Sunday, April 4, 2004

Roto-Rooter's path to success

Hospice acquisition is latest step forward

By Mike Boyer
The Cincinnati Enquirer

It triggered chuckles on Wall Street when a Cincinnati-based plumbing and drain cleaning company acquired the nation's leading provider of end-of-life care.

But investors in Roto-Rooter Inc. have had the last laugh. Shares of the 33- year-old company - which changed its name from Chemed Corp. last May and plans to go back to that name next month - skyrocketed 90 percent within days of its Dec. 18 acquisition of Florida-hospice provider Vitas Healthcare Inc.

The Vitas investment underscores the long-standing business approach of Roto-Rooter/Chemed. "We're a thoughtful financier of companies,'' said David Williams, senior vice president and chief financial officer at Roto-Rooter.

Over the last three decades, the company - originally a spin-off from W.R. Grace Co. in 1971 - has evolved from a specialty chemical company to an investor in a variety of health-care businesses. It also has spawned other companies, including a recent addition to the Fortune 500 list.

By acquiring the 66 percent of Miami-based Vitas it didn't already own for about $400 million in cash and assumed debt, Roto-Rooter - already the nation's best-known provider of plumbing and drain-cleaning - became the largest supplier of hospice care. The deal more than doubled its annual revenues to an estimated $730 million and its employees to more than 9,000.

The transaction has also transformed Roto-Rooter's investor group.

"What happened in a matter of days after the announcement was that our shareholder base largely turned over,'' said Williams, who was elected CFO last month.

With the exception of about 2 million shares held by insiders and Mario Gabelli funds, the company's largest shareholder, most of the remaining 8 million shares of Roto-Rooter's outstanding shares changed hands as investors in the plumbing and drain-cleaning business sold to those interested in the hospice business.

"We know this because we were talking to the institutions,'' said Williams. "They're holding it because of the hospice opportunity and very much intrigued by the cash thrown off by the plumbing company.''

Roto-Rooter's shares have since slipped back since the December deal.

But James Barrett, of C.L. King & Associates, the sole investment firm following Roto-Rooter, said that stems more from disappointing earnings from a publicly traded hospice rival and the overall market's pullback from small capitalization stocks than problems with Roto-Rooter.

He expects the combined Roto-Rooter/Vitas business to generate 20 percent annual growth in revenues and has put a price target of $70 on the stock.

Roto-Rooter's plumbing and drain-cleaning business, which struggled during the recession, reported a loss last year of $3.4 million, or 35 cents a share, on revenues of $308 million last year. The company's 100 company-owned outlets and 500 franchisees provide plumbing and drain-cleaning across most of the United States and Canada.

Privately held Vitas, founded in 1978 in Florida by a minister, had profits of $13.7 million on revenues of $420 million last year. Its 6,000 employees provided care in the last six months of life for an average of 8,000 patients each day in 25 states. In Cincinnati, where Vitas has had operations since 1993, it had 485 patients last week and employed 346.

The Vitas acquisition fueled speculation that Roto-Rooter might spin off the business in an initial public offering, as it did Covington's Omnicare Inc.

But Williams said the stock price run-up and the shift in the investor base has made a Vitas IPO unnecessary. Two weeks ago, the company signaled it is serious about the hospice business announcing plans to revert to the Chemed Corp. name that it abandoned last May when it planned to focus on the plumbing and drain-cleaning business.

"You don't want a hospice chain owned by a company called Roto-Rooter. You'd become the butt of a lot of jokes by Jay Leno,'' said Barrett.

'Always looking'

Vitas was a small investment in 1991 made by Ed Hutton, Roto-Rooter's chairman, then Chemed's president and chief executive. The idea was that Chemed would either acquire the business someday or profit from selling its stake in the then emerging company.

"Really, we're always looking for what I'd call 'companies in the later stage of looking for venture capital,''' Williams said.

The company's largely a reflection of the philosophy of Hutton, its 84-year-old chairman who still works almost daily in the corporate offices on the 25th and 26th floors of the Chemed Center on Fifth Street downtown. He wasn't available for an interview for this story.

Hutton's approach is "you buy a company because of its management talent,'' said Williams. "Unless they prove otherwise, you leave the management in place giving them good guidance and the resources to succeed.''

In that respect, Hutton and Roto-Rooter/Chemed have a something in common with another successful company, Berkshire Hathaway Inc., the holding company of famed investor Warren Buffett.

"By no means would I compare us with a Berkshire Hathaway,'' says Williams. "But on a much wider scale, what they do is buy into businesses and give them thoughtful management advice.''

Successful pattern

Although Kevin J. McNamara has been Roto-Rooter/Chemed's president and CEO since 2001 "we're still following Mr. Hutton's business pattern on establishing and maintaining relationships with businesses and being ready to make investments when they're ready to sell,'' said Williams.

That's how the Vitas acquisition came about and how the company originally acquired Roto-Rooter two decades ago.

Last fall Hugh Westbrook, a minister and Vitas' founder, received an unsolicited bid from an unnamed strategic buyer.

Roto-Rooter, which had a seat on Vitas' board because of its original investment in the company, was aware of the offer in the low $20-a-share range.

"We were prepared to be a seller if we though it was a fair price,'' Williams said. "But if it was inadequate, we were prepared to be a buyer.

"Based on our evaluation of the quality of the management, the potential of Vitas as the predominate U.S. provider, we put an offer of $30( a share) on the table,'' he said. That culminated in the December acquisition.

The company paid for Vitas with $100 million in new equity in a private placement and another $250 million in debt plus a new credit line.

Patience pays off

It used much the same approach when it acquired Roto-Rooter two decades ago.

"Here was a business that was primarily a franchise, with very low franchise fees,'' Williams said. "But it was viewed as a great brand name with a lot of potential if you had the cash to buy out franchisees at a reasonable price and build a national presence.''

Hutton was very patient with Roto-Rooter's founding family.

"He pursued them for over 10 years,'' said Williams. "He told them: Whenever you're ready to sell, we're ready to buy."

Under McNamara, the company had centralized operations. It has, for example, eliminated 50 different call centers and consolidated them into three locations.

"We've basically re-engineered Roto-Rooter,'' Williams said, so it can fold in new franchisees as they are acquired.

While the parent has no plans to divest the plumbing and drain-cleaning business, he said, it's possible the company might spin off part of the operation in a public offering.

A good fit

Williams said Vitas fits in with a number of the company's investment in the health-care field - including Covington-based Omnicare, the leading provider of pharmacy services to nursing homes that's now ranked 475th on the Fortune 500 list. (Roto-Rooter chairman Hutton has been chairman of the Omnicare board since 1981.)

He said the company first learned of Vitas more than a decade ago through an attorney involved in its acquisition of Patient Care, a provider of home health-care aides it sold in 2002.


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