Paul Giannamore: Given the global economy, given the potential for global debt crises in the near future, that can dramatically impact valuations. For now, we're effectively set up for a blow-off top in this industry. As there's a tremendous amount of capital that gets attracted to a small finite number of acquisition targets, prices blow up to the top, all the returns are wrung out, and it collapses.
---
Patrick Baldwin: What's up, PG?
Paul Giannamore: Patrick, welcome coming back from your road trip.
Patrick Baldwin: It was quite a road trip. I spent a little time with Mike and Debbie Rogers in Charlotte but it wasn't for The Boardroom Buzz.
Paul Giannamore: It was for Supernova, is it not?
Patrick Baldwin: It was. We had a film crew. We had Dylan out there. If you miss Mike and Debbie, because you haven't heard from them since episode 29, here we are episode 58, come to Supernova. There are a couple more days to register but you'll get to see some of the cars and hear from Mike and Debbie. There's enough to come to Supernova.
Paul Giannamore: I appreciate you going out there. I'm on the road doing some onsite filming. What we're going to try to do here in Supernova, because it's regional, there'll be nine different presentations. Everyone will have unique speakers. I'm going down to Rollins in Atlanta next week to do a little bit of filming. We've never done anything like this before. For those of you who are considering selling your business in ‘21, this is something that you have to watch. Whether you work with Potomac, anyone else, or do this by yourself, this is something that you needed to see. For those of you who might be planning an exit within the next few years, this is extremely important as well.
Patrick Baldwin: Can you explain the name to me Aftermath On Hands Supernova?
Paul Giannamore: You're the one that named this Supernova, Patrick. I made the comment on a call one day a couple of months ago about 2021 is almost like an M&A supernova with all the amount of transactions that don't get done. There you go, Supernova was born.
Patrick Baldwin: I've learned a lot, especially the last few weeks something like Peter Schiff. Maybe I've got a little Dr. Doom running around in my head now.
Paul Giannamore: I like Peter. I've known him for a while. Like Peter said in the interview, he's somewhat of a broken clock and he is. He's right twice a day. Timing is important in all of this. While thematically and directionally he is correct on a lot of things, it's the issue of timing.
Patrick Baldwin: It looks like 2021 is the year. Are you putting some wagers on this one?
Paul Giannamore: In regard to M&A, this one is a massive year because we have given the number of players in this space, given where the large companies are trading. Specifically, we're starting to see the rotation out of growth stocks into more value stocks. Rollins, in my mind, is a growth stock. We're starting to see this rotation in the capital markets. You can see Rollins is starting to trade down. We're in this phase transition in the economy. We've had the Trump tax cuts, which have been extremely stimulative.
We now have all this infrastructure spending and this COVID spending. At some point, this is going to wear off and we'll continue to see a phase transition. We did a lot of research for Supernova. We talked to a lot of different folks and now there's becoming a louder and louder chorus that the market is changing and valuations will begin to roll over here at some point. It's forced a lot of sellers into the market.
This will be the biggest year on record in pest control. I can get an advanced view of that because I can tell by the pipelines. I can see what goes on behind the scenes, it takes everyone else months and months to read the PCT and PMP articles on these deals. It'll be a big one and there's no doubt in my mind that this will be at least a $2 billion M&A year for the pest control industry. Depending on what happens between now and the end of the year, it could potentially go to $3 billion. We'll see.
Patrick Baldwin: Every time the phone rings, a pest control operator gets his wings.
Paul Giannamore: Speaking of an interesting year, we had Anticimex that was slated to go public. There was a lot of noise around AX going public in April 2021. They did the deal roadshows in Europe. in March. That slowed down. They had a blockbuster first quarter and wanted to get those numbers in the books. The roadshows were canceled in March. There was an expectation to go public in May. Personally, the business probably won't go public. They'll probably recapitalize the business, maybe EQT will kick it to its subsequent fund and they'll bring in additional outside money, but it won't go public.
Patrick Baldwin: What does that do for all the people who were hoping for this going public?
Paul Giannamore: It's probably a good thing for them. Number one, it gives them a little bit more execution certainty as a recap so there's not a lockup period like there is if you go public so they're not locked up for six months, for example. Number two, there are certain people in the market that looked at Anticimex as a potential 30 times forward IPO.
I never viewed it that way. I always viewed it as something in the low twenties consistent with Rentokil and what Terminix is trading. These recaps tend to get done probably somewhere in the mid-twenties. This deal might get done at 24, 25 times EBITA, which is a good return for a lot of the shareholders and platform presidents around the world that have rolled some equity. This will be a good story for them. That's what was going on with AX.
Patrick Baldwin: Any other news with AX?
Paul Giannamore: Anticimex North America has a new president Brian Alexson. Congratulations, Brian. Mikael Vinje has decided to resign and head back to Scandinavia. He's going to end up in Norway. Michael came here in 2017. He’s based in New Jersey and ran AX North America. He'll be returning against Peter, who took over from Mike Rogers down there at Killingsworth. He swayed him to leave the United States. Big news.
Patrick Baldwin: I hear that Americans continue to grow. They continue to do acquisitions. Turner is of course growing. We saw it last with Kyle Varona how they picked up Fahey. Are those two businesses expanding geographically?
Paul Giannamore: From my perspective, clearly all the AX portfolio companies are extremely acquisitive. I'm not sure what they'll do from a geographic perspective. It's interesting because American and Killingsworth don't necessarily overlap. In my mind, there are a lot of reasons why Anticimex, over time, might want to merge some of those brands. If you take a look at a company Certus, they have disparate brands around the country. Over time, they'll end up having maybe 2 or 3 brands. AX will probably do the same thing. At some point, maybe an American will join Killingsworth or Killingsworth will join Turner. Maybe JP McHale and Viking will merge. That seems to be an evolution here.
Patrick Baldwin: So far, I've heard you talk about Rollins, Anticimex, and Certus. Is there any news worth sharing on Rentokil or Terminix?
Paul Giannamore: On the Terminix front, I was with those guys. They finally come back into the market after a hiatus. They did $36 million in total acquisition spend in 2020 and they sold off the brand’s business. They now have some capital to invest strategically. We now see Terminix back out into the market. They have been relatively selective in the acquisition candidates that they've focused on. We'll see a ramp up from Terminix here in the coming months. Likely, they’ll get back to where they were traditionally in regard to acquisition spend vis-à-vis their peers.
As far as Rentokil, they have been relatively quiet in 2021. Rentokil tends to ramp up in the second half. They are active. They've been looking at a lot of businesses. Rentokil has the opportunity to be particularly selective. They've done a lot of deals in North America and Europe over the last few years. They can go after the companies that they view as premium assets or fill a specific hole in their network. That’s what's going on in the M&A front here with regard to the acquirers.
Patrick Baldwin: Supernova is going to be specific to the United States of these acquirers, or maybe there are others out there. For international, is there anything newsworthy?
Paul Giannamore: Not particularly. As per usual, about 30% of our transactions are global so we're spending a lot of time. In the summer of 2021, I have to go to about 6 or 7 different countries for pest control M&A deals. For the most part, you're right, Supernova is US-centric. We're doing it by region. I know we've had a lot of folks overseas ask to be a part of it. It’s like, “I'm overseas. What region should I view because, to me, it's all the same? Should I be in New York? Should I be in Florida?” We are going to do a Supernova by continent at some point. I am not making any promises right now but I know that's been on the agenda over here. We’re doing one for Latin America, one for Europe, and one for Asia.
Patrick Baldwin: It sounds like I should help do some travel.
Paul Giannamore: Perhaps.
Patrick Baldwin: Paul, I'm sure you hear it all the time, especially in a year where you’re doing a lot of deals. I don't know when they start asking this but what do I do with my money after I sell XYZ Pest?
Paul Giannamore: When I think about the pest control industry and individuals who have exited over the years, I do a lot of different things. You've got this segment of sellers who get back into the industry. They sell. Sometimes they live out a five-year non-compete, do something entirely different and other times they say, “I'm going to move. I'll go to a different state. I'll sell in DC and I moved to Florida. I'll either buy a business or start a business.” That happens quite often. You've grown a pest control business, you've sold it, you understand the industry. It makes a lot of sense to do that. You learned a lot of hard lessons that you can now shortcut your development so that makes sense.
There are other folks that depending on if they're in retirement age or they're not going to be actively involved in any commercial business, they've focused on investing in equities so on and so forth. Over the last few years, it amazes me how I have seen though, realistically, the level of sophistication of certain sellers who are thinking through, “I've sold my business at the height of the market. Now I've taken a lot of chips off the table.” All these guys in their 40s and 50s exit these businesses. What do you do with that money?
Some guys sit back and say, “I'm going to get involved in private placements, for example.” It’s going out and doing private investments in public equity around the world. If you’re an accredited investor, there are opportunities to go in. I'm involved in a private placement right now. It's an energy business where the stocks trade net is about $5 a share and we're able to buy in at $1 a share plus get some warrants.
It's on the OTC now and it's going to go public in the fall of 2021. Investing like that is an opportunity where you can end up with a 30 or 40 bagger. You could put in $100,000 and walk away with $3 million or 4 million from an event like that or you could lose everything. Some of these things are risky. I've seen a lot of guys get involved in a specific private placement. I've seen guys invest in various different private equity firms.
In 2019, we did a deal where one of the private equity firms that backed the sellers turned around and took the proceeds from the sale and got heavily involved in private equity. It’s like Tony Sfreddo. He'll go out and start a Porta Potti business and a lot of these guys like to do consulting. For the most part, there are good opportunities. We had a client that sold and reinvested that money into metals, oil, and all that stuff is up 60%. He made a substantial killing.
There are opportunities out there but as a business owner, you're not necessarily thinking about capital allocation and how you invest it. There is a learning process to this but there are a lot of guys that have gone out to be extremely successful and have made far more money investing the proceeds from their sale of the business and they did even in pest control. It's one of those situations where there's not a lot of upside from an appreciation perspective going forward. There's a lot of downside potential. Even Schiff said it, exiting the business, taking that cash, and redeploying it into markets and assets that have some greater upside. We're starting to see that rotation.
Our client base tends to be pretty damn sophisticated. I like to be an educator. I spent a lot of time with our clients, connecting them to offshore protection guys and a whole spectrum of different providers. We bring in all these sophisticated tax advisers. Our clients tend to be fewer industry guys. I'm the president of the local association and I spend my time pushing paper around in more commercially focused and enriching themselves. I have seen this interesting metamorphosis over the last couple of years where these guys have gotten sophisticated. In fact, I've had some pest control operators, former clients get on the road with me and go to some developing markets and look at stuff. Patrick, it’s interesting times.
Patrick Baldwin: If you're thinking about selling your pest control business, do you start looking at where am I going to invest my time going forward?
Paul Giannamore: The Pest Control industry is a great industry but everyone inside of an industry tends to view it as rosier than it is. Do you ever read the magazines and you'll get comments like, “Private equity discovered pest control because it's the best thing since sliced bread.” At the end of the day, pest control is a small industry globally. It's a $20 billion industry that is tiny in the whole scheme of things. I have seen a lot of people exit pest control companies, redeploy that cash elsewhere, and make far more money than they did in pest control.
For example, you've got Aaron Allred. He sold his stake in Pointe Pest Control and started a business called Acima. He sold that to Rent-A-Center for $1.5 billion and he owns most of that stock. He went from a small pest control operator to being a billionaire and that took place over the last couple of years.
Another client of mine, I'm not going to mention his name, sold a business in New Jersey some years ago. He left the United States and invested heavily into online sports betting. He's made far more money doing that than in pest control. I'm talking about guys that had $5 million to $10 million pest control businesses, exited that, and went out. Now they're playing in the $10 million, $50 million, $100 million, $200 million range. In Allred’s case, in the $1 billion range.
Pest control businesses, as we all know, grow inch by inch so it takes a lot of resources to grow. They're capital-light. It's a great and stable business that you're fortunate enough to grow a pest control business to $5 million in revenue. Let's say you've got great margins, you've got a great management team, you effectively never need to work again. You can collect this cashflow and you've got an asset that at some point you're going to be able to sell.
It's difficult to scale a pest control business without tapping into outside capital, whether it be mezzanine financing, sub-debt, or outside equity. It's also becoming more and more of a crowded space. In 2021, we saw a small private equity firm enter the business. We've already got EQT through Anticimex. We've got Imperial through Certus. I wouldn't be surprised to see another three private equity firms enter pest control in North America in 2021. All looking to build platforms, which will all this year have a positive impact on transaction values.
The question is, there's a lot of stuff that's outside of our control, given the global economy, given the potential for the global debt crisis in the near future, that can dramatically impact valuations. For now, we're effectively set up for almost a blow-off top in this industry, as there's a tremendous amount of capital that gets attracted to a small finite number of acquisition targets. Prices blow up to the top, all the returns are wrung out, and it collapses. That’s the discussion for Supernova. By the way, I originally named it as M&A Supernova Navigating the Late Stages of the Pest Control Consolidation Bubble. We changed it to Boom because I wanted to be precise with my words and we're going to talk about that on Supernova, the distinction between the two.
Patrick Baldwin: I don't know what to think. It's bittersweet. Taking a break here for the summer. I’m going to miss it.
Paul Giannamore: We had a lot of cool guests on here, Patrick. I appreciate you being the fantastic producer of The Boardroom Buzz. At the end of the day, this was your idea and you've put together a fabulous show as far as the guests you've had on here, the quality of the sound, the editing and the music, and everything you've done. It's been outstanding. In my mind, it's probably one of the best sources of information in this industry. I'm looking forward to what you do here in the second season. I am excited to get somewhat of a break from getting dragged into this hot box on a Saturday to film stuff.
Patrick Baldwin: You wanted a break for me.
Paul Giannamore: I needed a break but we’ve got cool stuff coming up. For those of you out there reading, I appreciate you taking this journey with us. I've said multiple times, I never expected to do a podcast, but I've enjoyed it. I've learned from it. I'm looking forward to getting back for season two.
Patrick Baldwin: Season one's been great and I've learned a lot and I've met a lot of great business owners in pest control that have reached out. We get the emails and texts and phone calls and it's building this community.
Paul Giannamore: You get a lot of food. A lot of food gets shipped to Patrick, which is why I have continued to lose weight during COVID. Keep it going, Patrick.
Patrick Baldwin: People ask for our addresses to send us cool stuff and I somehow give them my address twice. They haven't figured it out. Season one has been great. We're looking forward to what's coming up in season two. Paul, if back a year ago before we started The Boardroom Buzz, it's hard to think how things would be different.
This is where we are today. You've opened up your Rolodex. We've met a lot of great guests. I can't even begin to name off the awesome people that have been on here. I've learned a lot. The people that no one else hears from, our readers that have embraced The Boardroom Buzz and feel they're all part of it. Make sure you come back for season two. I know we both get into some travel, we're going to shoot some videos, and do a lot more audio. What do you think? Can I hold you down to a date?
Paul Giannamore: Middle to late July 2021. That's when we'll be back. That’s when we'll do it.
Patrick Baldwin: Let's do this.
Paul Giannamore: Let's do this, Patrick. Enjoy your summer. Happy Fourth of July and we will be back in the middle to late July 2021. Thanks for joining us.
---
This episode has been co-produced, edited, and mixed by Dylan Seals of HDAudioPost.com.
---
Dylan here. I want to remind you right now to go ahead and subscribe to The Boardroom Buzz. We have got some incredible episodes coming up that you're not going to want to miss. Also, if you've enjoyed the podcast, please go to the Apple podcast app and leave us a short review. We'd love to hear from you.
episode 29 – Killingsworth’s Mike & Debbie Rogers Life &Business Advice
Peter Schiff – Past Episode
EQT
Kyle Varona – Past Episode
Certus
Imperial
HDAudioPost.com
Apple – The Boardroom Buzz