Harris Williams recently advised Service Logic, one of the largest privately held energy and HVAC/mechanical company in the United States, on its sale to Leonard Green & Partners. Here, we discuss what makes the HVAC segment appealing for buyers, the factors differentiating Service Logic from other companies, and our advice for buyers active in the subsector.
Why is this an appealing space?
Baltimore: The commercial HVAC sector's total addressable market is large, growing, and fragmented, with significant consolidation potential. It is also recession-resilient, particularly with regard to emergency repair and preventative maintenance services. Property owners and building managers build trust in highly responsive service providers with a high degree of technical competence to keep mechanical systems running reliably. While certain end-of-life replacements can be temporarily deferred, most of Service Logic's services represent immediate, short-term customer needs. The sector also stands to benefit from long-term tailwinds from greater regulatory focus on energy efficiency.
What made this an especially attractive company?
Lucas: For one thing, its market position: Service Logic is one of the leading independent provider of aftermarket maintenance, repair, and replacement services for commercial HVAC equipment, chilled water systems, and building automation and control systems. That provides scale advantages. It has also invested in resources to drive continued growth, including technology capable of scaling with the platform. Business units acquired by Service Logic across the country are co-branded as "A Service Logic Company," and each one has a strong local brand and long-standing customer relationships. Local unit growth is then accelerated by Service Logic's investments in sales professionals and business intelligence tools.
Basmajian: Also, its mix of contractual and highly reoccurring, nondiscretionary services delivers attractive, greatly visible revenue and economic cycle resilience. That means the company was able to maintain strong performance through the depths of COVID-19. The corporate office environment might hold fewer people, but it's not composed of fewer buildings, and HVAC systems have to run regardless of occupancy rates. Also, the industry shift toward air filtration and air quality overall, which has been motivated by COVID-19, could have a lasting benefit to the business. Service Logic is in the early stages of capitalizing on this trend.
Walker: Another area that sets Service Logic apart is its strong customer value proposition. The company has a deep bench of talented employees who provide superior customer service and responsiveness. It focuses on providing technical expertise to service complex equipment and systems with high costs of failure or downtime. The management team has focused on such nondiscretionary repair and maintenance services as opposed to less recession-resilient areas such as new construction.
What should other prospective buyers know about this subsector?
Lucas: When evaluating companies in this space, start with a review of the maintenance base. How large is the base of maintenance contracts? What's the renewal record with that maintenance base? How good is the company at generating pull-through revenue, meaning generating bigger-ticket, project-based work and emergency services from that maintenance base? If you have a good foundation of maintenance contracts, and you're doing well at retaining those customers, more significant work comes as a natural extension of that.
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Published February 2021