the key to our future viability, added Benge of Trees Inc.

Luse noted other advantages that will aid the company:

• Economies of scale in product purchasing and overhead costs such as insurance
• Sharing best business practices
• Increased opportunity to attract and manage quality people
• Ability to focus on the management of core businesses without administrative hassles
• Ability to offer a wider range of services to the customer base
• Significant evaluations and liquidity from a publicly listed company

Interestingly, the mix of the companies and its owners share a similar corporate and personal profile: high profitability, strong customer service philosophies, team building initiatives and entrepreneurial owners now almost all in their 40s. Luse noted that while this profile identifies some of the key criteria the group used and will continue to use in determining which companies to approach regarding mergers, a real key to the group’s plans is that none of the founding owners are said to be looking for an exit strategy from their business. Instead, we are looking for opportunities to grow our businesses, he emphasized.

THE NOTRE WAY. In assembling companies for initial public fragmented industries. The landscape industry fits the bill. Currently, there are a number of significantly sized private companies, but only one publicly traded contracting firm ServiceMaster.

Notre hopes to benefit from the driving force in consolidation: the customers’ desires to shorten their vendor lists.

It’s a consistent theme throughout the country, said a source close to the Notre dealings. It’s outsourcing at its finest.

Each of the seven founding members will receive stock in LandCare USA and some cash in the deal, in addition to an equal annual salary.

Notre’s role is creating entities on the New York Stock Exchange, but keeping the business highly decentralized so it is a merger and not an acquisition.

Notre will retain about 10 to 15 percent of the LandCare USA stock once it goes public. Over time, the majority of stock will continue to be held by the founders and the owners of any companies that merger with LandCare USA in the future.

TRUGREEN-CHEMLAWN. In A Conversation with Dave Slott in the November issue of Lawn & Landscape, TruGreen-ChemLawn’s president was asked if the company would continue to diversify its service offerings after the acquisition of Orkin Plantscaping.

Never say never; however, we think we have enough opportunity with our core business, Dave Slott said. We think we have enough to keep us busy for many years to come.

Well, apparently that changed, as illustrated by the lawn care company’s acquisition of Northwest Landscape Industries, Environmental Landscape Services, Minor’s Landscape Services and Oatey Brothers for undisclosed amounts. The four companies, totaling approximately $40 million in 1997 revenues, represent the beginning of the new landscape management division of TruGreen-ChemLawn.

With consolidation happening before its eyes, Slott said, now is the time for TruGreen-ChemLawn to enact its rollup strategy for the landscape management industry and position itself to take advantage of the synergies between its services.

I think the marketplace is dictating the time, whether or not it’s the exact time we would have chosen. If, ultimately, we believe in the synergies between the two industries, then what better time to enter than when it’s consolidating, Slott said. We don’t want to wake up three years from now and find that the best players are all gone.

Rather than starting from scratch in the maintenance market, the company decided to align itself with partners that bring expertise to the table.

We’re under no time pressure. We’re aligning ourselves with the right people in the right spots that strategically make sense for us. Beyond that, I think we’re driven to be the best before the biggest, he explained.

But, as in the lawn care and interior industries, the company’s goal is to be the largest company in the maintenance field.

The deals also gives TruGreen-ChemLawn a jump start in the commercial segment of the landscape market. On the lawn care side, 20 percent of its revenues are derived from commercial business, whereas its new maintenance business services primarily commercial customers.

The new division will immediately be affiliated with the TruGreen-ChemLawn name, in a form that has yet to be determined. Day-to-day operations of the division will co-exist with the existing regional manager infrastructure. Additionally, the presidents of the formerly independent firms, along with Slott, will create a landscape management executive committee.

We don’t plan any changes, just enhancements. We’re looking to these owners to guide us taking the next step, he shared. We have a tremendous amount of work to do here. We have to build an infrastructure and an image, and that’s going to take a lot of effort on the part of these ex-owners.

Slott said TruGreen-ChemLawn doesn’t have a target profile it’s pursuing in acquisition, and geography isn’t necessarily key, either. Rather, forward thinking companies with high values, offering great service and the individuals themselves are the criteria.

We’re concentrating on assimilating the best practices of all of the companies we’ve purchased into a consolidated model that we think will work as we roll it out across the country, Slott continued. The executive committee will be responsible for building the model, from the mix of business to efficiencies at the front line to overhead. These are very astute people who understand they have a golden opportunity to create something special.

TruGreen-ChemLawn’s number one goal is to offer quality service followed by taking care of its employees. If the firm accomplishes that, everything else will fall into place, Slott theorized.

As consolidation efforts race across the industry, Slott said TruGreen-ChemLawn offers a proven track record. We are an ongoing entity. You can go read about us. We have an infrastructure already built. We have contacts in the industry that we can cross-reference. All that stuff is real.

As for Akerman of NLI, as of last November he was considering involving himself with venture capitalists in order to launch a group similar to LandCare USA when he met with Slott. He told us what they were trying to do, Akerman said. They want to become the best landscape management company in the country.

We knew the industry was going to consolidate. Jim (Wathey, Akerman’s partner) and I wanted to be on the leading edge as well as part of the best group, he continued, adding that he will remain with TruGreen-ChemLawn, heading up its West Coast landscape management division. I really believe in this group. We have similar philosophies in that we take care of our customers and our employees.

INDUSTRY REACTION. It wasn’t too difficult to find industry contractors who were already talking about LandCare USA and TruGreen-ChemLawn.

This isn’t about the landscaping industry. The entire service industry is taking off, said Frank Carson, president, Carson Landscape Industries, Sacramento, Calif.

It seems like there’s almost a feeding frenzy going on in the industry, and I think it’s probably just starting, added Drew St. John, president, St. John & Associates, Hattiesburg, Miss. The economy is so strong right now and people’s businesses are up, so they have a lot of cash and borrowing capacity.

I can see it turning into a race among these big companies to get out there and make the most acquisitions where the company that acquires the most will win, remarked Ed Laflamme, president, Laflamme Services Inc., Bridgeport, Conn.

I think consolidation in the landscape management industry is going to end up being a lot like it has been in the lawn care industry, Laflamme continued. The larger companies will end up with all of the good accounts nationwide and all that will be left will be niche players with small commercial and residential jobs.

There is less of a consensus, however, when the question turns to the potential of developing a national landscape maintenance company.

We think there’s a lot of consolidation potential right now, noted Dale Elkins, division vice president, ISS Landscape Management Services, Orlando, Fla. We’re coming across a lot of opportunities to work with companies looking for contractors with strong financial backing so they can take their contractors with them wherever they have offices. Not a lot of contractors can do that work.

Landscape maintenance is one of those renewable, repetitive services you can set up systems for that should work anywhere, observed Jud Griggs, senior landscape architect, Lied’s Nursery & Landscape, Sussex, Wis.

As for landscape construction, it’s going to be very interesting to see how these companies handle that, Griggs continued. We struggle to develop design/build services just within our own branch offices because they get a little more personal due to the work involved.

I don’t see a national landscape management company as being feasible unless the sales approach is based solely on volume, said Carson. If someone was trying to grow by creating quality and a service-oriented system, I think that would be more difficult to do.

Those contractors interviewed who were familiar with the various companies and individuals involved in these deals noted that they all have exceptionally strong track records of successfully providing these services. Where they may lack experience, however, is combining a variety of unique corporations and their cultures into one healthy and harmonious group.

The biggest challenge these individuals will face is aligning the different visions of these different companies, observed Bruce Wilson, president, Environmental Care Inc., Calabasas, Calif., who noted that although ECI did entertain preliminary discussions with representatives from LandCare USA it is not interested in any deals that would change its current ownership structure.

The value of a healthy organization is an intangible that shouldn’t be overlooked.

Companies like ours and Brickman are companies that were built from the ground up and that have put strong organizations in place over time, added Wilson. You can’t just take a bunch of different companies and put them together and instantly have a successful organization.

I think this group will have to let each original company maintain its own culture until it meshes over time, agreed Laflamme. They’re so geographically spread out that they might as well let them work independently and provide them with the tools they need to be successful.

In addition, the involvement of public investors should present a wealth of new influences on contractors used to doing business in an environment where they ultimately only answered to themselves.

Forecasting and meeting budgets are what we live and breath, not in terms of revenues, but in terms of profits, asserted Elkins, noting that ISS’ parent company is publicly traded. There’s going to be a lot of reporting to investors and stockholders that these individuals have never really seen before, and there will definitely be some new pressures on them.

Up until now, the decisions for their companies have been made based on the owners’ goals, added Griggs. Now, they may have to be more dollar-oriented to show shareholders that progress is being made. That could lead them to make some short-term decisions to build an increased return for one year but that might not be in the best interests of the company over the long term.

I wonder how the stock market will react to an initial public offering from a landscape company, added St. John. No matter how big a company is, we’re still in a volatile industry that is dependent on labor and where environmental and labor issues are always a problem.

EVERYBODY ELSE. What these deals mean for the rest of the industry remains to be seen. In addition, many eyes will be watching other leading firms, such as Environmental Care, The Brickman Group or ISS Landscape Management Services, to see how they react.

Our business has been growing at about 20 percent per year, and we plan to continue to grow and follow the track we’ve been on, noted Scott Brickman about his plans as president of the $100 million dollar group.

Regarding the company’s expansion plans, Brickman would only say, Our growth will include acquisitions when and where it makes sense for the company.

Wilson was equally reserved in discussing ECI’s acquisition strategy. We’ve always looked at the possibility of acquisitions, although it hasn’t been a primary method of growth for us, he explained. The fact that some other companies are making acquisitions won’t cause us to panic.

Most contractors seemed to agree that the companies most likely to be affected by these organizations are those in large markets. I don’t think we’ll see consolidation in cities with less than 500,000 people, commented St. John.

I want to say that this can get our industry out to the public in a larger sense for our image, recruiting and professionalism, said Elkins. But that won’t happen if these groups don’t take steps to move us in that direction.

As for market effects, Elkins guessed that certain changes could be in store depending on the strategies companies employ. Consolidation could result in the standardization of certain practices such as pricing, he noted. At the same time, we could see the price of services drop if companies decide they are going to buy business instead of buying companies. These large companies could also really change standard bid qualifications for a lot of jobs.

In the end, however, the customers are the ones most likely to dictate what happens to the industry and how successful these companies can be.

It’s still going to boil down to the fact that customers buy from a company because they trust that company and like the person they are dealing with, concluded Elkins. The size of our companies doesn’t matter as much as we think it does.