We have received a lot of calls and emails over the last few days regarding Rollins’ acquisition of HomeTeam Pest Defense, including, do “Do you have a copy of the purchase agreement?” I’ve included in this week’s report the most commonly asked questions and answers.
1. Was this an asset or a stock deal?
It was indeed an asset purchase. In fact, you can find a copy of the final asset purchase agreement between Centex and Rollins here.
2. What purchase price multiples did Rollins pay for the business?
I know discussing purchase price multiples excites a lot of you, however, the multiples that Rollins paid for HomeTeam or Western are not really too meaningful when looking at your own business, which is most likely 10 to 20 times smaller than either of these two pest control companies. However, with that said, very soon we will publish the financial statements and transaction statistic so that you can get a better look at how Rollins structured the deal.
3. Was there a holdback or contingent pay portion?
No, other than a standard escrow (indemnity escrow) in the amount of $3 million.
Why not? You grow your business this big and you won’t have to worry about a holdback either.
4. Do you think that Centex did its shareholders a disservice by not running a controlled auction process on the sale?
No. While I do think that a controlled auction process is important and can be very beneficial to pest control companies doing as little as $2 million in sales, in this situation, however, the extra $5 or $10 million that Centex could most likely have fetched in a more formal sell-side process might not have been worth it to them. I do think that Centex probably could have gotten more for the business, but in the end, management made a decision to get the deal done quickly and get the cash in the bank.
Remember, if you own an $8 million pest control company and you can get an extra $1 million or so for it from a competitive controlled auction, it’s probably well worth it. But an extra $10 million for an organization the size of Centex, which has been bleeding red ink in recent years due to the demise of the residential real estate market, getting a “good price quickly” was probably the way to go.
5. Why didn’t they sell to a private equity firm?
I tell every pest control owner that they shouldn’t sell until they’ve gotten some bids from private equity. If I owned a pest control company, I most likely would not sell without doing so. I think a lot of private equity firms are in a much better position to pay than some of the strategic acquirers; however, private equity firms tend to take a little longer than strategics in closing transactions due a general lack of industry knowledge… though that’s changing quickly.
Being the #3 pest control company, Centex focused on the #1 and #2, Terminix and Orkin. If Centex didn’t need the cash, they probably would have run a process and I think it’s very likely that Rollins wouldn’t have been the ultimate buyer here. In my opinion, if Centex didn’t need the cash so badly, it wouldn’t have sold HomeTeam at all.
6. Do you think that this was a smart move for Orkin?
Yes, I do. The same day that Rollins entered into this asset purchase agreement, Centex sold a real estate portfolio with an estimated original cost basis of $935 million for $161 million. You read that correctly, it sold a portfolio that it had paid almost $1 billion for at 17 cents on the dollar. The next time you look to acquire a pest control company, do as Rollins did and find the guy who is selling his car and personal assets for 17 cents on the dollar. Rollins was in a great position here and I think that the situation saved it a few bucks.
While this acquisition should be initially dilutive to Rollins’ earnings per share, I think that it nicely fills in some holes in their footprint and should allow them to penetrate deeper into the new homes market by eliminating the “A Centex Company” logo which caused some problems for HomeTeam when trying to win business from other builders.