Land of the Giants

Banking on the growth in end-user demand for a single-source provider of key building services, two of the largest consolidators of electrical contractors have announced plans to merge.Expected to close in February 2000, the merger between Houston-based GroupMAC, with about $1.5 billion in annual revenues, and Building One, Minnetonka, Minn., with annual sales of about $1.8 billion, would form the

Banking on the growth in end-user demand for a single-source provider of key building services, two of the largest consolidators of electrical contractors have announced plans to merge.

Expected to close in February 2000, the merger between Houston-based GroupMAC, with about $1.5 billion in annual revenues, and Building One, Minnetonka, Minn., with annual sales of about $1.8 billion, would form the largest player in the competitive arena of facilities-management services. Under the terms of the merger, which has been unanimously approved by the boards of directors of both companies, each outstanding share of Building One common stock will be exchanged for 1.25 shares of GroupMAC common stock. Five national players compete to provide a national source of electrical, mechanical, janitorial and other building services: GroupMAC; Building One; Integrated Electrical Services, Houston; Quanta Services Inc, Houston; and Nationwide Electric Inc., Minneapolis, Minn.

The new company, with an estimated $3.2 billion in sales, 27,000 employees, and more than 250 locations, would have five operating groups-mechanical, electrical, industrial, residential and janitorial services. Revenues from the electrical business in the proposed merger would be $1.2 billion, and would rank the company as one of the three largest electrical contractors based in the U.S. Bill Love, who led Building One's electrical and mechanical businesses, will manage the electrical operations of the new company after the merger is completed. Love was formerly president of SKCE Electric Inc., Lenexa, Kan., an electrical contracting firm that Building One acquired several years ago. "The merger of Building One and GroupMAC creates the undisputed leader in providing facilities services in the United States," said Joe Ivey, former president and CEO of Building One and now chairman and CEO of the new company. "The combination of our two companies' electrical and mechanical operations significantly enhances our geographic coverage and expands our capabilities. When combinedwith Building One's janitorial division, already in all 50 states, this merger gives us the foundation for a truly world-class facilities-services company."

Rick Millinor, who was CEO of GroupMAC, will serve as chairman of the merged companies. He said GroupMAC and Building One will benefit from the interest in upgrading existing commercial and industrial facilities with the latest in energy-efficient electrical and HVAC equipment and high-speed voice/data networks.

"Our combined strengths in HVAC, electrical, process piping, controls, voice and data and other high-tech applications mean the combined company will be a major participant in the accelerating trend in upgrading America's buildings and infrastructure, and in the ongoing servicing of these essential systems. The combined company will benefit from enhanced financial and operational resources, enabling us to compete more effectively within the major U.S. markets."

Building One's Ivey said large customers are looking for providers of facilities services who can package a broad range of services. "It accelerates dramatically the national footprint that we have all been seeking so that we can truly provide a national level of service in all the major markets in this country."

Ivey and Millinor said a key reason that they wanted to merge GroupMAC and Building One was because they each had strengths that did not overlap with the other. For instance, Building One had 1998 sales in electrical-service work of $449.9 million, while GroupMAC's 1998 electrical sales totaled about $83.8 million. However, GroupMAC has much larger HVAC and janitorial services business units than Building One.

"The two companies fit well together," Ivey said. "Only two or three markets out of the 85 or 90 that we serve have any overlap at all." After the merger, the company will provide electrical services in 47 of the 100 largest cities in the U.S., and a complete package of electrical, mechanical and janitorial services in 43 of the largest cities.

The companies plan to jointly focus their energies on national-account contracts, smaller but growing businesses for GroupMAC and Building One. National contracts at 3,500 customers sites around the U.S. account for about $18-$20 million in annual sales for GroupMAC, and about 12% of Building One's total revenues. However, most of Building One's national-account contracts are in its janitorial business.

GroupMAC's Millinor said the companies have gotten a good start in national accounts, but that it's a long-term sale. "Business-to-business selling is a relationship sale. You don't close a deal on the first sale," he said. The companies will aggressively pursue business with electric utilities because of the service opportunities created by utility deregulation, according to GroupMAC's annual report. The concept behind utility deregulation is to subject the power-generation markets to the same free-market competition that lowered the cost of the telephone and airline industries. Because utilities will lose income as rates plummet, they are looking for new markets to build revenues. Installation of energy-efficient electrical systems is a service that has caught their attention, and GroupMAC and Building One plan to provide this service for utilities as outside contractors. GroupMAC got into this market in 1998 when PG&E Energy Services, the unregulated subsidiary of PG&E Corp. tapped GroupMAC as its preferred national provider of commercial heating, ventilating and cooling services.

While GroupMAC and Building One quickly gained recognition in the electrical industry for the dozens of contractor acquisitions that they made over the past two years, Ivey said from this point on, the acquisitions that the merged company will make will be more strategic in nature. In the future, they will acquire companies to fill in gaps in geographic coverage or get companies with a specific market or customer expertise.

"We are not now trying to gain mass, as both GroupMAC and Building One were trying to do independently. We have put in place the infrastructure to support our strategic plans and our customer business for our business. >From that we will be looking incrementally to acquisitions. We just don't need to be doing the mass acquisitions that we have been doing the last couple of years.

"As a result of this transaction, we have become a true operating company. I don't believe it's appropriate to look at us anymore as a consolidator. We have consolidated a great part of the industry. We have consolidated a great deal of geographic reach. We will be able to leverage the infrastructure of both companies."

The two companies will also blend their union and open shops, as Building One does not own any union contractors, said Joe Ivey. "We understand that, in our company's strategy of trying to penetrate the company's top 100 markets, 15 to 20 markets are still predominantly union markets. At Building One, we knew that we were going to have to make a move into those markets in the future.

"Our reluctance was always in making the first move into a (union) market. We think the first one was always going to be the most difficult. What we have here is the opportunity to get some market leaders from GroupMAC in those various union markets to make us very comfortable moving forward. The companies that GroupMAC has in the union sector has a long history of good relations with their work forces."

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