[Market Watch] Who Are Those Guys?

There’s a classic scene in the Oscar-winning film “Butch Cassidy and the Sundance Kid” where the two notorious, yet charming outlaws played by Paul Newman and Robert Redford — after being relentlessly pursued across the West by a posse from the Pinkerton Detective Agency — turn to one another and say, “Who are those guys?” It’s a question many in the pest control industry are asking themselves after learning that Sunair Electronics, a low-profile publicly traded company based in Fort Lauderdale, Fla., with business ties to the U.S. military, had entered into an agreement with Royal Palm Capital Partners in November to invest $15 million in Sunair in exchange for millions of newly issued common shares.

Proceeds from the investment will be used to form a Pest Control Services Division, expanding Sunair’s operations outside of its existing lines of business, and laying the groundwork for a new round of acquisitions activity in the pest control industry. If the investment group exercises all of its warrants, its total investment, including the initial investment in Sunair, would be $54 million. In addition, the investment group — led by a former business associate of billionaire H. Wayne Huizenga — will have an option to invest up to an additional $10 million in Sunair.

KEY MANAGERS. While few in the pest control industry are familiar with Sunair Electronics, the management team recruited to lead the company’s acquisitions effort features several well-known figures in the lawn care industry with impressive corporate pedigrees. Leading the new organization is Donald K. Karnes, David M. Slott and John J. Hayes, three highly regarded former TruGreen executives who left the Service-Master organization in mid-November, much to the chagrin of their longtime employer. “They built a $1.5 billion business,” said one industry insider familiar with the situation, “so they’re not easily replaced.”

Karnes, former president of Terminix International and most recently president of the TruGreen Companies, will serve as chief operating officer of the new organization; Slott, longtime president and chief operating officer of TruGreen ChemLawn, will serve as president; and Hayes, former executive vice-president of TruGreen Companies, will serve as chief executive officer.
In an exclusive interview with PCT shortly after the announcement, Hayes said the opportunity to venture out on his own “came along at the right time” for the three longtime business associates. “We were at the right point in our careers and we felt this was a good time to work on our own.”

Slott, who grew up in the TruGreen organization, starting out on a lawn care route at the age of 22, said he was feeling “one dimensional” after overseeing a single category of business for ServiceMaster, which serves 10.5 million homes and businesses each year through a variety of brands including TruGreen ChemLawn, TruGreen LandCare, Terminix, American Home Shield and Merry Maids. “I’m 46, the next five or 10 years seemed like an appropriate time for me to do something different on my own,” he said. “We were all at a point in our careers where we were sitting in a ‘sub’ of a major company as opposed to running our own business. That was the calling.”

“The one thing we would like to make sure that people understand is that our decision (to leave) really had nothing to do with ServiceMaster or TruGreen. We loved TruGreen,” Karnes said. “It’s a great organization.” After a lifetime in a corporate environment, the three simply had a desire to venture out on their own, according to Karnes. “I’m an owner now and that’s very important to me.”

In the wake of the defections, Service-Master announced it had named Dennis Sutton interim president and COO of TruGreen ChemLawn. “Dennis is a seasoned professional with over 26 years of experience,” said Jonathan Ward, chairman and chief executive officer of ServiceMaster. “I know that Dennis and the entire TruGreen team are dedicated to continuing to grow the brand as they reach and keep more customers in the years ahead.” Sutton previously served as senior vice president of the company. The Purdue University graduate has been with TruGreen ChemLawn since 1978. He and Robert Fates, president of TruGreen LandCare, will now report directly to Ward.

The defections also prompted ServiceMaster to file a lawsuit in December against the three former executives, alleging that Karnes and Slott had breached certain elements of their non-compete agreements with TruGreen, and Hayes had induced Karnes and Slott to breach the agreements. Specifically, the complaint alleges that all three breached their fiduciary duties to ServiceMaster, usurped certain corporate opportunities, misappropriated trade secrets and interfered with ServiceMaster’s business relations with its customers and employees. As a result, the suit seeks to forbid Karnes, Slott and Hayes from performing services of any kind for any entity planning to provide pest control services, as well as unspecified monetary damages including ServiceMaster’s attorney’s fees.

After the lawsuit was filed, a court in Shelby County, Tenn., issued a temporary restraining order that prevents Karnes, Slott and Hayes from soliciting for employment anyone employed by TruGreen or its affiliates, including but not limited to Terminix, and from using or disclosing ServiceMaster’s confidential information or trade secrets. However, the court refused to restrain the three former TruGreen executives from pursuing acquisitions of pest control businesses identified as potential acquisition candidates, or from performing services competitive to TruGreen or its affiliates, including Terminix. A full evidentiary hearing on ServiceMaster’s motion is scheduled for late January.

While the personnel changes at ServiceMaster are likely to have the greatest impact on the company’s “green” business, Steve Good, vice president and chief marketing officer at Terminix, indicated it will be business as usual at the nation’s largest pest control business. “This (pest control) is a category with 18,000 companies,” he said. “We happen to be in the leadership role and we’re going to very actively and aggressively pursue our goals, our objectives and our strategy just as we would before the announcement,” he said.

MARKET REACTION. Pest management professionals contacted by PCT magazine following the Sunair announcement in mid-November were shocked by the shakeup at ServiceMaster. “I was very surprised and I think the whole ServiceMaster organization was pretty surprised,” observed Bob Wanzer, president of Centex Pest Management, Dallas, Texas. “I think everybody pretty much knew that Don Karnes was going to be stepping down in the relatively near future, but I think Dave Slott was a total shock to the organization.”

“They are three very capable people,” added Harvey Massey, president and CEO of Massey Services, Orlando, Fla. “I think they all bring something different to the table. It’s going to be interesting to see what they do.”

“We’re really starting from ground zero,” Karnes said, “…but we’re confident we’re going to be around for a while.” However, both Wanzer and Massey — who run two of the most successful pest control businesses in the nation — say it’s not going to be easy for the former TruGreen executives given the rather subdued state of the acquisitions market. “You don’t have real sizeable, quality organizations out there that have an interest in harvesting (cash) and getting out of the business,” Massey observed. “I’m not saying there aren’t any, but the ones that are there have some young people coming up running the businesses. There are some sizeable companies out there. I just don’t know a damn one of them that is interested in getting out and selling. I think acquisitions right now are just slim pickings. They’re just not that plentiful.”

Wanzer agrees, pointing out that acquisitions are “events” that don’t always present themselves at the most opportune times. “As much as you think you can drive them, you can’t,” he said. “The challenge they’re going to have is businesses are going to become available, but they’re not going to choose where or when, which is a tough way to start a business. I have a tremendous amount of respect for those three individuals, but I think it’s going to be a tough putt.”

Slott says he’s aware that Sunair’s entry into the pest control market isn’t going to be a cakewalk, but the key is to be disciplined. “It’s not a race,” he says. “We want high-quality companies that have stable employees, stable earnings and a great management team. That’s what we’re looking to bring on board. We’re not trying to get caught up in it being a sprint as much as making sure we’re disciplined.”

Despite the relatively static nature of the mergers and acquisitions market, Slott says the business dynamics of the pest control industry are very positive and not dissimilar to the state of the lawn care market a decade ago. “From the lawn perspective, we (Tru-Green) kind of consolidated that business,” Slott says, but the pest control industry has a significant number of “maturing sellers that you have to ask, ‘What’s their exit strategy?’” he says. “So we provide, hopefully, a viable option for an exit strategy for a lot of owners that have built solid companies.”

While Karnes readily admits Sunair would like to complete an acquisition “as soon as possible,” it won’t rush into a purchase simply to develop an immediate market presence. “We’re in it for the long haul,” he says.

“The first several (acquisitions) are key,” Slott adds, a sentiment shared by Wanzer, a veteran of the acquisitions market. “Understanding the pest control business is going to be a little challenging for them and knowing what to buy,” Wanzer says. “Unlike a lawn care acquisition, you make a bad acquisition in pest control and you have all sorts of liability.”

Nonetheless, to a man, the former TruGreen executives remain undaunted. “For the most part we’re looking to start in the Southeast or Southwest because that’s where we have a presence,” Slott says, “but we’re thinking nationally over time.”

“We’re here to grow a pest control business and we’re going to be around for awhile,” Karnes adds.

GROWTH STRATEGY. To get a sense for Sunair’s long-term strategy as it relates to the pest control market, one has to look no further than a similar deal financed by Royal Palm Capital Partners, the private investment firm based in Boca Raton, Fla., that played a key role in the Sunair transaction. The company is led by Richard Rochon, who served as president of Huizenga Holdings, Inc., a management and holding company owned by billionaire H. Wayne Huizenga, who was a major shareholder in TruGreen at one point in his legendary business career.

Earlier in 2004, another Rochon-led group invested $18 million in Devcon International Corporation, a Florida-based construction materials firm, as a way to gain a foothold in the electronic-security business. The infusion of capital was used to establish a Security Services Division at Devcon that was led by an experienced security executive recruited from ADT, a leader in electronic security systems.

Beau Ferrari, vice president of Royal Palm Capital Partners, says they plan to employ a “similar strategy” in the pest control industry, particularly since the two industries share comparable business dynamics — a highly fragmented market ripe for consolidation with solid recurring revenue. “Pest control really represented a lot of those characteristics we look for when getting into a deal,” he said.

John Hayes describes Sunair as a “nice stable business” that will serve as a “vehicle” to create a beachhead in the highly competitive pest control market. “It’s a free-standing company and we’ll be building the pest division,” he said. Sunair proved to be an attractive business partner because Chairman Michael D. Herman owns 51 percent of the company’s stock and he “was interested in a growth opportunity in the service industry,” according to Hayes. When several acquisitions in the communications industry failed to positively impact the company’s stock price, Sunair executives began looking elsewhere as a way to attract Wall Street capital and grow.

Enter Royal Palm Capital Partners, which brokered the deal between the TruGreen executives and Sunair. “Rochon is providing the equity infusion (for the transaction),” Hayes said. “It’s a great group of guys over there at Royal Palm. They’re friends, as well as very bright, hard-working guys.”

“With Royal Palm our access to capital is significant,” Slott adds, so he’s optimistic about the company’s future, as well as its ability to handle virtually any size transaction. “If we had an opportunity that required us to raise (additional) capital, we think that’s their strength and we would have the ability to raise the amount of capital required for us to be a player.”

Nonetheless, after nearly a quarter of a century in business, Slott’s a realist. “I don’t think any of us … have any illusions that this is going to be easy,” he says. “No business is easy. I think we are pretty grounded about the amount of work it’s going to take in the next three years to get to the point where we’re feeling pretty good about our start-up.”

Still, he says, like any entrepreneur he’s excited about the future. “You can feel the potential, which is really exciting. We’re looking to be a player … to be national and sizeable over time.”

Who knows? Someday, Dave Slott, Don Karnes and John Hayes may build a pest control business that rivals the organization they helped create at TruGreen. If so, you won’t hear their colleagues in the pest control industry asking, “Who are those guys?” any longer.

The author is publisher of PCT magazine. He can be reached at dmoreland@giemedia.com.