Sunair: Exterminating Value?
Does it ever make sense to take stock instead of cash when selling your company? For as long as the public equity markets have existed, public companies have used their stock as currency to make acquisitions. While the days of all-stock deals (pooling of interest) have more or less vanished, there does seem to be at least one public company in the pest control industry that has been effective in convincing sellers to take its stock (along with cash) in return for their companies: Sunair Services Corporation. Because Sunair is a public company, we can look to the public equity markets as a barometer of what the investing public thinks of Middleton’s acquisitions.
As of the writing of this article, Sunair had a market capitalization of $35.8 million and an enterprise value of $49.2 million. What I found to be very interesting about this is that Sunair has spent a minimum of $71 million (and probably much closer to $85 million) since the summer of 2005 making acquisitions in the pest control industry. The chart below summarizes the publicly available data on Sunair’s pest control acquisitions since the acquisition of Middleton. As you can see, the stock market is currently valuing Sunair at $49.2 million, or about half of the $85 million it has paid on its dozen or so acquisitions over the last two years.
When the Middleton shareholders sold to Sunair in June of 2005, they received $35 million in cash, $5 million in a seller’s note, and $10 million in Sunair stock. On October 18, 2007, just a little over 2 years later, that $10 million in stock is now worth $2.8 million, a staggering loss of $7.2 million in value. Not only did Middleton get caught up in the decline, those who took stock in all of Sunair’s subsequent acquisitions felt the squeeze as well. Paragon’s stock has since lost half of its value, falling from $100,000 to $51,000; Ron Fee and Archer Exterminators have both lost about a third in the value of the stock that they received, provided that none of them have been able to bail out yet (I am not going to get into SEC holding requirements, talk to your lawyer about that one).
The chart below illustrates Sunair’s performance versus the S&P 500 beginning on the day it acquired Middleton. For the first few months, the Company’s stock outperformed the index but beginning in September 2005 it entered free-fall and has continued ever since, losing 73% of its value.
My goal in writing this article was not to badmouth Sunair. I believe the Company has a very capable management team and Middleton is an excellent operation. It’s hard to manage Wall Street’s expectations, and if you miss your numbers, your stock takes a hit, Sunair is no exception. It’s been a tough environment for a lot of pest control operators this year, and I’ve seen it reflected in a lot of companies’ financial statements. Bottom line, a company’s stock can rise just as easily as it falls. When selling your business, you have to do your homework, whether the acquirer is public or private. If you are taking stock or holding seller paper, investigate the acquirer just as they will investigate you… ask for financial statements. If you know more about growing pest control companies than you do about pouring over financial statements and negotiating purchase agreements, make sure you engage a competent advisor who knows the industry – doing anything else is rolling the dice with your retirement fund.
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