HVAC distributor Watsco Inc. and air conditioning product manufacturer Carrier Corp., a unit of United Technologies Corp., are moving forward with their plans to form a joint venture that will distribute Carrier, Bryant and Payne products throughout the U.S. Sunbelt, Latin America and the Caribbean.
The U.S. Federal Trade Commission has granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 related to the joint venture.
When it closes, the deal will nearly double Watsco’s sales. Watsco is a distributor of air conditioning, heating and refrigeration equipment, parts and supplies in the HVAC/R industry, operating 412 locations serving 40,000 customers in 34 states.
Watsco and Carrier’s joint venture will be named Carrier Enterprises LLC. The venture will operate 110 locations in 20 states and Puerto Rico, the Caribbean and Latin America and serve more than 19,000 air conditioning and heating contractors.
Carrier will contribute 95 locations in the U.S. Sunbelt and Puerto Rico and the export division in Miami, FL.
Watsco has agreed to purchase a 60% interest in the joint venture for a payable in a combination of cash and Watsco stock, with options to purchase 10 percent more in three years, and an additional 10 percent in five.
Watsco is contributing 15 of its locations that currently distribute Carrier, Bryant and Payne products to the joint venture.
Carrier Enterprises will operate as a separate and distinct entity. The unit is created partly on the base of independent distributors Carrier started buying 10-12 years ago, according to Barry Logan, Watsco senior vice president, in a presentation at the William Blair 29th Annual Growth Stock Conference.
The joint operations will sell Carrier, Bryant and Payne-branded residential and light-commercial equipment (80% of sales) and complementary parts and supplies. On a combined pro-forma basis, Watsco and the joint venture had $3 billion of revenues in 2008.
Carrier Enterprises will carry products at three price points – the only Watsco locations that will have those price points from the same manufacturer in one place.
The addition of Carrier Enterprises also allows Watsco a sales presence in the light-commercial HVAC market.
The transaction also marks Watsco’s entrance into international markets through the addition of the Latin American and Caribbean sales operations of Carrier Enterprises.
Albert Nahmad, Watsco’s CEO, said: We are excited to partner with Carrier in this outstanding business. We consider this joint venture to be transformational. It accelerates our strategy to develop a national network of high performing HVAC/R businesses to serve contractor customers with quality services and products.
We are also fortunate that our historically conservative mindset toward our balance sheet and overall financial position has allowed us to take advantage of this substantial opportunity. As important, the transaction structure provides us with the capacity and flexibility to continue our buy-and-build strategy in the years ahead."
In the William Blair presentation, Watsco said it would continue its acquisition strategy of "strong, established businesses" both in its current footprint and in new markets.
Watsco plans to continue sticking with its strategy of keeping the acquired business’ original names on the storefronts.
The distributor credits the HVAC replacement market with 70-75 percent of its sales; 10-15 percent is commercial, mainly refrigeration products. Its share of sales from new housing has compressed in the past few years; while it used to be nearly a third of sales, it now comprises 10-15 percent.
Logan says Watsco continues to look at new housing as an opportunity because every house that is built increases the installed base, which increases the size of the longer-term market for replacement units.
In its investor presentation this week, Watsco also addressed plans for a new private label program to be launched next year. It would be pushed through a portion of the distributor’s branches.
"We want another price point in place," Logan says.