Janitorial Industry Analysis February 2015 S Executive Summary 2 Industry Overview 3 Publicly-Traded Companies 7 Mergers and Acquisitions Transactions 9 O N T E C About Scott-Macon 20 Overview of the Janitorial Industry February 2015: Industry Report Dear Clients and Friends, Scott-Macon is pleased to present you with our analysis of the Janitorial Market. This report reviews janitorial companies from three perspectives: • Industry Overview – Pages 3 through 6 present an analysis of the janitorial industry’s important trends. • Publicly-Traded Companies – Pages 7 and 8 present comparable publicly-traded companies and their valuation metrics. • Mergers and Acquisitions – Starting on page 9 we present a table of selected Janitorial Industry M&A deals since 2010. Following are the summary valuation statistics: Revenue EBITDA Revenue EBITDA MERGERS & ACQUISITIONS Multiple Multiple PUBLICLY-TRADED COMPARABLES Multiple Multiple Mean 0.6x 8.3x Mean 1.4x 11.0x Median 0.5x 8.2x Median 1.0x 10.7x I would welcome your call or email to discuss your corporate development plans or answer any questions you may have about this article or Scott-Macon’s merger and acquisition advisory and capital raising capabilities. Sincerely yours, Nathan D. Cortright Managing Director Group Head – Business Services Investment Banking [email protected] Telephone: 212-755-8200 Janitorial Industry Overview Introduction Exhibit 1: Janitorial Industry Revenue 2010 - 2018 The Janitorial Industry comprises establishments primarily engaged in cleaning building interiors, interiors $70.0 of transportation equipment (e.g., aircraft, rail cars, ships), $65.0 and/or windows. Industry activities include contract cleaning services for factories, retail outlets, shopping $60.0 centers and malls, business and government offices, trains and airlines and housecleaning services. Globally, janitorial $55.0 ($ Billion) ($ and carpet cleaning services companies are more common $50.0 in industrialized countries. The Janitorial Industry is expected to grow at a faster rate than GDP through 2018. $45.0 Improvements in the general economy, as shown in Exhibit $40.0 1, will drive future growth. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: tradingeconomics.com, IBISWorld The industry is segmented into commercial and residential cleaning services. The commercial sector Exhibit 2: Major Market Segment (2014) mainly comprises office buildings, municipal structures Healthcare Facilities 4.7% and retail spaces, while the residential sector includes Industrial Government Plants single-family homes, apartments and condos. 6.2% Educational and healthcare facilities represent the 6.1% biggest growth areas for the industry. The educational Residences segment includes janitorial services that are provided to 7.0% colleges, universities and professional schools. Over the Retail Offices Complexes 32.0% past five years, this segment has grown as an increasing 12.3% portion of municipal school districts and public universities have opted to privately outsource janitorial services. The majority of revenue is derived from the commercial and retail sectors. These are the mainstays of Educational Facilities the industry, although they remain very price competitive. 31.7% Source: IBISWorld 3 Janitorial Industry Overview Competitive Landscape The Janitorial Industry has few barriers to entry, • There are over 829,522 businesses Competition operating in janitorial services in the due to a low level of market share concentration and low (Very High) capital investment requirements. As you can see from United States Exhibit 3, the top four players in the industry account for less than 10.0% of the available market in 2014. There are an estimated 829,522 companies competing in the Concentration • The top four companies only comprises industry. Commercial cleaning contracts are typically for (Very Low) 7.9% of the industry’s revenue one year and can be terminated by the operator or client with 30 to 90 days of notice. Companies typically bid on contracts, a factor that makes price-based competition important for this industry. • Through 2018, industry revenue is forecast Life Cycle Stage There is also a low level of training required for to increase at an average annual rate of (Mature) industry employees, thus labor is not expected to be a 4.3% significant barrier to entry. Competition within this industry is high but steady, since many companies operate with a small share of the market. Typical wages Capital • Costs are largely related to labor and for industry employees average $14,753. There are no Intensity cleaning supplies used during service licenses or regulations exclusive to this industry, apart (Low) requests from meeting all general state occupational health and safety regulations, including the use and safe storage of all cleaning chemicals and compounds. Technology • Most of cleaning supplies are easy to use Change Exhibit 3: Industry Market Share and require very little training Jani-King International Inc (Low) 1.2% DTZ Other <1.0% Companies 92.1% ServiceMaster • There are no licenses or regulations <1.0% Regulation & exclusive to the janitorial industry, apart Policy from meeting all general state occupational (Light) ABM Industries Inc. health and safety regulations 4.9% Source: IBISWorld 4 Janitorial Industry Overview Exhibit 4: Products and Services Segmentation (2014) Commercial cleaning is the largest industry segment, making up 77.6% of industry revenue in 2014. Growth has Damage occurred in this segment in the past five years due to the Residential Restoration Cleaning outsourcing of cleaning services and investment in new Cleaning 7.0% 4.6% buildings, particularly in the educational, healthcare, penal, Other food processing and pharmaceuticals manufacturing 10.8% industries. Residential cleaning services will account for an estimated 7.0% of the industry’s revenue in 2014. This Other segment has fallen as a share of revenue over the past five Commercial Cleaning years primarily because of decreased disposable income 18.6% Standard Commercial during the recession and the slow recovery period. Cleaning 59.0% Damage Restoration Services is expected to account for 4.6% of industry revenue. These services generally encompass water extraction dehumidification, mold and mildew remediation, debris removal and site reconstruction, depending on the cause. Source: IBISWorld Key External Drivers • Number of Businesses – Growth in the number of business operators creates a large potential client base for industry operators. • Office rental vacancy – When the office vacancy rate is low, there is greater demand for janitorial cleaning services. • Corporate profit – As corporate profit rises, businesses typically expand, therefore more janitorial services are required to clean additional offices, retail stores, restaurants and malls. • Value of private nonresidential construction –Nonresidential construction is a major market for industry services and therefore serves as a leading indicator of demand. • Households earning more than $100,000 – Households in the highest income brackets have the greatest propensity to purchase housekeeping services, due to their greater amount of disposable income and larger estates. • World price of crude oil – When the price of gas rises, transportation costs increase for industry operators. 5 Janitorial Industry Overview 20 20 Industry Trends Key Features of a Mature Industry There are a number of trends that can be • Revenue grows at same pace as economy 15 Quality Growth • Company numbers stabilize; M&A stage observed regarding the industry’s overall growth High growth in • Established technology & processes 15 • economic importance; Total market acceptance of product & brand characteristics. The Janitorial Services industry is • Rationalization of low margin products & weaker companies close brands starting to enter the mature phase of its industry 10 Maturity down; developed Company technology and markets life cycle due to recent consolidation. Despite the 10 consolidation; level Quantity Growth of economic Janitorial industry entering the mature stage, a Many new companies; 5 importance stable Landscaping Services minor growth in new wave of growth (4.3% CAGR through 2018) Painters 5 Janitorial Services Landscaping ServicesFence & Swimming Pool Constructioneconomic importance; is emerging, fueled by the rise in consumer Painters substantial technology JanitorialDepartment Services Stores ChemicalFence Wholesaling & Swimming Pool Construction change income (residential cleaning growth), increase in 0 Department Stores Chemical Wholesaling business confidence (office cleaning) and rise in 0 Growth % in share of economy manufacturing (industrial cleaning). Through economy of share in % Growth -5 2018 the industry revenue is forecast to increase Decline at an average annual rate of 4.3%; this is 1.6% -5 Shrinking economic importance greater than the United States annualized GDP -10 growth of 2.7% over the same period. -10 -5 0 5 10 15 20 -10 % Growth in number of establishments -10 -5 0 5 10 15 20 % Growth in number of establishments Source: IBISWorld The Janitorial Services industry will encounter promising conditions over the four years to 2018, due to an expected Number of Businesses Office Rental Vacancy upswing that will be caused by the recovering economy. As a 3 18 result, industry revenue is forecast to increase at an average 2 16 annual rate of 4.3% to reach $64.2 billion in 2018. Demand for 1 14 domestic cleaning services is also expected