The deal also raises deep questions about brand loyalty, fair treatment of two categories of Lennox’s dealers, and — more significantly — the unprecedented notion of Lennox buying $120 million worth of competitive equipment to stock its 120 Service Experts outlets.
While the equipment manufacturers have a history of private arrangements — private labeling, intramural supplying of components like compressors and heat exchangers — the high-stakes Lennox move will change the very texture of the manufacturing and contracting sectors.
Many questions arise about the intensely competitive hvac manufacturing business.
1. Will the competitive “preferred vendor” brands now moving through Service Experts — Amana, Carrier, and Trane — force their independent distributors to walk away from those big sales volumes, sacrificing income in the name of control?
2. Will the handful of other branded oem’s be tempted to sell to Lennox to gain market share?
3. If the competitors decide to deal with Lennox, will they (and their distributors) be able to work out the 1,001 customer-related details like sponsoring service seminars, dispensing co-op advertising dollars, handling warranty claims, and working out other intimate, back-of-the-room negotiations?
Consider the competitors’ dilemma: delivering sensitive information on pricing, product development, credit terms, callback patterns, production schedules, and other confidential things to a company that is selling against them.
4. Will competitors try to pry loose Lennox’s independent dealers?
5. Will Lennox ultimately wean these newly bought Service Experts dealers away from competitive brands to its own brand?
How's feasible?
And beyond the intramural world of manufacturers, the deal also raises questions about the long-term feasibility of contractor consolidations, which began three years ago, and threatened to give the contracting sector a nervous breakdown.Contractor consolidation, in which the new business goes on Wall Street, sells stock in its company and raises tens of millions of dollars to roll up other independent contractors. It is just over three years old.
It was part of the fundamental change in this business, and it had a profound, psychological effect on the nation’s contractors.
For the first time ever, they had four well-heeled buyers who offered a cash-and-equity buyout. At last an exit strategy was available to contractors, or an option to stay on in corporate management.
On the downside, contractors feared having to compete with billion dollar companies that could outgun them in customer service, advertising, employee benefits, and discounted equipment sales. In all, more than 500 once-independent contractors were rolled up.
Utility buyouts
Consolidation also stimulated gas and electric utilities around the country to buy up independent contractors, and spawned a variety of other alliances.Several hundred contractors of all sizes, from small residential firms to large mechanical contractors, have sold out to (or bought into) the utilities’ migration into their businesses.
Three years after going public, two of the four big consolidated firms have found buyers, first American Residential Services, now Service Experts, leaving in their wake many former owners disillusioned as they watched the value of their equity shrivel.
The pattern of both of these consolidators was an initial public offering in the $14 range, a quick surge, then a gradual dwindle into single digits.
Assuming the transaction gets regulatory approval in June, only two of the original four publicly traded consolidated contractors will be standing. Although their stock prices have also lost their initial surge, both Comfort Systems USA and GroupMAC have made impressive sales gains, taking them to the $1 billion-plus level.
They, too, have made alliances with large utilities, national accounts, energy service companies, and real estate investment trusts.
