[Cover Story] It's A Horse Race

In the past three years the pest control industry experienced a relative lull in major acquisition activity, but PCOs, distributors, manufacturers and others are abuzz with the news that Rollins Inc., the parent of Orkin Pest Control – the nation’s second largest pest control firm – will be purchasing Western Pest Services – the nation’s eighth largest company.

When the acquisition is finalized later this month, it will be the largest the industry has seen since 2001, when ServiceMaster (parent company of Terminix International) purchased both Allied Bruce Terminix Companies – at the time the fourth largest pest control firm in America – and Sears Termite & Pest Control, the nation’s No. 3 pest control company.

The deal, which is Orkin’s largest acquisition ever, has numerous implications for the industry, most notably an increased Orkin presence in certain mid-Atlantic states where the company has had a lower profile, and an immediate position in the East Coast fumigation business, where Western Pest Services has a solid reputation for providing a variety of fumigation services (i.e., food processing, commodities, storage facilities, etc.). At the same time, when the transaction is finalized later this month, it will effectively mark the end of the Sameth family’s 76-year involvement in the pest control industry – including company founder J.E. Sameth, who passed away in 2002, and second-generation siblings Bob Sameth, president; Dick Sameth, vice president; and Jeanne Burke, corporate secretary.

THE MAKING OF A DEAL. In a move that surprised some – but not all – in the pest control industry, Rollins Inc. announced on March 8 it intended to purchase Parsippany, N.J.-based Western Industries Inc. and its affiliates for $105-$110 million in cash. In making the announcement, Orkin President and COO Glen Rollins said, "We are financing this purchase almost entirely from our cash at hand. We will incur very little debt from this transaction." In addition, Rollins said the purchase will "not extinguish our appetite for teaming up with great companies and buying companies that have great reputations and similar values to us."

Included in the sale are Western Pest Services, Western Fumigation and the company’s highly regarded distribution arm, Residex Corporation (see related story on page 38). The transaction is expected to close in the second quarter, subject to Hart-Scott-Rodino approval and other conditions.

In 2003, Western Pest Services had revenues estimated at $72 million, not including Residex’s contributions to the company’s bottom line. The company has more than 130,000 customers from New York to Virginia with additional operations in Georgia and Florida. Atlanta-based Orkin Pest Control’s revenues came in at $677 million in 2003, second only to Terminix International, which boasts annual revenues of approximately $950 million. The two companies (Orkin and Terminix) represent approximately 30% of the pest control market.

Rollins said he feels Orkin is already "very strong in Virginia and Maryland." But in other areas that Western has offices, including parts of New Jersey, Pennsylvania and New York, the company could have a larger market presence. "We have a very strong business in Maine and parts of New England. But generally speaking in Boston, the New England area, New Jersey and Pennsylvania we are not nearly as strong as Western and so we are very, very pleased to be teaming up with them," Rollins said.

While enhanced operating efficiencies are a natural by-product of the merger and acquisition process, Orkin officials said they don’t anticipate closing any Western or Orkin offices in the wake of the purchase. Both companies are growing and heading into the busy season, according to Rollins, meaning current staffing levels will be necessary to meet customer demand. "We’re happy to be able to offer opportunities to all people that meet the screening (process)," he said.

If recent major Orkin acquisitions are any indication, the transition should be relatively seamless. Orkin’s most recent major acquisition was the 1999 purchase of Canadian giant PCO Services Inc., a Toronto-based company that recorded revenues of approximately $25 million in its final fiscal year before the acquisition. Following the purchase, the company was renamed PCO Services Orkin.

Dr. Dale Blaine, a technical specialist for PCO Services, said the company had little trouble transitioning to PCO Services Orkin. Blaine said that prior to the sale, Orkin had very little presence in Canada, whereas PCO Services was a well-known entity – having served Canada for more than 50 years – so there were very few overlapping territories.

"We still operate sort of semi-independently, so there really wasn’t much difference for all the people at the field level. They are still doing exactly what they were doing," Blaine said. "Probably the biggest difference was at the higher level where you have people up here, like human resources and accounting, now reporting to the people in Atlanta."

In the aforementioned acquisition, Orkin retained the PCO Services brand while gradually incorporating the familiar Orkin "diamond" into the company’s logo, promotional materials, uniforms and equipment. For example, when a technician’s shirt or service vehicle needed to be replaced, he or she would receive a shirt or service vehicle featuring the new logo.

A similar scenario is expected at Western Pest Services. "They’ve earned a terrific name and a terrific reputation in their markets, so we would be foolish to walk away from that," Rollins said. "We do anticipate that at some time we will have something blended like ‘Western, a division of Orkin,’ but those decisions will be made from a business perspective, not an ego perspective."

Although a final decision about the name change is still pending, the company’s new management structure is already in place. Tom Walters, Western’s general manager, will remain in New Jersey and report directly to Glen Rollins in Georgia, while Chris Donaghy, general manager of Residex, will report to Walters. "Other reporting structures will remain intact," Rollins said, so no major structural changes are anticipated in the new organization.

OTHER QUESTIONS. The Western acquisition is of interest to so many in the pest control industry not only because of the size and scope of the business, but because of the company’s longtime affiliation with Copesan Services and its involvement in product distribution through Residex Corporation, with estimated sales of approximately $30 million (see related story above).

Western is a longtime member of Copesan Services, an alliance of regional pest management companies united to provide pest control services to businesses throughout North America. Several prominent members of Copesan include Sprague Pest Solutions, Tacoma, Wash.; Western Exterminator Co., Anaheim, Calif.; Waltham Services, Waltham, Mass.; Presto-X-Company, Omaha, Neb.; and J.C. Ehrlich, Reading, Pa.

"As a founding member of Copesan in 1958, the Sameths, and the many great people at Western, have been an integral part of our organization. The friendships that were developed through their involvement in Copesan will remain life-long," said Alfie Treleven, president of Sprague Pest Solutions and Copesan’s chairman.

So what happens to the $5 million in business that Western had as part of Copesan?

"Due to redundant service capability by other Copesan stockholder partners in much of Western’s service territory, our ability to transfer our accounts to other service centers will be mostly administrative," said Mark Campbell, Copesan vice president of national accounts. "We already have a transition plan in progress for our accounts that Western was servicing. Our clients will be placed in the capable hands of the local service centers of our regional partners that will be assuming the service responsibilities for these accounts."

It seems to many that J.C. Ehrlich, whose headquarters is about 100 miles away from Western’s headquarters in Parsippany, N.J., would assume much of the work Western leaves behind. Not only are the companies close geographically, they’re similar in other ways – both are family owned, both were founded in 1928 and both are actively involved in the National Pest Management Association.

"Fortunately, Copesan’s basic structure will make this transition reasonably smooth. Copesan has what are known as primary service partners, and in most areas there are back-up service partners. J.C. Ehrlich was the back-up service partner in much of Western’s mid-Atlantic geography," said Victor Hammel, president of J.C. Ehrlich. "So, yes, we anticipate stepping in to take responsibility for Copesan customers in those areas."

While industry observers agree J.C. Ehrlich has the most to gain from the sale of Western, the Rollins purchase changes the competitive landscape throughout the mid-Atlantic region, providing market opportunities for a number of companies in the area. Like other Copesan partners, J.C. Ehrlich and Western Pest Services had an unstated understanding "not to tread on one another’s turf," according to one industry consultant familiar with both organizations. "They would spar on the edges of their territory," he said, "but not aggressively go after one another’s business. Now the gloves will be off."

Therefore, expect Orkin to take the necessary steps to protect its investment. "I would expect that the buy agreement would have incentives to keep the company’s key people in place," said Gary Curl, president of Specialty Products Consultants, Mendham, N.J. "Otherwise, they’re going to have good people picked up by their competitors." In addition, he said, "You will have some people who will decide this is the time to start their own business," resulting in an influx of new businesses throughout the region, a fairly common occurrence following major acquisitions.

INDUSTRY REACTION. Regardless of how the "mega-merger" ultimately shakes out, there was universal praise for Western Pest Services and the Sameth family’s contributions to the industry shortly after the deal was announced, even from Orkin’s major competitors. "Western Pest Services has long been associated with quality, professionalism and integrity," observed Norm Goldenberg, senior vice president, government/public affairs and technical services, Terminix International, Memphis, Tenn.

"The Sameth family for years and years have been great leaders in the industry, not only in the areas in which they operate, but throughout the United States through their involvement in the National Pest Management Association. We wish both Orkin and Bob and Dick Sameth well in their future endeavors," he said.

Bill Kolbe, who spent 29 years with Western, most recently as technical services manager and corporate staff entomologist, says that in the long run the acquisition will be a positive for Western employees. "My brother John Kolbe has worked for 22 years as a technician for Orkin. He loves the company and the people he works with," Kolbe said. "The Sameths built a successful company by taking care of their customers and their employees. Once the dust settles, people will realize that (the Sameths) have taken care of the people at Western by selling to Orkin."

"I have always had great respect for Western," added J.C. Ehrlich’s Victor Hammel. "They employed many top-notch people and their culture was similar to J.C. Ehrlich’s. As a significant and quality competitor to J.C. Ehrlich, they helped make us a better company. I will miss Western and the Sameths as a valuable and independent force in our industry." As will, no doubt, the entire pest control industry.

The authors are Internet editor, editor and publisher of PCT magazine, respectively. Additional coverage of the Orkin acquisition of Western Pest Services appears on the publication’s Web site, www.pctonline.com.

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Chris Donaghy Signs Letter Of Intent To Purchase Residex

ATLANTA — Chris Donaghy, general manager of Residex Corp., announced  he has signed a letter of intent to acquire the Residex business from Rollins, Inc. with the financial backing of some of the independent members of Speckoz, Inc.

In a statement posted on the Residex Web site , Donaghy said “the independent Speckoz members and myself will own the company, with the likelihood of a May 1, 2004 closing date, which will coincide with the Rollins Inc. and Western Industries Inc. transaction.”

The future of Residex was in limbo  following the March 8th announcement that Rollins Inc. — parent of Orkin Pest Control — will be purchasing Western Industries Inc. Residex was Western’s distributor arm.

“I think it’s good news for Speckoz, good news for Residex, and I know it’s good news for the industry,” said Pat Callahan, president of Speckoz, Atlanta, Ga. “It is a credit to the solidarity of Speckoz members that they were able to come up with the capital to support one of their own.”

Tom Forshaw, president of Forshaw Distribution — a Speckoz member company — said there will be “a lot of room for expansion” for the company since Residex will no longer be affiliated with a pest control firm, prompting PCOs who may have been reticent to do business with a competitor to take a second look at Residex’s product and service offerings.

“There were many pest management companies that would not buy from Residex as they viewed it supporting a competitor,” observed Phil Cooper, president of Cooper Pest Control, Lawrenceville, N.J. “With no ties to a firm active in the delivery of pest management services comes a host of market opportunities that I am sure Chris and his team will seize.

“I am pleased to see Chris lead a group to acquire Residex,” Cooper added. “It is important to continue to have diversified suppliers in the industry and a better person could not be leading the charge. Chris has shown himself to be an industry leader and advocate for the pest management industry,” a sentiment expressed by others upon learning of the announcement.

“Residex, like our other industry suppliers, has always played an integral role in supporting and promoting our association events,” said Leonard Douglen, executive director of the New Jersey Pest Management Association. “I am personally glad that they will remain independent and home-based here in New Jersey and that we can continue to rely on them as a valuable resource.”

“Bowco Laboratories Termite and Pest Control has been dealing with Residex for the past 55 years,” added Vice-President Barry Bowers. “We have been dealing personally with Chris for the past eight years. In those years he has been nothing but a professional in the way he has treated us.”

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