The move is just one in a series of recent fast-paced changes in the composition of the hvacr market.
Financial details
The opening price of $18.75 per share is expected to net out at $141.4 million, to be used to repay a portion of its debt and finance the acquisitions of its own dealers, more than 50 of whom (and almost all Canadian) have been rolled up by the company.Purchase price for this dealer roll-up was approximately $74 million. Nine more Canadian dealers and 11 U.S. dealers have also agreed to be acquired for about $79 million, the company said.
Of the shares being offered, 8,088,490 are being sold by Lennox and 411,510 are being sold by certain selling shareholders. Following the offering, Lennox will have approximately 44.7 million shares outstanding. The company has granted the underwriters of the offering an option exercisable within 30 days to purchase up to an additional 1,275,000 shares to cover over-allotments.
The move to Wall Street will not substantially change the nature of Lennox, the company said. According to its prospectus, about 110 descendants or others related to founder D.W. Norris will collectively represent more than 70% of the shares of stock, enabling them to control the destiny of the company and elect all board members.
The company comes off a strong sales performance in 1998, at $1.8 billion, a 26% gain over 1997 sales.
The prospectus offers an extended look at the company’s manufacturing and marketing activities, as well as its financial status and a rationale for buying up many of its dealers. This is part of its entry into an innovative “retail distribution,” which will permit enhanced control, pricing, and profits.
The move is also being closely watched by the company’s competitors.
Different path
Lennox, which has an estimated 10% of the equipment market, is unique in that its brand has always moved in one-step distribution through company-owned wholesalers to independent dealers.Another of its brands, the Armstrong line, moves through two-step distribution; that is, through independent distributors, the conventional mode for other manufacturers.
Going public ends the company’s private status, and is another link in the chain of its decade-long strategic plan undertaken by ceo John Norris Jr. that has taken it to the $1.8 billion level.
Within the past decade, the company purchased Maytag’s Magic Chef Division, renaming it Armstrong Air Conditioning. It also bought the Refrigeration Products Division from SnyderGeneral Corp. Now the company is acquiring the hvac products of The Ducane Company for $45 million.
In addition, within the past year the company acquired Superior Fireplace Co. and Security Chimneys International, Ltd., for an aggregate price of about $120 million. This has taken it into the $150 million hearth products industry, which gave Lennox $68.6 million in sales last year.
Overseas acquisitions in Australia, South America, and Europe have added to sales volume in the refrigeration sector and put its international sales at $350 million.
This diversification has broadened the company’s products, including 13% of its sales in the commercial refrigeration sector and 9% in the heat transfer sector. Its heat transfer coil line has taken it into the oem and replacement markets.
The company cited several developments that are transforming the hvacr business, especially those taking place in the residential and light commercial contracting sector, as background for its decision to go public.
Consolidators a factor
The national consolidation of contractors, whose aggregate sales now exceed $3 billion, is one reason. These publicly traded consolidators have acquired scores of Lennox dealers in the past three years.“We face the risk that dealers owned by consolidators and independent dealers may discontinue using our heating and air conditioning products because we are, and will be, in competition with them,” the prospectus says.
The consolidator trend may also result in “future price reductions.” Last year, Lennox said it sold about $50 million worth of products to the consolidators, nearly 3% of its net sales.
Another factor cited by Lennox is the aggressive move by utilities into the nonregulated contracting sector. In market after market, gas and electric utilities have acquired hundreds of contractors.
Under its year-old “retail distribution” method, the Lennox brand is now moving through both its company-owned dealers and independents. The challenge is to keep independent Lennox dealers happy.
These independents have been offered an “associate dealer” program, which offers retirement, discounts on advertising materials, and other benefits. In return, they agree that at least 75% of their equipment purchases will be Lennox and must grant the company the right of first refusal to acquire their businesses. About 1,200 of its estimated 6,000 dealers have signed onto the program.
The company plans to promote cross-selling of its Armstrong products as a second line to its Lennox dealers, as well as cross-selling its hearth products to these dealers.
In addition, it plans to extend its geographic market for the Armstrong line from its traditional presence in the Northeast and Central regions, to the southern and western regions of the United States.
