Scotts LawnService Appears Poised for Lawn & Pest Acquisitions

Scotts LawnService (SLS), a unit of The Scott’s Miracle-Gro Company (SMG),  appears poised to make acquisitions again in both the lawn service and pest control sectors.  I thought it would be interesting to look at the SMG’s recent statements on the topic of Scott’s Lawn Service and acquisition.

Scotts Law=nService Appears Poised for AcquisitionsSLS is the second largest lawn care company in the US, although much smaller than industry leader TruGreen.   TruGreen was recently spun-off as a separate company by ServiceMaster after several years of disappointing results.

This week, SMG reported its earnings for the quarter ended December 31, 2013, which is the first quarter of its fiscal year.  As customary, the Company’s executives hosted a conference call aimed at financial analysts discussing the quarter and the Company’s prospects.

Part of the call focused on Scott’s LawnService , a bit surprising given that it represents less than 10% of the overall company’s revenues and profit.  Although SLS has not made any acquisitions other than a few franchise re-acquisitions in recent years, SMG’s management has been saying they are actively pursuing acquisitions and particularly looking at a significant pest control acquisition.  Scott’s has been experimenting with adding pest control to Scott’s Lawn Service using the Company’s Ortho brand name.

There was a good bit of discussion regarding how future acquisitions might differ from earlier acquisitions made by Scott’s.  Jim Hagedorn, chairman & CEO of SMG, said “My expectation is we should do deals that are standalone, and at the price we pay, they could stand alone. I think if the team can operate them out of the same office, that’s all the better. And I think they [SLS management] believe that based on work they’ve already done and branches we have today that operate both pest and lawn, that they can do that…  My only concern with that is ServiceMaster had not been particularly successful at integrating their branches. So I just want the deals to be priced based on the fact that if we don’t integrate, we haven’t overpaid. If we do integrate, they just look all the better. And I think they understand my point of view. But I — so I think the plan is to integrate the branches, but I don’t want to do the financials assuming that they have to be integrated in order to make them — the deals work, if that makes any sense.”

Describing their previous acquisition experience in SLS, Hagedorn added, “… we acquired a lot of stuff probably too fast and didn’t control it as well as we could have, and we had some pretty significant integration issues that we have corrected… In the process of making those corrections, I think we understand the process of running businesses better, and especially that [SLS] team, which is a very well battle-tested, highly-experienced group of managers…We have focused quite a bit of budget money for them to make deals, but the expectation is that we don’t get ahead of ourselves.”

To illustrate the opportunities in lawn care and pest control, the Company estimated the lawn care market at $4 billion, with their revenue representing an approximately 6% market share.  In targeting the pest control market, they estimated that market at $7 billion with their current market share negligible.

SLS reported sales of $257.8 million for the fiscal year ended September 30, 2014.   It currently has 177 branches, of which 87 are company-owned and 90 are franchises.  The existing locations cover approximately 60% of the US population.  While no specific announcement was made, it seems they may be considering a separate franchise business under the Ortho Pest Control name.

After listening to the conference call, reviewing the Company’s SEC filings and transcripts, our take away is that SLS is very serious about pursuing acquisitions this year and beyond.  We expect them to complete at least one pest control acquisition and multiple lawn care acquisitions this year.  However, they are committed to approaching acquisitions on a very disciplined basis and are unlikely to price acquisitions at historical levels, especially with TruGreen currently not making acquisitions at all.  That will be a greater challenge in pest control where the acquisition market is much more competitive.

I confess that SLS’s focus on acquisitions surprises me a bit given the fact that SLS represents less than 10% of SMG’s total revenues and is a decidedly different business that their principal distribution business.  I am convinced, however, that they are committed to growing this business.

 

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