March 2004: Volume 46, Number 3
John Packard on Prospects for a New Culligan Owner
by Carlos David Mogollón, WC&P Executive Editor
John Packard is not only the largest independent Culligan dealer, owning 20 dealerships and UNCO Data Systems, but he's a former Water Quality Association (WQA) president and the son of a WQA president. WC&P had an opportunity to speak with him in mid-February about anticipation for a new owner of Culligan International, also known as Culligan Northbrook for its headquarters in Northbrook, Ill., near Chicago. Here's what he had to say:
WC&P: I'm writing an update on mergers and acquisitions in the water treatment industry and want to offer readers a feel for which way the wind is blowing. As such, I wanted to see what your perspective was on the status of the industry with Pentair's acquisition of Sta-Rite and what you look forward to with a new owner of Culligan?
Packard: Well, obviously, Pentair is becoming a bigger player. And I guess I don't have any particular view of that. It's very interesting. They want to get further into the industry and be more successful. I'm fine with that. As far as the Culligan sale, we still don't know enough about what's going on. Until that book comes out, the OM…
WC&P: What's the OM?
Packard: It's the "operating memorandum," I believe. Until that comes out, you really don't know.
WC&P: I spoke with Greg Norgaard as incoming WQA president and he mentioned he would be surprised if a deal was announced for a new owner before the third quarter. But we've heard rumors. Those have included everybody from Pentair to GE to Apollo/Blackstone to even Dick Heckmann, not USFilter. Are there suitors that you know who are actively involved?
Packard: Yes. I know there are people that are interested, because they say they are. And, frankly, I've heard all those rumors myself. I haven't had any verification of the people that you've talked about, but I know there are people who are interested. You see, what's going to happen is whatever the price is when it comes out, whatever the target is and what some of the opportunities appear to be—which will be in the OM—that's going to take probably half the players out. Then, I think that shortly after that, within six weeks after the OM comes out, you have to get your bids in. The bids will come in and they'll accept a certain number of them. This is my understanding.
WC&P: Why has it taken so long to get the OM out?
Packard: Well, they had to have an audit. That's what I heard. It's to make sure they're figures are accurate, I'm sure. And so, at any rate, when you're going to have something to talk about is when you get to the final group of bidders. It'll be down to, I'm being told, something like six to eight players, maybe less. Who knows? That's when there'll be something to talk about in terms of, gosh, who's going to make the final cut.
WC&P: Any idea how long it's going to take to get to that point?
Packard: I think it's going to take probably six weeks, maybe two months. But I haven't been through that kind of stuff, so I'm not a very good guy to ask on that.
WC&P: What's the CDANA position on all of this?
Packard: Well, the CDANA position—and I think I've told you this before—is we want a buyer that recognizes the value of the dealer system. I'm assuming, let's say, six buyers make it to the final cut. I think we'll have an understanding when we look at that list that some of them will see more value in a dealer organization than others. And, probably, the longer term players will have more interest in the dealers.
WC&P: That's sort of an intangible in terms of the value of what the dealers have put into Culligan. It's something that's hard to measure, but everyone knows it adds significant value to the equation. So, I imagine, you guys—the dealers—are going to try and make sure that whichever end-buyer is involved will recognize that.
Packard: Yes. I think the thing will go for a relatively high value just because most deals right now are going for relatively high value because of the market itself.
WC&P: I noticed that in the final report from Watts acquisition of Flowmatic that, on $12 million in annual revenues, it went for between $16 million and $17 million. That was a little lower than I might have expected, but Watts points out that they don't buy at a premium so much as for the long haul. And if you look back at the whole reason for why Culligan and USFilter are for sale, you look at the fact that Vivendi had to write off $2.2 billion euros because of how much they spent for USFilter. So, are you looking at a likely premium or somebody that's going to buy it to run it for the long term value?
Packard: The dealer would like somebody who's going to buy it for the long term.
WC&P: What is this telling of? If you look at the two deals, one pending and one still being set up, what do they say for the industry and the dealer? With Pentair/WICOR and whatever happens with Culligan, what do you see as the message it signals for the dealer? What should they read in terms of what this says about their position in the market?
Packard: The message for the dealer is there's activity going on. I think it's very positive. No matter what happens, I'd like to think it will be positive. And the reason I say that is anybody who comes in and pays a current growing price for a business is going to have to grow that business—and that means every constituent part of it, which includes the dealer business. So, from that perspective, unless the buyer is not too enlightened, I think it's positive for the dealer. They're going to have to figure out, "Gosh, how do we grow the dealer portion of this?" They're going to have to grow all portions. And they're going to have to be a smart buyer. And they're, hopefully, without a lot of deals being done in the past couple of years, there's some very sharp—I'm guessing—buyers out there.
WC&P: There've been some, but they've been strategic rather than speculative or across the board.
Packard: Right. There's going to be some buyers who know how to run businesses that are going to get in here and demand some returns, some cash flow, some growth. And if they do it right, that should be positive for the dealers.
WC&P: I've got a pretty poignant question here. What advice would you offer the next owner of Culligan such that they don't make the mistakes or missteps of previous ownership in the last few years? By that, I mean, it seems as if Culligan was at war with corporate over the last few years—although that seems to have ebbed more recently. And above that, with foreign ownership in France, there was somewhat of—I don't know how to characterize it well—a rift there as well, a disconnect between all three players at that level. What lessons are there for a new owner to bear in mind to make whoever the next parent of Culligan is a more successful venture and one that's more cooperative where all horses are pulling in the same direction?
Packard: I would say that if you look at—and I think the new owners will—the history of the Culligan system, and ask yourself, "What's the mainstay? What's been there forever? What's pretty much prospered throughout the whole history of Culligan?" It's the dealer. So, with that in mind, you probably, if you want to run a successful company, Culligan International, you ought to listen to the dealers. You ought to get them involved in what's going on. And you ought to very seriously consider their input. And I think that if you do that, you're going to have a successful business. Now, that doesn't mean do everything they say. But make a serious attempt at involving the dealer.
WC&P: You mean good faith.
Packard: If you look at what's happened and you look at what's stuck around and you look at what's staying and you look at the success of let's call it the factory vs. the retail division, it doesn't take you long to figure out what's continuing to be successful. Although we haven't had two really great years recently, I think the factory side of it is not as well off as most dealers are.
WC&P: I've heard that as well. Two questions as follow-up to that. One is that the factory side has been looking at other points of sale, other channels to market—what's your perspective on that and how that should be handled going forward? The other question is you've also seen a period where there's that generational turnover among the dealer core which has led to the growth of the superdealership. Yours is the largest network of independent dealerships, for instance owned by one entity, correct? How many is that now?
Packard: Yes, we're involved in 20 dealerships now.
WC&P: And you also own UNCO Data Systems.
WC&P: And CR Hall has gone from owning four to 10, I believe, over the past several years. It might be 12 now. So the question there regards whether there's a concern about generating new blood coming forward so you have new dealers coming into that dealer network as well. Those are the two questions, the first one regarding other channels to market.
Packard: Well, I would tell you that the dealers have been characterized as not being open to other channels to market. We understand there are opportunities in other channels. Involve us. We'd like a role in that. We'd like some input into that, since we helped develop the brand. We don't want to go to other channels only to have the brand go downhill.
WC&P: In other words, you may have good advice to offer to make that more successful.
WC&P: And also to arrange it so that it's not a zero-sum, but more of a sum-sum gain where everybody wins.
Packard: Right. And we're the only ones that have been through it all. Current management may have been through some of the changes. And the new management, or owners, will not have been through some of the changes. You need to involve us in it. You need to get our perspective on it. And we should have a role somewhere in that because we are in the local markets. We're in the markets affected by retail, etc. And we know what consumers are wanting. We know the failures. So, deal with us on that. As far as the "new blood" goes, I don't have a huge sense that we need any massive infusion of new blood. I think the fact that there are so many family businesses that are moving from generation to generation is a super indication of the health of the independent dealer side of the business. The fact that we can pass these on, that they are good businesses, that we are really into it and we have a fantastic history of what's gone on—I think is just a clear indication of the health of this channel.
WC&P: I can't say that I can think of any other market where you have two, three and four generations of families in a single business.
Packard: Boy, I'll say. And you look at the esprit de corps of the independent dealers among themselves, it's pretty good. It's very good.
WC&P: Do you see anything coming out competitively with say a Pentair? I assume there might be some antitrust issues that may come up, possibly over consolidation of pumps or pools. And with the acquisitions it's made in the past year, it owns the tank business. I'm not certain how that will wind up, but are there any concerns in that?
Packard: Frankly, I don't know. That would kind of affect the whole industry. Myself, I don't care too much about that. I'm not on that level of it. I'm more in the marketing side of it.
WC&P: I was chatting with Rich Clack and he mentioned that you and he had talked at one point about who would buy Culligan next and he said that you replied, "We've been through 12 owners in 20 years. I don't spend 10 seconds on that."
Packard: That's sort of true. This time, though, the one thing that I get a positive vibe from is that, prior to this, I never was contacted by a prospective owner to get my view of what's going on. This time I have been contacted.
WC&P: By one or more groups?
Packard: Probably three or four. That's really nice. It's really gratifying. And that's why I tend to have a positive view because, you know, people that want to buy it are doing more research on the dealer side than I've ever experienced. And to me that can only be positive.
WC&P: Due diligence on what they're getting into so they have a strategy from the get-go.
Packard: Exactly. And that tells you that they care a little bit or understand a little bit about this dealer side of it.
WC&P: OK, well, I appreciate your time. Thanks so much for your input.