Paul Giannamore: Thank you for joining us for M&A Supernova. Patrick, we did nine regional Supernova presentations with a lot of great guests from all the acquirers in the industry. It's been a long one.
Patrick Baldwin: Paul, quick question. Before we get into this, why did we decide to break it into nine different regions?
Paul Giannamore: Number one, M&A and valuation tends to be regional. After all, pest control is a local business. Different acquirers are making different acquisitions in different areas of the country so I wanted to be able to talk specifically to business owners in each region. Almost as important though is I wanted to give each acquire an opportunity to spend some time with our guests.
Having individuals from Rollins, Rentokil, Certus, Anticimex, and Terminix would have been an all-day affair. In order to break it up, we gave each acquirer a different region. We had some great guests. In this episode, we heard from Andrew Klein and Jay Brown from Terminix on our New England session. What you guys are about to hear about is the primary presentation, which is similar across all regions and then you're going to get some highlights, effectively the best from each of our guests.
Patrick Baldwin: Paul, I learned a lot this week being part of Supernova. I appreciate you making time to do this. Without further ado, let's jump into Supernova.
Paul Giannamore: Let's do this, Patrick.
Mike Rogers: I had a conversation with a company down in Atlanta and I could pick it up from him thinking that this is as good as it gets right here where I'm at. My business is doing good. It's growing crazy. This is as good as it gets. I got news for you. It's not as good because he called me wanting my opinion, how I liked where I'm at now and I told him, “Do you know what I like best?” I said, “I like not knowing what day it is.”
I was an ole country boy. I graduated high school and that’s it. We didn't know anything about business, labor, or HR. None of that stuff. We knew none of that stuff. We just had done what we'd done our whole life but we had never been in business. We’ll figure it out. We started in ’93. Debbie’s Office was in the laundry room, and we bought it in ’07. We headed up our sales for eleven years and we grew the hell out of it and sold it in 2018.
Mat Rogers: There were definitely a couple of weeks where we were like, “What is happening to our lives right now?” We thought we were on this path but now we're going on this different path. The realization does settle in on you that this thing that they built out of our laundry room is their thing. It's the thing that they built. Once I started to sit back and evaluate the things that this business was taking away from dad versus giving to him once it got so big, then I did start to question whether the path that we thought we were on was the right path.
Mike Rogers: The bugs, the trucks, the chemicals, and the customers are easy. It's the employees by far, that's the hardest part. Not having that headache to deal with every day and wondering which one of those bombs are going to explode. We had 165 vehicles on the road traveling 60,000 miles a week, that's two and a half clips around the earth every week, the odds were monstrous that we were going to have some kind of disaster. With all that in mind, I came back here and I said, “It's time for us to sell.”
Mat Rogers: This transition that he was about to make could set him up for a bright future that has no worries because that's ultimately what everybody's working for. What are we working for if we're not trying to get to a place where we are unencumbered with life?
Mike Rogers: I enjoyed going to my garage every day and playing with the cars. I enjoy that a lot.
Mat Rogers: It's almost like I’m meeting somebody new because in my adult life I only knew this dad and so I am meeting someone who is brand new. He's unencumbered, relaxed, and down for an adventure. He's got all this free time. He wants to talk on the phone and there's nothing to talk about. All that stuff is the good stuff that you don't know that you're missing on the flip side.
Mike Rogers: PCT sponsored a webinar. There are these guys. I can't remember their names and I'm sure they're good guys but I asked the question I said, “Do the advertising that you do and the reputation that you've built with your brand have anything to do with the valuation of your company?” The first answer out of their mouths was, “Heck, no. That doesn’t have anything to do with it. It's all based on numbers.” Paul sends me a private message and he goes, “That's BS. It has a ton to do with your brand.” I looked at Debbie and I said, “That's our guy right there. Anybody that understands that nuance of the business, that's who we want.”
Mat Rogers: Honestly, what dad has now is what people work for. It's hard in that last moment when you're ready to make that transition to finally let this thing go, that you've poured yourself into.
Mike Rogers: Debbie and I will lay down at night and think about what a great life we have. I don't know what could be better.
Debbie Rogers: I want our kids and our grandkids to always see us working together but I don't ever want them to forget how we started. Reach for your goals. Don't accept a job. Don't accept a paycheck. I'd rather see you do something where there's no limit. Paul would be good from day one. Start asking questions. He's full of guidance.
Mike Rogers: The good thing about Paul is, he’s a guy that knows what the acquirers are looking for and knows what they want to see. You want to be around somebody that you can learn from. I always tell our people, everybody in our company, “If you ever walk into a room and you think you're the smartest person there, then you’re in the wrong room.”
Mike Rogers: Folks, I'd like for you to put all your assumptions aside because you made a great decision by attending this meeting. You're about to meet a person that I consider a dear friend. Any big decision that I'm going to make I'm going to bounce it off of him because I value his opinion greatly. Put your assumptions aside right now and know that you made a great decision by being here. Let me introduce you to Paul Giannamore
Paul Giannamore: I made the comment on a call one day a couple of months ago. 2021 is an M&A Supernova. This will be the biggest year on record. I can tell by the pipeline that it’s right. 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. There's no doubt in my mind that this will be at least a $2 billion M&A year. We're effectively set up for a blow-off top in this industry. There's a tremendous amount of capital that gets attracted to a small finite number of acquisition targets. Prices blow up to the top and all the returns are wrung out and then it collapses.
Paul Giannamore: Welcome to M&A Supernova. Patrick, this is our last of nine live sessions. I'm super excited to be here. This is the New England session and we have some great guests today to talk about pest control M&A and all sorts of other stuff. Since I'm fantastic at pointing out the blatantly obvious, my first piece of advice is to not do presentations all day, drink water, and forget to go to the bathroom before you go live. That's number one.
Number two, Patrick Baldwin is my co-host on the Boardroom Buzz and there's no guy in this industry that's more generous with his time and more sincere about helping business owners improve their businesses. He convinced me to do the Boardroom Buzz which I was hesitant to do but it was the middle of COVID and I thought, “What the hell?” Whether you spend all afternoon with my wife, I might as well go talk to Patrick and a bunch of pest control guys. I came out, we did The Buzz, and it's been a joy and we've had some great guests. We've got Andrew Klein on here, formerly of Assured Environments now part of Terminix. I'm excited to get him on The Buzz at some point as well. Patrick, you're giving me a summer break, aren’t you?
Patrick Baldwin: You get a few weeks and I still have not relinquished control of your schedule because here we are nine Supernova presentations. We can do some traveling and get on the road. It changes the show up a little bit and keeps you busy.
Paul Giannamore: When we come back in the middle to late July 2021 depending on who knows when the hell we'll be back but it'll be by mid-July 2021. It's going to be somewhat of a different show. We're going to do some cool stuff with it so I'm super excited about that. I want to start this presentation. This is the nicest one we've done so I've learned things as we've gone on. I made some mistakes and one of the mistakes that I made is we've got a lot. There are almost 1,000 people that show up for this thing, and not everyone knows who we are. Who are we? We're an M&A and valuation firm. That's all we do and our main focus for the last couple of years has been the structural pest control industry. We do this around the world.
I moved from Switzerland to Puerto Rico but we do this in Europe, Asia, the Middle East, Latin America, and North America. I’ve done billions of dollars in M&A transactions in the pest control space over the years. As all of you know, it has been particularly busy as valuations have continued to increase. In the last couple of months, we've done over $300 million in transaction volume. One of the things we're going to talk about, and before we get the party started, is where the market is going in 2022.
My only claim to fame here and the only reason why you should listen to me is I probably do more M&A transactions in the pest control space than anyone. We'll do more deals in one month than a lot of other advisors do in a year. That's because we focus on this. This is all we do, valuation and M&A in pest control.
When you look at the acquisitions found historically, you'll quickly realize that 99% of acquisition dollars in the United States in the pest control industry are spent by a small handful of companies. You've got Terminix, Rentokil, Rollins, and Anticimex. You've got some other companies, some newcomers like Certus, a private equity-backed business. It might have started a few years ago. We've got Arrow Exterminators down in Georgia owned by Joe Thomas and Massey Services in Orlando as regional acquirer.
For the most part, most of the money has been dropped by the big players Terminix, Anticimex, Rollins, and Rentokil. In a quick cursory glance of acquisition spent over the last few years, 2017 was a pretty decent year. We don't have 2016 data up there but you can take a look at it. In 2017, all the acquirers were active. Terminix didn't do a whole lot of spend in 2017 but in 2018, we saw a ramp-up. More money is being spent. Acquisition multiples continue to increase.
2019 was a blowout year, somewhat skewed by the Clark Acquisition but at the end of the day, that's the zenith. I truly believed that 2020 would have been the largest year on record but COVID derailed that. Here we are in 2021. We'll do at least $2 billion globally in pest control acquisition spend, depending upon what happens in the second half of 2021 we might be looking at $3 billion-plus so it will be a big year.
We're going to talk about valuations in pest control but whenever you operate in an industry, a lot of folks tend to focus on what's going on in the industry and be somewhat sometimes oblivious to what goes on in the outside world. When I think about valuations, first of all, I’m focused on the global macro environment. What's going on globally with asset prices? Unless you've been living in a cave for the last few years, you realize that the world has gotten to be a far more interesting place for a lot of reasons.
On the financial side, since 1971, when the United States disassociated itself with gold, Nixon closed the gold window, the financial system has become more and more unstable. The US Central Bank, the Federal Reserve have continued to try to suppress the business cycle, smooth out the business cycle, and keep everyone from feeling the pain of recessions. This made the whole system far more unstable.
Over the last 40 plus years, we've had dramatic suppression of interest rates through financial repression from the central banks. More acutely in the last couple of years since the global financial crisis, all of this monetary stimulus by governments around the world has propped up asset prices across the globe, but more acutely here in the United States.
After the financial crisis, the goal was to create a wealth effect? We had a bust. We went into the Great Recession, as it was called, and the government wanted to stimulate spending so they increased the prices of assets artificially in order to make people feel wealthy. Unfortunately, they didn't cause people to spend, but they certainly did inflate asset prices to the highest we've ever seen in history. Here in the United States, asset prices, publicly-traded equities have now eclipsed the 1929 run-up to the Great Depression, blew past the dot-com bust and here we have it.
On this chart right now, you'll see the S&P 500, which is a broad-based US equity index. It's a descriptive index and a meaningful index. In fact, fund manager performance is based on this index. Equity risk premiums, so on and so forth, utilize this particular index. This is a price over revenue so a revenue multiple index. Throughout this presentation, we're going to talk a lot about transaction multiples but we have to keep in mind that multiples don't drive deals, particularly sales.
Revenue doesn't drive deals. It’s cashflow and it’s the growth rate for your cash flow. That's what drives valuations but what we see in this chart is the S&P 500 index is trading at north of three times revenue. This is interesting for a variety of reasons. First off, it's the highest it's been in history so it's a ridiculous multiple.
This index, for example, includes companies like Rollins, the parent company of Orkin, some of the largest companies in the United States. It's interesting that not only is it trading at an all-time high, but it's also interesting that people look around the pest control industry for private market transactions. A lot of these companies are selling for premiums to where the S&P 500 is. When you look around and you hear, “This guy got two times revenue.” “This guy got three times revenue.” “This guy got three and a 3.5 times revenue,” at some point, some of these small, privately held pest control companies are getting valuations that are higher than some of the largest publicly-traded companies on the planet.
If that doesn't strike you as particularly interesting, I don't know what does. One of my favorite charts is looking at Rollins. When you spend a lot of time doing valuation work that I do, especially when you're focused on the pest control industry, you start to look for bellwethers, important indices, and indicators that provide some guidance as to where valuations are and where they're going. There's not a better one in the pest control industry to look at than Rollins.
Rollins, again, is a parent company of Orkin. It's been a publicly-traded company for decades. All other publicly traded pest control companies and non-publicly traded pest control companies aspire to get a Rollins valuation. Rollins is a stable business. It's largely owned by the Rollins family, who even today still owns 56% of the company's equity. It's got a small public float. It is a business that consistently kicks off a dividend and it trades like a bond, a bond pays a coupon, on a monthly, quarterly, or annual basis. Rollins pays out a quarterly dividend and the markets trade it like a bond.
If you look at this chart, you've got over twenty years of Rollins revenue multiple so Rollins price in the publicly traded markets divided by its revenue. One of the first things that should catch your eyes on the left-hand side of the chart in that box, you'll notice that Rollins has traded historically from a 1 to 2 times revenue perspective. Back in the day, 2003, “Jim, what's your pest control company worth?” “It’s worth dollar for dollar.” That's where that comes from.
A company like Rollins was trading at 1 to 2 times revenue and even if they got aggressive, it was rare for a company to pay more than dollar for dollar or 5 to 6, 7 times EBITDA back in those days. Those gray boxes on the screen are also interesting because they mark out the Federal Reserve's quantitative easing program. I know we're talking about pest control valuation today but it's again, it's hard when you look around the global macro environment to see what these federal banks have done. This direct and violent intervention in capital markets where the Federal Reserve and quantitative easing effectively went out and increased the money supply and how they did that is simple.
The US government runs a deficit, the US Treasury issues Treasury Bonds and T-Bills and the Federal Reserve goes out into the open market through open market operations and buys interest-bearing treasury securities. When it buys those securities, it is effectively taking interest-bearing security out of the market, a T-Bond out of the hands of the investing public out of the hands of commercial banks out of the hands of institutions and it's replacing that interest-bearing bond with base money. Base money has no coupon. It's got no interest and it’s dead, or they call it dead money and it becomes a hot potato. When institutions that are focused on getting yield, need to get yield, they can't do it by holding base money so they have to take that base money and go out and try to get yield with it.
What that effectively has done is bid up the prices of assets that are more risky than T-Bills and T-Bonds are the benchmark US securities. They're considered riskless. They’re risk-free debt instruments in the world. By replacing that with base money, that base money has flown into the equity markets. We're going to get to quantitative easing a little bit later in the presentation. Before we do that, for those of you who saw any of the presentations we did during the COVID time period in 2020, we drew this beautiful chart which tells a lot. It's one that I've used a few times already because there's a tremendous amount of information on this slide.
There are three main things you're looking at. The light blue line is the S&P 500 Index on a revenue multiple basis. The dark blue line is the Potomac Pest Control Index. There's nothing particularly interesting about that index. There's nothing magical about it. What it is, is Rollins, Rentokil, Terminix, and Ecolab on a weighted basis. We weighed it ourselves internally and we ran it as an index. You'll be able to see how the publicly traded companies trade vis-à-vis the S&P 500.
At the bottom of this chart, you'll see a blue shape. What that is, the scatterplot of 280 for private market transactions going back more than twenty years, it certainly doesn't have every deal on it. There are all sorts of outliers but for the most part, using the 80/20 principle here gets a good illustration of where private pest control transactions have been priced on a price-to-sales basis.
I want to talk a little bit about this chart for a second here. After the dot-com boom and bust, the Federal Reserve lowered interest rates in order to stimulate economic activity. That took place in 2000 and then we saw a little bit of a bump in the equity markets. We have the unfortunate 9/11 attacks on the United States. After those terrorist attacks, as we all know, commercial activity came to a screeching halt in the Federal Reserve now double down on suppressing interest rates to the lowest point they had been, the nominal rates at least historically.
Capital began to flow into the equity markets but what took place in the early 2000s is with the dot-com bust in recent memory, investors are constantly rotating capital in and out of segments and in and out of markets. In the early 2000s, we saw a dramatic amount of capital rotate out of equity markets and into the building trades in homes, residential real estate, building materials, base money in a variety of different commodities used in the manufacturing of homes. We were off to the races on what became the great housing boom and bust.
Housing was interesting. Anytime there's a big bust in an economy when you look back historically, and you can look back hundreds of years, you look at the South Sea Bubble, Tulip Mania, Argentina, and a lot of different case studies. Whenever there's a boom and bust, capital typically is scared money and is attracted to things that are viewed as most riskless or least risky.
Housing in the United States was a super resilient and low-risk investment. Housing prices never went down was the thought process until a tremendous amount of capital went into mortgage-backed securities and the housing industry. Back then you didn't need a job. All you need to do is own a house. Houses were appreciating for $100,000 a year. You can sit around playing video games and everyone gets rich but we all know what happened. The Fed blew another bubble and it exploded. It turned into the Great Recession and capital fled. The markets deflated and a lot of paper wealth was lost.
2008 is when we started quantitative easing, and on that chart, what is interesting is when you look at the quantitative easing periods that began in ’08, ’09, ’10 and ‘11, we started to see money looking for a safe place to go. One of the sectors that were viewed as resilient was pest control, trading like a bond and you could see how the pest control index dramatically outpaces the S&P 500. That's what we call a spread premium between the pest control index and the S&P 500.
In a lot of ways, folks, the valuations that we see in the private market are derivative from the public market. If Rollins were trading at one times revenue, I guarantee you, you wouldn't be hearing any details from your buddies at the bar that they sold their business for 2x or 2.5x, or whatever that they sold it for. That would not happen.
The Federal Reserve has given us owners of financial assets, a gift at the expense of savers and many other people in society. Wage-earners haven't gotten a whole lot of wage inflation but they've certainly blown a big bubble in equity markets. With a new regime in Washington, DC, we've got AOC and Bernie Sanders effectively writing fiscal policy. We've got Janet Yellen at the head of the Treasury.
There's somewhat of a new social contract in America where there's wealth inequality, even though it was the government that created it in the first place. Now it's time to expropriate some of that wealth through confiscatory taxation, which is what we're hearing from the Biden administration, in addition to doubling down on a tremendous amount of spending.
Before I get off on a tangent, let's take a look back at the private market transactions. Around 2001, Rollins bought PCO Services of Canada, it was a $25 million deal and they spent $25 million for it so that was real smugly in the days of dollar for dollar and it was a decent-sized business. By the end of 2005, Rentokil was doing $25 million a year as a North American business for a lot of years, for decades, in fact.
Finally, Alan Brown came on at Rentokil and decided to ramp up pest control in North America. They bought JC Ehrlich, an eastern PA, based out of Redding. It was a large transaction for the industry that at the time and quite frankly, a large purchase price but in retrospect, relatively mild. They spent 1.1 times revenue for that business.
Deep in the heart of the financial crisis, Clarke Keenan and company sold Waltham Services to Rollins, an $18 million business around a $22 million purchase price relatively subdued, deep in the heart of the financial crisis where the markets were in a doldrum and you can see in that private market spread there was a very narrow spread between the top and bottom of what companies were like, “This is it. We're paying at one times revenue, whether you're extremely profitable, not profitable, growing, not grown, it doesn't matter. If you want to do a deal, here's a few bucks.”
Western was acquired by Rentokil out on the West Coast. Western, a business that has been around since 1913, owns target specialty. Rentokil got a steal on that business but that was about the time in September 2012 that we first started to see acquisition multiples begin to ramp up. Andy Ransom had come on at Rentokil as a CEO in the UK and decided to allocate the portfolio away from hygiene and textiles to general pest. As we can see by the pest control index, Rollins and other pest control companies began to trade at a premium to the S&P 500. It was time to go pure pest for Rentokil.
One of the interesting transactions of 2015 was Rentokil’s acquisition of Steritech for 2.8 times revenue and I don't even know what EBITDA multiple. I don't even remember what that was. It was the high twenties. That was a transaction that was certainly talked about quite a bit and that was about 6 or 7 months prior to Anticimex entering the United States. If you look at the chart, the shape there, you'll see that was the beginning. In my mind, this started it all. This was a dramatic ramp-up and increased competition amongst the large strategic acquirers for US pest control assets.
As we continue to move forward in the industry here by 2017, we start seeing three times revenue deals. By early ‘18, we started seeing 35, 36. By ‘19, we started to see that it was a deal that we did. It was a $200 million deal we did in September of 2019. It was a $200 million transaction. If you folks were at our Unhinge presentation, you recall that I said in February 2021, that 2021 was going to be the year of the scarce asset, which would effectively drive up transaction multiples. By February 2021, all we had to do was look at the tremendous amount of debt that the US government was taking on, the ridiculous monetary policy in the increased competition among the strategic acquirers and here we have it.
I'm going to qualify something quickly. When I show these multiples here, this doesn't mean if you want a $2 million pest control business, you're going to go out and sell it for $8 million or $9 million tomorrow. I'm not saying that but for the most part, what we're talking about is a high end of the range here for scarce and premium assets.
Whether you've got a business that's going to be sold as an asset deal or stock deal that makes a big difference. These are not blanket statements but this is an overview of what the high end of the market looks like. Even though deals get done at 3.5 times revenue, I can point at the same time deals that are getting done at one times revenue. There's a widespread in the market as to what deals are getting done at.
Going back to Rollins, I'm not going to go to too many more charts here but here's one that I find particularly interesting when we talked about financial repression and the suppression of interest rates over the last 40-plus years. We've seen the ten-year treasury which is the benchmark US sovereign rate. Corporate debt and equity risk premium are tied to it. It is the most important interest rate in the United States. Over the last 40-plus years, that number has continued to go down and down. On the left access, we have Rollins. That's the darker line. The green line is the ten-year US Treasury.
Rollins and pest control companies tend to trade inversely to interest rates. They trade similarly to a bond or at least they have historically, at some point here. Given what's going on in the market that is going to break down and that will probably break down relatively soon. When you look at this chart, look all the way to the far right-hand side, you'll be able to see that in February, March, and April of 2021, there was a backup in yield.
The ten-year yield has increased and Rollins rolled over even though Rollins had reported some pretty great quarters the stock has traded sideways and the trading multiple has continued to decrease. That is part of the rotation from growth stocks to value. Rollins and pest control is more of a growth stock given that it's a GDP plus business. Capital tends to rush into pest control stocks as growth plays just as much as defensive players but they tend to trade closer to my mind to some growth stocks, at least historically.
One of the big themes for this presentation and the main reason why I did this is, we've had this run-up for many years in transaction multiples and pest control as well as overall. At some point, the party is coming to an end. It has lasted a lot longer than I thought it was going to last but I'm starting to see some substantial changes in the market that lead me to believe that we're late in this acquisition boom. A concern for all of us is the tremendous amount of debt the US government's taken on. This is a 100-year view of the US deficit. We've got a budget and a current account deficit so we've got twin deficits. We've got a debt to GDP of 130%, which is substantially higher than it's been anytime since World War II.
Unfortunately, the US is a far less productive country than it was in World War II. Clearly, we've unfortunately shipped all of our manufacturing overseas and hollowed out our productive base. Now we've taken on a tremendous amount of debt to the extent that the US Federal Reserve now needs to monetize debt. Foreigners have been net sellers’ Treasury assets since the fourth quarter of 2013.
As you can see by this chart here, the US Federal Reserve Bank is now a bigger purchaser and it owns more US Treasury debt than foreigners. I know a lot of folks talk about the US dollar as the reserve currency. The US dollar is only the reserve currency because the US Treasury is the reserve asset. The US dollar is a reserve currency derivative of the fact that the US Treasury is the reserve asset.
It was like 30, 40, 50, 60, 70 or so years ago when the US dollar was the reserve currency. When you had the Bretton Woods system it was the reserve currency because it was tied to gold and the US Treasury has replaced gold. The problem that we have right now is the Federal Reserve's buying treasuries and effectively converting that into non-interest-bearing base money and we're monetizing the debt and we're starting to see the inflation in the market.
That will have a dramatic impact on risk assets going forward but the first most important thing for you to know from this presentation is we are at the highest point, we have been from a valuation perspective in pest control. It will continue to ramp up in 2021. All of the government fiscal spending in monetary policy is extremely bullish for risk assets but we're coming towards the end here. We're coming to risky times based on what we're seeing.
If we talk a little bit about corporate debt, although the value of a business is the present value of a stream of cashflows, interest rates shouldn't have any bearing on valuation. At the end of the day, when you buy a business you're buying its future cashflow. When central banks are able to manipulate the money supply.
We now live in a world where interest rates on corporate debt are the lowest they've ever been in history, where companies like Rentokil used to borrow at 5.25% more than ten years ago, and now can go out and borrow at 50 basis points or one half of 1%. It's having a dramatic impact on not only creating zombie large publicly traded companies. It’s also allowing companies and private equity firms to effectively do levered carry trades by going out and buying pest control businesses.
Courtesy of the US, doubling down on helicopter money to pay people to sit around, play, stick around and play video games all day instead of work, payment protection programs, all sorts of government spending, the Federal Reserve dramatically increased its balance sheet. They’re buying mortgage-backed securities and corporate debt. We now have corporate debt in the United States $11.2 trillion which is half of the US economy continues to be bullish for risk assets, but at some point, it will begin to slow down and this brings me to one of Patrick's favorite parts of any presentation, which is a case study. Like a genie, can I summon Patrick?
Patrick Baldwin: I’m like a kid in a candy shop. You say case study and there’s supposed to be confetti coming down.
Paul Giannamore: Patrick, let's get our case study on to try to bring a little bit of this to light. We've got Project Beetle. This is an actual transaction. In my early years, I was a Bulge Bracket Investment banker. What does that mean? That means when I graduated from Cornell, I didn't know what the hell I wanted to do. Back in those days, it was the late ‘90s. They were taking nerds from schools.
You could have worked in the Taco Bell drive-thru window and an investment bank would suck you up and put you in New York, London, or San Francisco. I started working in Bulge Bracket Investment Banking and tech banking out in the West Coast, Silicon Valley, taking businesses public all day long. I did that for some years and went into private equity. We got out and we started Potomac.
We did that in 2003 and at that point in time, we were a generalist firm experimenting. We were effectively disposing of the American capital portfolio of companies and I stumbled upon pest control. This is one of my early deals. This one closed in 2006. Patrick, because I'm an old man and can't see that screen, what revenue and EBITDA were Project Beetle doing in 2006.
Patrick Baldwin: Topline, gross revenue, $3.4 million, and some change, adjusted EBITDA away down there to $800,000
Paul Giannamore: Here I am bright-eyed and bushy-tailed. This is maybe my 3rd or 4th pest control deal. It was a small one. We took this bad boy out to market. What do we have? We got no bidders. We've got Rollins, and we've got Terminix. It’s a duopoly. Rentokil had acquired JC Ehrlich but they weren't buying anything. No private equity firm wanted anything to do with that control. Wind Point had already blown up. Wind Point was a PE shop out of Chicago that came out and bought Wilson, that thing had blown up in the ‘90s and now all of a sudden, here we are with Terminix.
I don't even remember who else maybe looked at this. Patrick, we ran a process and we got the price up super high and I was proud of what we sold this $3.4 million business for. This was a tough and multi-month process negotiation. Walking away, slamming stuff down at the table and what did we get for it? $3.7 million. We sold our $3.4 million business growing top and bottom line, with low double-digit growth rates. 82% recurring revenue, a great business for $3.7 million but Patrick, this chart was for you, and tell me what it means.
Patrick Baldwin: If you take a business you sold in the past and how valuations have changed over time, you talked about inflated asset prices, not in pest control. You sold in the past and you sold it in the future. What would that look like?
Paul Giannamore: This is somewhat of a thought experiment. By using past transaction statistics, we imputed what Project Beetle would have sold for at different points in time. We did not sell the business 5 or 6 times. In 2004, it would have sold for $3.5 million. Everyone's getting rich flipping houses. No one wants to buy pest control. It sells for $3.7 million. Had we sold it in the heart of the financial crisis, we would have sold it for $3.3 million.
Fast forward to the month of June 2021, we're probably looking at $10 million to $11 million for this Sea Coast business. It’s a quality business growing at the right speed and that's likely where we would end up. That demonstrates the asset price inflation in this industry as well as other industries. The number two thing that you should take away from this presentation is that the market over the long term tends to get everything right but over the short-term markets can dramatically mispriced assets. We're seeing dramatic mispricing of assets in pest control and other assets.
Let's take GameStop, Patrick. Was GameStop adequately priced or was it appropriately priced when it was trading at $400 a share? No, it was not. Is Bitcoin adequately priced at $40,000 a coin? Who the hell knows? We've got this speculative frenzy. Central banks are creating money. It's ultimately going to turn into a big headache for everyone at the gas pump as this inflation continues but this is what the hell we're looking at. A lot of asset price inflation and mispricing of assets. We could talk about valuation, which is what I love to talk about but Patrick, unfortunately, you have other discussions and those are generally related to what?
Patrick Baldwin: Uncle Sam and tax
Paul Giannamore: Uncle Sam doesn't spend as much time in Texas as he does in DC so you don't worry about the state. You don't worry about those folks or those cowboys in Austin. You worry about the Redcoats in DC, so to speak. If you were to take Project Beetle and sell that bad boy at 20% Capital Gains Tax, you’d roughly walk away with $8.7 million assuming a debt-free cash-free balance sheet.
Everyone I know on the Buzz I see the questions that get sent in. They're not all about, “How is Paul so handsome and charming?” A lot of them have to do with taxes. We've brought Cory Vargo from Wipfli, the nineteenth largest accounting firm in the country. What these guys have effectively done is they have taken the most boring people on the planet, put them together and these guys are all figuring out taxes. We brought Cory, as a tax expert on The Buzz, and he said this was in September of 2020, “Taxes will probably go up but it's not going to be retroactive. It's not going to happen in 2020.”
We're in 2021. We've got Biden here. He loves to blow everyone else's money. It's always easy for everyone to get on TV and say, “Rich need to pay their fair share. Let's spend some money. Let's steal it from somebody else and pay for it.” No one likes to pay it out of their own pocket but it's always great to get other folks to pay it. At some point, capital gains taxes will go up because we've got to pay for this masterful cluster that we're creating now. Will it happen in 2021? I don't know. Will it happen in 2022? I don't know. When you look at valuations and they're at a point right now where if pest control valuations go much higher, we've got a negative forward return.
When acquirers are buying businesses, they're buying businesses to get a return. The return of a business is inversely related to how much you pay for it. If you buy an apartment building and you're getting $1,000 a month for it. If you pay $50,000 for that building, your return is much better than if you pay $100,000. At some point, we get to negative returns and on some of these transactions, we're pretty close to it and that's one of the indicators that I keep in mind as we start to reach the top.
Number two, by the end of 2021, there's going to be 3 or 4 additional private equity firms into this space. What does that mean to me? Private equity always comes to the party late. Do a little bit of research. Look at the consolidation booms. Historically, in private equity, these guys were out drinking, hanging out, and other industries. When they see things blow up, it's time to roll in the pest control and they're here in town and they've been here. They've been sniffing around and we'll see it in 2021.
What happens if we get to 2022? Let's pretend for a second, Patrick, that valuation multiples are the same. Biden gets his wishes. He makes you pay your fair share, you dirty greedy businessman who has not created tens of thousands of jobs for an industry you guys get to pay your fair share. Taxes have doubled now. What do you get? You get shafted $1.7 million to fund some gender studies in Pakistan. Congratulations, you're paying for it.
That's a shitty situation to be in but the worst situation, far worse than that is if let's say taxes didn't change and they're still the same and valuations roll over and begin to revert towards the historical mean. Now you walk away with a measly $3 million. It’s not a good position to be in. Number three, at the end of the day, taxes will be the least of your concern at some point in the future, if you own financial assets and your ownership and a pest control business is a financial asset. I'm tired of hearing myself talk. It's time to bring the venerable Andrew Klein and Mr. Jay Brown from Terminix to grace us with their pleasure and tell us what is going on in the world of big pests.
Andrew Klein: Thank you for having us.
Jay Brown: Thank you.
Patrick Baldwin: I appreciate it. I know visiting with you all getting ready for Supernova, I can tell that you all are authentic and want the best for people, especially as you're doing acquisitions and making sure that they fit in. A question, Jay. Outside of the owners, I have conversations with owners, guys, and girls that are looking to sell the business. At least in heart, they say, “I want to make sure my people are taken care of.” What does that look like as far as opportunities, benefits, and safety? What does that mean after the acquisition? What does it look like for those employees?
Jay Brown: That's probably one of the things that we focus on, to bring in those new teammates and bring them into the fold because they're going through a lot and lots going through their heads. What's it going to mean to us? How's it going to work out for us? What I look at is we'll make sure they get that extra attention. We want to make sure that they understand that they’re part of the family from day one and there are a lot more opportunities.
I can give you examples from a lot of different areas. Even with Andrew's team, we were able to take one of his associates from Assured and we've called them into a management role within one of our Connecticut branches. We're an international company but think of it even across the US the number of opportunities that we can provide to people. Benefit-wise, a lot of times we do see the power of the size of the company and be able to offer a benefit package that is tied to a 401(k) and different benefits that they may not be able to get with their company.
It's how we give them a path to get to the levels that they want to get to. As we were working together and coaching them through their careers, finding out what's making them tick, what opportunities they’re searching for. There are a lot more opportunities that we can offer across the enterprise for someone coming into the company.
Patrick Baldwin: Questions for Terminix. What is it working with Paul on a sale versus listing with a broker versus selling on my own?
Paul Giannamore: That's an interesting one.
Andrew Klein: I know what I know. Paul and his team are experts in this. Do not think that you can toy or sell the most precious asset that you've got as an entrepreneur and a business owner on your own. The value that Paul and his team bring to the equation is immense. I've been on both sides of this equation. I've been on the ownership side selling to a large company like Terminix and now on the other side of the equation as Terminix, a large company wanting to acquire lots of different-sized businesses on the other side. I can tell you that I see the value day in and day out of what groups like Paul's bring to the table. Do not try this on your own.
Paul Giannamore: Jim McHale is one of my favorite clients. Patrick Jim joined us on The Buzz. What episode was it?
Patrick Baldwin: Episode 25.
Paul Giannamore: Jim joined us on episode 25. Jim and his brothers at JP McHale were clients at Potomac for over a decade. We ultimately took that business out to market in 2018 and sold it in 2019 to Anticimex. Jim runs JP McHale, Anticimex’s portfolio company up there in New York, Metro Connecticut. Jim's a busy fellow. Jim and I were both traveling. We wanted to get him online. He's traveling. Patrick, you sat down with Jim and had a few-minute chat with him and we're going to bring that on. I have yet to hear this so I'll be hearing this for the first time. After we speak with Jim, we're going to bring on Paul Bergmann who is in another AX portfolio company at Viking in New Jersey. Let’s go ahead.
Patrick Baldwin: Jim McHale, welcome to Supernova.
Jim McHale: Thanks for having me. Looking forward to meeting with you guys for a long time.
Patrick Baldwin: Jim, you were on The Boardroom Buzz episode 25. Some of this might be an extension of what we heard on that episode but you’re definitely a fan-favorite take us back. You were a longtime client working with Paul and Potomac for over eleven years or so.
Jim McHale: Absolutely. When I first started thinking about transitioning the family business to someone else, a larger entity, I did connect with Paul. I met with him at a Starbucks down in New Jersey. I appreciated the way he approached the situation. We discussed several different possible outcomes, how he looks at things, and through what to what lens. He's a former Cornell graduate as am I so we had an instant connection.
Patrick Baldwin: Fast forward. I'm sure that you will continue this conversation and the relationship with Paul. Was it 2018 when you decided to sell?
Jim McHale: Over the years, we had multiple discussions with different buyers at different times, the big three. AX had come into the market and Paul reached out to me and he disclosed it. He said, “I'm having some deep discussions with the AX Group. I would like you to set up a meeting with Mikael Vinje, the North American regional president.” He connected us and the three of us went to dinner. It was probably January of ’18. From there, we built a relationship and we came to market probably in March. By May 1st, the deal was complete.
Patrick Baldwin: Jim, before joining up the Anticimex, tell me what it was working with Paul leading up to that transaction.
Jim McHale: Working with Paul, in my opinion, was phenomenal. I had two brothers in the business, two partners so when you engage in a process of selling your entity, a family business, a lot of different things are coming into play. There are emotions, money, a new home for your teammates. Decisions come fast and furious. You need somebody to help shepherd this all along and keep the peace between the three partners because, at some point, your interests will diverge. Paul was an integral part of keeping everyone together and moving this thing down to the goal line and ultimately pushing it in with the AX Group.
I want to thank you guys for having me. I dealt with Paul Giannamore and the Potomac group on both sides of the aisle. They are the true pros. The sim and the book that they deliver to prospective sellers and acquirers are professional and clear. It provides a lot of clarity around what's going on in the company and will help maximize the asset that you've worked your whole life for.I thank Paul for his interest in time. I look forward to speaking with anyone who has any thoughts about moving on, joining, or becoming part of something bigger for your employees and better and ultimately, great things for yourself. Thanks again for having me. I appreciate it.
Paul Giannamore: While we've got Paul Bergman here, I want to bring Paul on and do a little chit-chat about New Jersey and PA. Welcome, Paul.
Paul Bergmann: Thanks for having me.
Paul Giannamore: Mr. Bergmann, you and I were busy in the fourth quarter. It was total insanity. Tons of deals got done. We got them all done in the fourth quarter, didn't we?
Paul Bergmann: It was a busy year, for sure.
Paul Giannamore: You are the president of Viking. You formally came from American, isn't that right?
Paul Bergmann: Correct. When American was acquired by Anticimex back in 2016, I was there working with David Billingsley and the Nixon family. A year later, the Viking transaction took place and that presented an opportunity for me, which I'm grateful for. It's a great story to tell. When I'm talking to potential sellers, I'm living proof of what opportunities exist when you sell your business so it's been fun. It's been an adventure. We've helped grow the business tremendously and we're looking forward to continuing to do the same thing for the next couple of years.
Paul Giannamore: Your pest control business right now is being dramatically mispriced by the market. The value of a business is nothing more than the present value of the future cashflow streams. We can blow all the smoke and say all the BS that we want but at the end of the day, you're the acquirer is effectively buying a stream of cashflow going into the future. Irrespective of what interest rates are doing or anything, that stream of cashflow does not change. It's a stream of cashflow growing. The interest rate environment doesn't have an impact on that. It has an impact on investor psychology and where the markets are pricing these things now.
We're in a period where there's dramatic mispricing. We're also seeing at the high end of the market. These deals are getting done with future implied returns in the low single digits. You see valuations go up any higher than this, it doesn't make sense to do the deal. At some point, if you think about this, if you're talking about doing a deal at 15 to 20 times EBITDA, you're better off not buying the company. At some point, it doesn't make sense to do the acquisition so we're effectively beginning to approach this point.
I was on the road and I met with Paul's boss at Anticimex, the Rollins guys, and the Terminix folks. The list goes on. I saw Certus and I sat down to dinner with Mike Givlin. I saw all these guys in one of my first big trips post-COVID and we talked about valuations. More times than at any other point in the last few years have I heard from these guys that it has gotten ridiculous, we are getting more selective, and we are not going to be indiscriminate. We expect at some point for these things to roll over. That's what we're hearing. Paul, any input on that?
Paul Bergmann: This ties into marketing, which is not what this is about but what I do see is when we get to those ridiculous multiples, where people say, “I'm not going to continue to pay these multiples,” you start looking at your marketing dollars and you say, “What can I do with digital marketing at a targeted spend.” One thing that is not reflected in your historical charge is we have the technology now to target and focus on who our ideal client is that we can utilize and for far less money, I can target and build this business organically especially when it comes to the smaller transactions.
I may not go out and organically grow $10 million overnight, which I could do with the transaction but could I grow$500,000, $1 million, $2 million organically by spending a little more money in a particular geographic area? Absolutely. Those are things we're starting to look at because I said we're getting to the top end there. At some point, you guys say, “When is enough enough?” “What other means do we have?” Digital marketing is what we have.
Paul Giannamore: Patrick, now might be a pretty good time to take a quick break and bring Tony and Mike Schmidt on to enlighten us.
Tony Schmidt: Thanks for having us.
Patrick Baldwin: Tony is one of my favorite guys in the pest control industry. I consider him a dear friend. Working with him and his brother Phil was a pleasure. When did that deal close?
Tony Schmidt: October of 2018.
Patrick Baldwin: American bought Triple S in 2018. Mike Schmidt was the M&A guy executing that deal for Anticimex. American bought it and effectively integrated Triple S which was a roughly $8 million, $9 million largely commercial pest control business in the mid-Atlantic with accounts the Pentagon, Department of Defense, and a lot of storied names in the DC area. Tony, you sold in ‘18. Why'd you make the decision back then? You're a young man and I know that that's not hair dye on your hair that is natural.
Tony Schmidt: Unfortunately. My brother met you before I did and we got to know you over a two-year period and during that period, we were growing the business. We were watching what was happening in the industry and some of the acquisition that was occurring and we kept in contact with you. Quite frankly, it was simple. We saw an opportunity that we didn't think would ever come around in our industry. The timing felt right.
A quick story. When you introduced us to the American team and Anticimex, at first, they weren't at the top of our list or my list but once I met with David and other folks at American I soon realized quickly that they were probably the best fit because we shared so many synergies. They made the process so easy and with your help it was the right decision for us. I've been speaking for the last few minutes about the perfect storm. We kept watching a lot of our competitors in the marketplace sell. I'm impressed with what they were selling for so we ventured in with you and you felt a good fit with American.
Paul Giannamore: I have one more question. This is for the two of you, Tony and Mike. One of the questions that we've most received as we've done this presentation and talked to various folks that have been in both of your positions, a lot of people ask, “I want to sell my business. Am I required to stick around? Do I want to stick around?” I always look at it myself personally and say, “How involved in the business? Are you a shareholder? You're not needed. You sell your business and you're out. Sometimes there has to be a transition.”
In my experience, it's often better for sellers to go their own way after a sale because I find it's difficult. If I own a $2 million pest control business and I sell it to any acquirer, there are going to be some changes. Most of those changes tend to be positive, although I might not always view them that way. It becomes difficult sometimes for sellers to stick around. Tony, I know you participated for a short while after the sale but your goal was, “I'm either going to run this business myself, or I'm going to sell it and then I'm going to go do something else.” Could the two of you talk a little bit about how you guys think about that stuff?
Mike Schmidt: I'll go first. It definitely depends on the seller, Paul and it depends on where the business fits in our footprint. We have a guy here named Bernie Cox who sold us a business a couple of years ago who took a job with us and is a great integral part of our organization. You're definitely right that folks who have run a business for a long time tend to have a hard time with that change. For folks who are talented and who enjoy going to work every day and being part of the business, there's definitely room for them in our organization.
Tony Schmidt: For me, I was on the other side of that fence. I've been doing this for over 30 years. We've worked hard growing our business and I stayed for six months. They asked me to stage for a short period of time, which I did and it was beneficial for everyone but it was also the right period of time. It’s because I was there to reassure everyone that what we had done was a good decision and it was going to be good for them. No one was going to experience any major changes that are going to change their lives. I was ready to go.
To Mike's point, I had poured everything into this for more than 30 years. I had my finger on the pulse of everything that was going on in the business and it had gotten to a point where I didn't think that I had the same drive that I had and that was important to me to make sure if I were going to do something I was going to do it to the best of my ability.
I personally felt that I was starting to, for lack of a better word, burnout. Staying for that short period of time to make sure the transition was as smooth as possible was the best option and then leaving thereafter was perfect. David and others at American, if they needed anything, I was always available and we always maintained a good relationship and spoke to one another often.
Patrick Baldwin: Let me throw another question your way. Valuations are at an all-time high. How high can they go? If the bubble bursts, how low will it go, and how soon?
Paul Giannamore: That's an impossible question to answer. I'm of the mindset that it's hard to predict. You just have to be prepared. At the end of the day, these valuations come down to basic math. We're at a point right now and I'd be interested in Mike Schmidt's perspective on this as well but I feel we have gotten to the point where we're starting to price assets now with Ford implied returns in the low single digits in certain cases.
At some point, it doesn't make sense to make the acquisition. Firms and acquirers can redeploy that capital elsewhere. In 2021, more so than at any other time in history, I've started to hear a lot of moaning from the folks high up in these organizations. I was on the road and I met with the Rollins guys, I was with the Anticimex, the Certus guys, Terminix, and all of these different folks and we're starting to talk about where this market has gone and how it's gotten crazy.
At some point, it will begin to roll over. I truly believe that we're at the batshit crazy mental evaluation level where it doesn't make sense for it to go any higher. How low will it go? I don't know. Everything's mean reverting, quite frankly and we'll probably overshoot the median at some point with timing. If I knew that I wouldn't be having this conversation right now. I'd be doing other things. To comment on that, he wishes anything super-low immediately.
Mike Schmidt: I was going to say valuations are creeping down as we speak but, in all seriousness, you have started to see some of that take place in the market. I know that high-quality assets are always going to garner market premiums but not every pest control. When Paul says multiples are at four times not every pest control is going to trade it for. Not every pest control company is going to sell for four times revenue. High-quality assets will continue to garner high valuations into the future. Even if there is a market correction, they will still garner market premiums.
It's your average business that's going to see that change from, trading it 2 maybe even 3times revenue if it's in the right place at the right time to maybe back to that mean reversion of one times revenue. What matters more for an acquirer from a valuation perspective is what we can do with the business after we acquire it. It is our post transaction multiple that matters to us, not necessarily what we pay you for the business but what it is going to look like 12, 24, 36 months from now.
Paul Giannamore: Now's a good time to take a break and bring our colleagues from Anticimex on, unemployed Kyle Varona and barely employed Bill Talon from Turner. Let’s have a chat with these guys. Welcome, gentlemen. Can you talk to us a little bit about Turner's service footprint and your philosophy on growing that business? Bill, at the end of the day, what we want to talk about is we think about the southeast of the United States. We want to talk about what's going on from an M&A perspective down there. What's that market like? What should sellers be thinking about? Why might they want to do a deal with Turner?
Bill Talon: Based out of Jacksonville, Florida, it originated with a builder program where we would provide some termite treatments with the builders. From there, we would use that to help develop value creation and sell other bundled services, if you will, and further increase our portfolios. We've expanded throughout the state, up and down the East Coast and on the West Coast. Now we're experiencing some great growth as we move into Georgia.
This is no different from some of my peers that are in other locations in the southeast leveraging the builder relationships that we have and we think it's a fantastic opportunity. What I love about the Turner team is the fact that there are a lot of great folks on the leadership staff that have the employees as first in mind, which then ultimately takes care of the clients. For us, it's all about making sure that we deliver fantastic financial results is what would be expected of somebody in my position. On top of that, it’s how we make sure that we reinvest into the infrastructure of our team and then ultimately, how do we continue to improve the client experience.
We push that out throughout the entire organization even as we continue to move into geographies that we don't normally have any experience with. As an example, some of the new footprints that we're experiencing in Georgia, which is fantastic. We apply the same type of thought orientation into looking for those acquisitions and once they align with what it is that we're trying to do and we believe that there's a good mutual relationship between the two of us that we take the next steps forward.
Patrick Baldwin: Kyle, if I remember you had a conversation with your parents and said, “Maybe it's time. Maybe it's the year.” You called on Potomac and said, “Let's at least see what's going on in the market.”
Kyle Varona: During the pandemic, I was listening to The Boardroom Buzz and liked the content and the guests that you guys had on it. I enjoyed listening to it. When January came, my dad and I spoke about transitioning and seeing if I could possibly buy the business and in the fashion that he was able to buy the business from his dad. The first step to that I told him, “You need to see what it's worth first.” That's what we did.
Unfortunately, it's worth way more than I could ever afford and I definitely couldn't finance it in the manner he was able to in the ‘90s when he bought it from his dad. We came to an agreement to be fair to my family and my mom and dad and make sure that everyone's taken care of and still loves each other in the end. We decided to move forward with putting the business out to market. From the get-go, we were interested in doing business with Anticimex and Turner because we knew several other companies that had sold to them. They had good experiences and their employees were well taken care of.
There's a tremendous amount of opportunity given to them by partnering with Anticimex and Turner. We felt that that was the best fit for us and if that we could come to an agreement with them and that's who we'd want to move forward with. We were able to do that and it was pretty quick. We engaged with Potomac in January and we sold the business on May 3rd.
Paul Giannamore: Alex, I would argue, is one of the most experienced M&A professionals at any of the largest firms. He's with Rentokil North America. Rentokil is a British firm and they've got a massive operation here in North America. Alex has been around since 2005. He has driven all of the large transactions in North America as well as been involved with us in transactions overseas. He is a wealth of knowledge. It’s great to have you, Alex. Good
Alex Nigh: It’s good to be here, Paul and Patrick. Thanks for having me.
Patrick Baldwin: The first question that comes in is, what is the valuation historical mean? Is it one times revenue or two times revenue?
Paul Giannamore: Alex, I’m going to toss it to you first.
Patrick Baldwin: Put him on the hot seat. Take a drink of water, Alex.
Alex Nigh: You're the macro guy, Paul. Paul's right. We did buy some businesses at certainly $1.5 million or below and that was back in 2006, 2008, even up 2012 when we bought Western. Sometimes there's that point where a business depends on the situation that business is almost so large, who has the money to buy it? There's that issue but Paul laid it out pretty quick. Since 2012, ‘13 we've seen valuations go up dramatically. Do we still buy businesses at that lower level? Yeah. There are some businesses that we don't want to buy at all, at any price.
There are some businesses that are worth one time and there are some businesses that are worth two times, and there are some businesses that are worth more than that. You have to operate in a competitive environment. It's extremely competitive right now. Each buyer and that includes us has to figure out what works for them.
There's a lot for sale right now because of the market. A lot of people are taking advantage of the high valuations right now. Each buyer needs to figure out what means the most to them and that's what we do. We can't go after them all so we make a concentrated effort to go after the ones that mean the most to us.
Patrick Baldwin: Alex, you said there are some businesses that you don't want to buy at all. I'm wondering, is that a threshold of revenue, is that culture, or is that profitability? What puts your brakes on?
Alex Nigh: There's a whole spectrum of quality businesses out there. It doesn't necessarily relate to size. We bought a $300,000 business in Oregon a couple of months back because we were subscale and some of the parts of the area that this business serviced but, for us, we're looking for good people. We're looking for good service. We're looking for good pricing. We like people who are paid well because we want to pay our techs well.
We want people who can come along and save for retirement, buy a house, put their kids through college, and those types of things. Not every business does that. Different people have different approaches or different owners or different large companies have different approaches. In our approach, we're going to provide a premium service and a bit more of a premium price. There are different models out there and those work for those sellers. There could be a buyer for them but at Rentokil, we have to figure out what works for us and fits in with our structure.
Paul Giannamore: On the historical mean question from my perspective, Alex, it was a great overview of what's going on on the private side. For me, from a valuation perspective, I'm always looking at the publicly traded companies out there. When you look at companies Rollins, Rentokil, and Terminix, these S&P 500 style businesses, historically would trade anywhere between 7 and 11 or 12 times EBITDA, which is, 1.2 to 2.2 times revenue or somewhere in that range historically.
I know it's hard to look at stock valuations now and even think about the fact that we're talking about for decades and decades that's where these businesses traded. Pest control in this environment has been re-rated by the public equity markets. What does that mean? That means, instead of being a 7 to 10 times EBITDA business, it is a 15 to 25 times EBITDA business.
Rentokil, Terminix, and these other folks are benefiting from that. At the end of the day, from a historical mean perspective, for a privately held pest control company, it is without a doubt one times revenue, 5 to 6 times EBITDA. That's where it is. Let's bring these two characters from the West Coast. I know I missed the introduction here but I want to be able to give a proper introduction and I'm going to start with David Billingsley. I met David more than five years ago right after he became president of American Pest, which is an Anticimex portfolio company out on the East Coast based in Maryland.
He and I have done a lot of deals together. We have a wonderful relationship, and he's done a great job building American Pest. If I think back, David, we did GreenStar, Triple S, and Innovative together. There are probably others that I'm not even thinking about but we've done a lot of deals over the years. Shane Hoy and I met, correct me if I'm wrong, around 2013. Does that sound right to you?
Shane Hoy: Yeah. 2013 or maybe 2014.
Paul Giannamore: It was a little bit later. That's right. It was 2014, maybe 2015 even. Shane tracked me down one day, and we started talking about pest control valuation. He had a business that he and his brother bought when it was super small and you guys were growing it. Back in those days, you were thinking about potentially selling it.
We did a preliminary evaluation and we maybe had multi-month discussions about your business. Shane, we were in the era of transaction multiples going up on a quarter by quarter basis and you and I had some discussions and said, “Shane, why the hell would you sell this? You've got a great base, you've got a lot you can do with this business. Knuckle down and continue to ride that wave as they go up.”
Shane Hoy: That was one of the things I appreciated about our first conversation or that engagement year, I suppose. If you remember, I had contacted you about trying to sell a piece of our pest control business to generate some cash. You didn't mince words. You said, “That's stupid. We'll do a valuation for you but that's a stupid thing to do, Shane.” You gave me some good reasons as to why that was a stupid decision. We engaged in that way, and then we were able to continue a relationship for a number of years. With you acting as an advisor even though I'm not sure we paid you to do that.
Paul Giannamore: That's true, you did not but you ultimately ended up when the transaction all worked out. Shane is a typical example of the types of individuals I love to work with. Back in 2015, we met. We did a preliminary valuation. We started to have some chats about various strategic alternatives for the business, but Shane and I kept in contact over the years and talked about these things. Sometimes I write commentaries I haven't done at all a lot but every single time I would write and publish one, Shane always had a pithy comment like, “I can't believe you wrote that,” type of thing.
Shane, correct me if I'm wrong, you started to see these valuations increase over time. You and your brother are running this business. You're starting to see some progress. Taking a business from a few million dollars up to where you guys ultimately grew that business is super hard work and it costs a lot of money. You started to look at transaction multiples. It was the end of 2019 when we started. I remember that I was in Stockholm. We started having some discussions. You said, “We’re thinking, what's our next step or they're going to knuckle down.”
I remember having some chats with the guys in Stockholm and they started eyeing the West Coast. I called you up and I said, “Shane, if you're going to do something, you want to be the platform acquisition. You want to be the first entry acquisition by a large company in the market. If you can pull it off, take a meeting with the Anticimex guys and see if you'd like them.” That’s how it went, right?
Shane Hoy: That's exactly how it went. We had PestWorld out here in San Diego in 2019. It was an easy lunch meeting. It was only 30 minutes from home. I sat down with Mikael Vinje and the Anticimex guys and had a good lunch. It felt like we meshed well. It's rare that you sit down with somebody and have a conversation where you feel like you understand one another and we could work together. That worked well for us.
Paul Giannamore: Is it true that I was in Europe at the time of that meeting, but I told the Anticimex guys that you are a dark-complected Korean man?
Shane Hoy: I don’t know if you said Korean. You told them that I was Asian and my last name is Hoy. Mike Schmidt called you right after the meeting and said, “What are you talking about?”
Paul Giannamore: Shane, the plan for you then was you took the opportunity to exit, take some chips off the table, and monetize that asset but in your mind, you are not satisfied with how your business had not reached maturity. You still had a lot. You were like Jim McHale. Jim wanted to sell. He wanted to exit and buy his brothers out. He wanted to take some chips off the table but Jim wanted to triple the size of that business, taking it from $26 million to $75 million. That's your philosophy too. You've got a great team and you want to grow that thing.
Shane Hoy: I want to have my cake and eat it too. It's so rare that you have the opportunity to do that. You nailed it. I would imagine most people who run a pest control business or any business for that matter care about the people who work for you. There may be a limit to how much you care about them in terms of what the value is, but in reality, you do care and you want to see them succeed. It becomes an important part of your identity and who you are in terms of a business owner. That was one of the things that were attractive about Anticimex. It was not only the opportunity for me and my brother, Ben to continue to grow and learn in an organization like this while taking some chips off the table. Also for our team to have this tremendous opportunity to grow and continue to expand their opportunity base.
David Billingsley: Going into 2021, and Paul brought it up in one of the buzzes around how we're almost at the half-year point here. What happened in 2020 was this huge ramp up towards the end and you had quite a few people running for the exits around the election. We're going to be experiencing the same thing here. I'm fortunate enough to have three great teams here, where I had one great team at American, but in the end, as people consider what to do in the second half of the year, as acquirers we only have so much bandwidth to action some of these deals.
If I'm speaking with anybody, I encourage them that if you're thinking about doing these things, you better get towards the front line because in the end, eventually, some folks are going to be left, pushing those deals into 2022. Being here with Shane, the northwest team, and the buyer pest team, we've got some pretty good resources to help us do that.
Paul Giannamore: Matt, thanks for having me here at the Rollins corporate headquarters in Atlanta.
Matt Whiting: Paul, thank you for being here. It's a pleasure to have the Potomac Group in our fantastic broadcast studio.
Paul Giannamore: Matt, what I wanted to talk to you about is the general overview of what Rollins is seeing effectively in the M&A market and some of your strategies going forward? For our audience, Matt Whiting joined Rollins in late 2013. Is that right, Matt?
Matt Whiting: That's correct.
Paul Giannamore: You're the VP of Corporate Development.
Matt Whiting: My primary role is to help our business leaders to identify the companies that will make a difference in their businesses and then compete for them and get them closed.
Paul Giannamore: In 2021, we continue to see public equities trading at an all-time high. We've got suppressed interest rates. Clearly, the consolidation boom is continuing in the pest control industry. That makes it difficult to be a buyer whether you're a Rollins, Terminix or you're an individual going out to buy a business. When you think about 2021 and 2022, given a lot of uncertainty on the horizon, where do you think valuations will be going?
Matt Whiting: We've certainly seen a dramatic increase in acquisition valuations. That has forced us to make sure that we do a good job of planning and understanding on the front end what the core value of that business is so that we can nurture that and make that grow after we've closed. We're at the top but I've been saying we're at the top for a couple of years. Each year, it seems to get a couple of points higher.
With the fundamentals of valuation and the metrics that are provided by Terminix valuation, our valuation, Rentokil’s valuation, and public companies, all three with public data that you can go look at, those valuations function as a cap on the M&A market. We've seen some moderation in the valuation increases that have been out there in the last few years in the market. Prices will be stable for a while. I don't necessarily see a downturn in valuation coming but clearly, from a public market perspective, investors seem to be more interested in investing in electric cars and Dogecoin.
Paul Giannamore: Patrick and I are joined by Mike Givlin who runs a business called Certus and they started. They did their first acquisition out on the west coast so I thought it would be a good opportunity to maybe bring him on to talk about that region for a little bit. After we have a chat with Mike, we'll come back for some Q&A and I have some other thoughts that I wanted to talk about with regard to valuation and transactions. Mr. Givlin?
Mike Givlin: Paul, how are you doing?
Paul Giannamore: Doing well. I finally saw Mike Givlin in person after a long COVID break.
Mike Givlin: It's been a long time since we've seen each other in person, a couple of years.
Paul Giannamore: Mike, thanks for joining us. We're talking about the Northwest. Why don't we start? Let's get a little history on you and let's talk a little bit about service first?
Mike Givlin: Sure. I started in the industry more than 25 years ago at this point. I start with my own business. We did specialty bird control. We didn't hang nets. It was more of complex jobs using scare tactics and that sort of thing. We sold that business in 2007 to Steritech. I joined their executive team and stayed there from 2007 through to 2015 when we were acquired by Rentokil. Rentokil offered me a great job. I liked the people, but it wasn't the right home for me.
I left there and went to Anticimex. I was the first person on the ground here in North America for them. I helped them build that business up over a two-year period and decided it was time to part ways and build my own thing. I left them in June of 2018. I took summer off and hung out with my kids, which was great. I started fundraising for Certus in September of ’18 and closed that out in December of ’18. We made our first two acquisitions back to back on April 30th and May 1st of 2019 and we've been on a good growth trajectory ever since.
We sit about $72 million in topline revenue spread across ten states now. We focus on retaining people and doing the right things for the people that we acquire. Also, being kind of an open and transparent company and working to set ourselves apart from the other acquirers mainly on how we treat our people and our customers.
Patrick Baldwin: What's it like when you're looking for companies to at least start having a conversation with? What are some areas that you see yourself aligning with sellers?
Mike Givlin: A couple of things. Number one is the fact that we don't do synergistic layoffs. If we buy a company with twenty people, we keep the twenty people. We don't do layoffs. It's definitely an area that resonates with a lot of sellers. With our ease of doing business, we've worked hard to have a smooth and easy transaction process that helps with the sellers as well in terms of what we look for in a company. Cultural fit is a huge one. We want to make sure that they're aligned with us on how they want to treat their people and how they want to service their customers and, and all those small little things that become big things when you buy a company and bring them into the service family.
Patrick Baldwin: Are there certain business sizes? Do you have a minimum where you only have the bandwidth to work with certain sized companies, as far as acquisitions?
Mike Givlin: No. We've worked with all sizes from buying a gentleman's route who wanted to retire, who is a one-man show up to millions of dollars in topline revenue. We're kind of open to who's ever interested in selling out the time provided they run a quality business.
Paul Giannamore: Patrick, it's the end of the day. We've run out of time. Maybe I'll give a different message at the end here. Forget the slides. We'll get right down to brass tacks on the closing of Supernova, a summary of all the different sessions. You guys are number nine. We've had a lot of different sessions with a lot of different questions but, at the end of the day, Patrick, here in 2021, we've got transaction multiples at an all-time high. I realized that a lot of people can or can't sell a business.
If you're a young guy and you've got a $2 million business, unless you have an immediate use for those proceeds, it puts you in a hard position to sell. The messages out there for the people that may be a little bit up in years or individuals that have counted on the paper wealth they have in their business. If you look at your business, and you say, “I've got $30 million in value here,” until you monetize it, it's on paper. When you look back from a historical perspective, that $30 million might be $10 million.
At some point, we're going to hit that point again and I feel it's getting closer and closer. I spent the week on the road talking to senior executives at all the various different pest control players. We've done a lot of interviews on Supernova and we've talked to a lot of the guys that are heavily involved in the acquisition programs there as well as the executives.
At no other point in time in recent history, at least during the run-up of this period have I heard from those folks that this is long in the tooth that at some point, we're not going to pay these prices anymore. This is becoming a louder and louder message from the acquirers. I'm hearing a lot about why am I paying X amount for this acquisition target when I could redeploy that capital into sales, marketing, advertising infrastructure, and get a better return.
In a low-interest-rate environment, it incentivizes companies to buy back shares and distribute dividends as opposed to making a capital investment in their business. Making acquisitions is something they're rewarded for instantaneously in the publicly traded markets but at some point, when prices get high enough for too high, those rewards tend to disappear. That is my main theme in this entire presentation.
We are at a height right now. There's no reason to rush out to the door if you're growing your business but if you're at that stage in life where you think, “I can't afford to not have these sorts of valuations,” then it's something that you need to think about. Patrick, I know you have some questions. We'll get you back on here. What questions do you have at the end as you're doing this throughout the whole thing?
Patrick Baldwin: Paul, you've been my advisor for more than ten years. For the sake of repetition, you say things over and over and they finally click. I've heard it in The Boardroom Buzz but I listened to the podcast over and over because I have to. It finally sinks in. With Supernova, now going through this nine times, it's finally starting to click. I'm hearing you.
I'm glad we're going to be putting this together and making this available for those that weren't able to make it. I know in the past that you've talked about Jim McHale, Shane Hoy, APM, “We want to sell.” You said, “Not yet.” I know, especially with Jim being extremely competitive and wanting to sell at an all-time high. What's different?
Paul Giannamore: Over the course of the last few years, we've seen this run-up in transaction multiples. Patrick, I know you're getting close to Jim McHale. He's a fantastic guy. You chat with him often ever since he's been on The Buzz. He's a prime example. We worked with him for more than ten years and Jim wanted us out the height of the market but we weren't there yet. As we talked about on The Buzz episode, for a couple of years, I told Jim, “Relax. Calm down. Continue to grow your business valuation multiples and continue to increase.”
Shane Hoy, which was Anticimex platform acquisition Pro Pacific out on the West Coast, engaged us back in 2015. Shane wanted to sell part of his business and I said, “Are you an idiot? You’ve got a great business here. Grow it. Transaction values and multiples are going up.” 2021 is the first time ever since I entered pest control where I'm telling everyone that if you are close to selling, now is realistically the time to do it. Could valuations run longer? Sure. Clearly, if I knew the answer to that, then I wouldn't be having this discussion with you right now. I would be off on a yacht somewhere because I would have had a crystal ball. We do see a lot of signs of being late stage.
Patrick, when about telling people to move if it's in the cards for them in the near term and now being the time to do it, I'm talking about the year ‘21. If I'm talking about more acutely the time pressure within the year 2021, one of the things that I learned in 2020 is something that I never expected to observe in pest control. COVID pushed deals off from March through September for the most part so there were a lot of deals queued up. What was going to be a big M&A year they all got pushed off because of COVID.
By the time we got to the end of the year, we had to get all the deals that had been pushed off, and then new people came to the market but there wasn't capacity. These large acquirers have substantial financial wherewithal. They've got collectively billions of dollars in cash to spend. The problem is, there's only a small handful of deal professionals, integration professionals, HR people, attorneys at these firms to execute these deals and deals take time. They've got to be in the queue and in diligence periods.
In 2020, we ran out of time, we did twelve transactions in the final quarter of the year. If you think about that for our firm, that was an immense amount of transactions. We were on 5 or 6 of Rentokil’s eight transactions at the end of 2020 and it got to a point in time where I heard things from acquirers around August or September, which was, “Potomac, do you have any more deals? They’re going to the back of the bus now. They're going to 2021. There's no way we can do it anymore. That's it. We've already shut the books.”
This is going to be a busy year with the threat of taxes, which is what concerns the majority of the industry. For me, it's more of a valuation issue but for many of your colleagues out there, it's all about taxes. We're going to see a rush to the exits. We are seeing pipelines now that are three times larger than they were this time last year. If you are going to do something this year, don't wait until the end of the year.
Don't wait until August or September, which would be typical for owners that wait until the end of the season to get out to the market. You need to make a decision right now. Am I selling in 2021? If I'm not, that's great. Push it aside and do some long-term planning. If you're going to attempt to sell in 2021, you've come to a fork in the road. Are you going to engage an advisor or are you going to do it on your own? Either way, make that decision and get moving on whatever choice that you make. Patrick, to answer your question, I have sounded the alarm more than I have ever historically based on what we're seeing here in the market.
Patrick Baldwin: It's true. I can vouch for it. You've said it over and over.
Paul Giannamore: More than ten years.
Patrick Baldwin: I know that it takes more than Potomac in your team to get a transaction across the finish line. We had Mike Stanczyk on The Boardroom Buzz twice. We had Cory Vargo twice, his own episode and with Doug Stevenson. You bring in other resources. Can you tell us more about that?
Paul Giannamore: Absolutely. One of the things that we do here at Potomac is because we focus on valuation in M&A and we don't do anything else, we need to bring in experts to assist our clients in maximizing their after-tax proceeds. Taxes are a big portion of a transaction. Because we are not tax specialists, we don't go out and hire CPAs or regular accountants. We go out and we find tax advisers and that's all they do.
As we talked about Cory Vargo, earlier in the process, Cory is a guy that we've done hundreds and hundreds of millions of dollars of transactions. We, Potomac, pay Wipfli, the accounting firm to bring Cory in and he's been involved in Jimmy McHale, Modern, Triple S, Innovative, and Suburban up in New York and the list goes on. We also have been dealing with a company called BKD which is based out of Patrick's neck of the woods or at least their pest control practice. BKD is one of the largest accounting firms in the United States. It’s the twelfth largest firm.
In a transaction, the Fahey! transaction, we brought BKD, not only from a tax perspective but a historical tax perspective to look at some corporate returns. BKD does not only get involved in tax, and we still use Cory all the time, but BKD also has a pest control practice that they've dramatically ramped up. Not only do they do general accounting and bookkeeping, but they get involved in audit, wealth management, and a variety of other services that only the twelfth largest accounting firm in the country could do. Further, they get involved in a variety of data analytics, a lot of stuff that companies like Anticimex now are using Microsoft Power BI to analyze customers, and other market data so they've been a phenomenal resource. If you're looking for an accounting system or an accountant, I can't recommend them enough.
Patrick Baldwin: We made it Paul. Nine sessions in Supernova, nine regions. You set aside a whole week to do this and to share what you're seeing from what's happening outside. Sometimes we can't see the forest or the trees. We love the industry. I am concerned about what valuations are doing within the industry. You're bringing this outside vision and what's going on so I appreciate you making time to share it with us.
Paul Giannamore: Absolutely. Maybe it's time to mention one more thing about folks out there. If you work with Potomac, we have made a move to bring people down to Puerto Rico. COVID shut things down. We've got our main office that covers North America out of PR. Patrick, you've done down here. This is our main office. We are now conducting DD. Now that everything's open up, we've got acquirers coming down here to conduct due diligence. We, Potomac, fly our clients down on our dime.
If you want to get away from the office, if you want to conduct diligence far away from any of your employees, we’ll bring you down here. Even if you don't want to do DD, we'll bring you down for a meeting. We had the Fahey closing. Kyle and his wife, Hilary, were down here. We’ve had a half dozen people down here for two months and we look forward to seeing you down here in PR.
Patrick Baldwin: I almost forgot. I apologize. I forgot how Franco likes to steal that camera spotlight. I do want to thank everyone for joining us for Supernova. Thanks again, Paul, for doing this for us. To continue the conversation with Paul and his team, I want you to go to PotomacPestControl.com/connect. Thanks, everyone. Have a great one.
Paul Giannamore: Thank you for joining us and thank you Dylan Seals, Eric, and Patrick, for a wonderful production. Have a great weekend everyone.
Cory– Past Episode
Episode 25 – EP 25 - Anticimex Acquisition Bellweather JP McHale Pest CEO Jim McHale
Doug Stevenson – Past Episode
Microsoft Power BI