Faced with the need to refinance $205 million in debt next year, specialty contractor Comfort Systems USA instead is choosing to sell most of its union operationsabout one-third of the companyto giant Emcor Group Inc.
Norwalk, Conn.-based Emcor announced the "definitive agreement" Feb. 12. The deal would reduce Houston-based Comfort's debt substantially but deprives the mechanical contractor of its biggest unit, Shambaugh & Son, Fort Wayne, Ind., as well as some of its best-run operations in key markets in the East and Midwest. Emcor is the country's largest union construction employer with most of its business coming from mechanical and electrical contracting. It reported net income for 2000 of $40 million on $3.46 billion in revenue.
The units being acquired had revenue of $650 million in 2001, with $257 million from Shambaugh. Under the terms of the deal, Emcor will pay $164 million in cash and assume $22 million of debt for all the units.
The identity of the other acquired units was not announced but together with Shambaugh they provide Emcor with desirable customers in the food processing, pharmaceutical and biotechnology businesses. The units also perform design-build work and fire protection installations. Both the geography and market segments "are areas we wanted to do more in," says Frank MacInnis, Emcor's CEO.
MacInnis believes Emcor is acquiring the companies for a lower price than Comfort Systems paid, although the exact difference was unclear. Emcor sat out the buying spree engaged in by newly formed specialty contractor consolidators in the late 1990s, when companies such as Integrated Electrical Services, Encompass Services and Quanta Services were formed. Now, Emcor will pick up some of the most desirable companies at a discount, officials say. "We thought the prices were too high" when the new consolidators were assembled, says MacInnis.
Faced with refinancing in uncertain economic times, Comfort chose to sell. "In a perfect world we would have been reluctant to do this," says J. Gordon Beitenmiller, its chief financial officer. Comfort reported that it expects to take a charge in the fourth quarter of $3.5 million to $4.5 million related to unpaid bills from one of its best customers, Kmart Corp. The giant retailer has filed for bankruptcy protection.
Comfort Systems has been restructuring itself since last year. For the first nine months ended Sept. 30, 2001, Comfort had net income of $10 million, on revenue of $1.16 billion. According to Beitenmiller, the units being sold to Emcor last year had earningsbefore interest, depreciation, taxes and amortizationof between $31 million and $33 million.
In another development, Comfort announced that President Gary Hess plans to retire in April. The departure is unrelated to the sale, company officials say, and Hess supported the sale. Hess says he became active in Comfort's corporate management because he believed it needed more emphasis on operations. Now that the company is shrinking and operating profitably, he says, Comfort also needs to restructure its leadership and "this was a good opportunity to step aside."
