United Industries Corporation

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United Industries Corporation

2150 Schuetz Road
St. Louis, Missouri 63146
U.S.A.
Telephone: (314) 427-0780
Fax: (314) 253-5978
Web site: http://www.spectrumbrands.com

Private Company
Incorporated: 1969
Employees: 900
Sales: $536.1 million (2003)
NAIC: 325320 Pesticide and Other Agricultural Chemical Manufacturing.

United Industries Corporation is a St. Louis, Missouri-based company with its business divided among three operating divisions. Operating under the Spectrum Brands name, the Home and Garden division offers household insecticide and insect repellent products, insect control products, and lawn and garden fertilizer and organic growing media products. The Canada division operates as Nu-Gro, offering a variety of home and garden products, including fertilizers and controlled nitrogen release products. United Pet Group, United Industries' pet division, offers a wide range of pet supplies for cats, dogs, birds, fish, and small animals. United Industries is highly dependent on three major customers—The Home Depot, Lowe's Home Improvement Warehouse, and Kmart—which account for nearly 75 percent of all sales. The private company is majority owned by The Thomas H. Lee Equity Fund IV, which has a 84.3 percent stake in the business, and is expected to eventually cash out through a sale or public offering of stock. Current management owns 7.9 percent and the previous owner and management 7.8 percent.

Late 1960s Origins

United Industries was founded in St. Louis in 1969 by David C. Pratt. The company started out as a bolt maker but switched gears starting in 1973 with the acquisition of a contract manufacturer of insecticides and herbicides called Spray Chem. Subsidiary Chemisco was formed to house the new business line. A dozen years would pass before the company moved beyond contract work to become involve in branded products, achieved through the 1985 acquisition of Real-Kill. Three years later, United Industries bolstered its portfolio of branded products considerably by buying lines from Unilever's U.S.A. subsidiary Chesebrough-Ponds, adding such brands as Hot Shot, No-Pest, Rid-a-Bug, and Spectracide. The next major pickup came in 1994 with the acquisition of the well known Cutter insect repellent, along with other lines, from Miles Laboratories of Akla-Seltzer fame. The product was developed in 1957 by physician Bob Cutter and grew to become one of the leading products in the insect control category, trailing only Off! in sales.

After being in business for a quarter-century, United Industries was now poised to enjoy dramatic growth, realized by making larger and more frequent acquisitions. In 1995, the company added a number of brands that enjoyed strong sales at Kmart, including plant products KRid, KGro, Shootout, and Gro Best. It also obtained an exclusive license on the Peters and Peters Professional brands of plant food from Scotts Co. The company's lawn and garden slate was so strong that Lowe's named United Industries its Supplier of the year for its products in this category in 1995. The company would also make inroads with Home Depot, which in 1997 began offering Real-Kill as it opening price point brand, as well as recognizing United Industries' lawn and garden offerings by naming the company its Partner of the Year.

In 1998, United Industries introduced what it called the first new do-it-yourself termite home defense system, an item that generated some controversy. Dubbed Terminate, the product relied on bait stakes that homeowners planted around the foundation of their houses. Although it was approved by the Environmental Protection Agency, Terminate came under fire from the Federal Trade Commission and eight state attorney generals, which went to federal court to halt the sale of the product, charging that United Industries' labels and advertising made unsubstantiated claims about its effectiveness. The FTC maintained that the Terminate did not kill drywood or Formosan termites, which only professional exterminators could eliminate. Moreover, the commission charged that United Industries could not prove that Terminate by itself could prevent infestation, eliminate active infestations, or was more effective than chemical barriers and sprays already on the market. Far from being a no-maintenance system, according to the FTC, Terminate's bait stakes needed to be inspected periodically and replaced every 11 months. United Industries ultimately settled the matter in 1999 by agreeing to change its advertising and as a consequence escaped paying any fines.

Climbing Sales in the Mid- to Late 1990s

From 1995 to 1998, United Industries performed strongly. On average, revenues grew by 26 percent each year while profits increased at an even faster clip. By this stage, the company was generating annual sales in the $300 million range, and Pratt, who had become a minority owner of the St. Louis Cardinals baseball team, was ready to cash in after 30 years of effort. He found a willing buyer in Thomas H. Lee Partners L.P., a Boston-based leveraged buyout company. Lee Partners paid $620 million to acquire a 90 percent stake in United Industries. Pratt retained a 5 percent interest.

United Industries' new owner was founded by Thomas H. Lee in 1974. A 1965 Harvard graduate, Lee always wanted to own equities. He cut his teeth as a securities analyst in New York before returning to his native Boston, where he joined First National Bank of Boston's high-tech venture capital group. Lee eventually headed the unit while he simultaneously attempted to launch two of his own funds, neither of which caught on with investors. Finally, in 1974, he put up $100,000 of his own money and started Thomas H. Lee Co., which slowly began to attract outside funds. Lee was an earlier proponent of leveraged buyouts, but he took a far different approach from that of most corporate raiders of the 1980s. He was a little known practitioner of "friendly takeovers," concentrating on companies that wanted to be bought and could be improved and later sold at a profit. Lee told Forbes in 1997, "It's like buying an already nice house on a perfectly good lot and then improving it." Acquisitions made in the 1980s included SCOA Industries Inc., Playtex Products Inc., General Nutrition Inc., and Sterling Jewelers. Although Lee would attract such high-caliber investors as the State of Connecticut, Commonfund Capital, Duke University, Hamilton Lane Advisors, Liberty Mutual Group, and the PSR&G Master Retirement Fund, it was not until the 1992 purchase of soft-drink maker Snapple that his name became widely known. After buying Snapple for $140 million, he grew the company's revenues from $95 million to $750 million in just two years. He then sold the business to Quaker Oats for $1.7 billion. His funds had invested $28 million in Snapple and now reaped $927 million in return. As the reputation of Lee Partners grew, so did the size of his funds. In 1990, the firm raised a $568 million general buyout fund, followed by a $1.37 billion fund in 1995, and a $3.4 billion fund in 1998 that would provide the money to buy United Industries.

The number of companies interested in being acquired by Lee Partners also grew over the years. Tom Lee was willing to pay a high price if necessary to acquire a target company. He told Money in 2004 that what he bought was momentum: "We look for kernels and gems and then we roll with it." To find such hidden treasures required a great deal of sifting. "Of 1,000 deals that come in," he explained, "probably 300, or a deal a day, actually fit what we're looking for. And we'll actually do only five or 10." Hence, his decision to acquire United Industries spoke volumes about the growth potential of the business.

In November 1999, United Industries installed a new management team headed by Robert L. Caulk, named president and chief executive officer. Two years later, Caulk would also assume the chairmanship. Like Tom Lee, Caulk was a Harvard graduate, earning a masters of business administration. In addition, he had experience in the insecticide industry, having worked ten years at S.C. Johnson & Johnson, which owned the Raid brand. He then spent five years at Clopay Building Products, a residential garage door manufacturer, where he rose to the level of president. His experience at Clopay was helpful because the company employed a marketing strategy similar to that of United Industries. They both sold to some of the same customers, such as The Home Depot.

The first order of business in taking United Industries to the next level was to pay down the company's $375 million debt load in order to improve the ratio of debt to earnings and prepare the ground for acquisitions. The plan was to achieve growth through acquisitions, with the goal of taking the company public, or, as was the case with Snapple, selling the business outright. The first significant acquisition under Lee Partners ownership did not take place until late 2001, when United Industries acquired several consumer fertilizer lines from Pursell Industries, Inc., expanding its presence in the lawn and garden category beyond insect control products. It was the first step in the company's strategy of becoming an industry consolidator in lawn-and-garden products. Brands acquired from Pursell included Vigoro, Sta-Green, and Bandini. In addition, United Industries added the rights to the Best brand of fertilizer as well as some intellectual property. Altogether, these branded products generated some $145 million in revenues for Pursell in 2001. As a result, United Industries now commanded the second largest market share in the lawn and garden fertilizer market in the United States.

Key Dates:

1969:: The company is founded by David C. Pratt.
1973:: Spray Chem is acquired.
1985:: Real-Kill is acquired.
1994:: Cutter brand is acquired.
1999:: The company sold to Thomas H. Lee Partners.
2004:: Nu-Gro Corporation and United Pet Group, Inc., are acquired.

More Acquisitions in the Early 21st Century

Several months later, in May 2002, United Industries added to its cache of lawn and garden products through the acquisition of Schultz Co., maker of consumer garden fertilizers, plant food, potting soils, soil conditioners, and an emerging line of organic pesticides sold under the Garden Safe brand. At a cost of $58 million in cash and stock, Schultz also brought with it exclusive supplier agreements with a number of retailers. Later in 2002, United Industries paid $19.5 million in cash to acquire WPC Brands, a Wisconsin company that manufactured Repel, an insect repellent, as well as other outdoor health and safety products. United Industries now owned the second- and third-largest selling personal insect repellent brands in Cutter and Repel. Together they accounted for about one-third of all U.S. sales in this product area, while Off!, owned by Caulk's former employer S.C. Johnson, controlled about half of the market. Moreover, due to concerns about the West Nile Virus, which is spread by mosquitoes, all insect repellents experienced a bump in sales. As a result of its recent spate of acquisitions, United Industries grew its annual sales to $520 million, from $297 million in 2001.

Also of note in 2002 was an alliance forged with Bayer CropScience, a unit of the giant German healthcare and chemical concern Bayer AG. Bayer agreed to buy about 9 percent of United Industries over the course of seven years and allow United Industries to develop new products using current and future Bayer pesticide ingredients. Bayer also agreed to sell its Bayer Advanced line of lawn and garden care products through its partner's distribution network. There was some speculation that Bayer was taking the first steps in acquiring United Industries, but the relationship between the two companies would last no more than two years. Only months after establishing a strategic partnership with United Industries, Bayer sold much of its household insecticide business to S.C. Johnson, a sign that it was not likely in the market to buy United Industries. The distribution part of the alliance also proved to be a disappointment, since Bayer's distribution was reduced to a single retailer, Lowe's. In February 2004, United Industries terminated the relationship by canceling its distribution arrangement for Bayer products and buying back the stock Bayer had purchased to that point. United Industries would continue to purchase some of Bayer's products, but they accounted for only a small fraction of the company's revenues.

United Industries moved into a new 80,000-square-feet corporate headquarters in St. Louis in 2003. The company also paused in its acquisition efforts to digest what it had purchased in 2002. The next major acquisition came in April 2004 with the $143.8 million purchase of Nu-Gro Corporation, Canada's top manufacturer of consumer lawn and garden products. It also did a sizeable global business in controlled release nitrogen and other fertilizer technologies intended to keep lawns green over an extended period of time. Not only did the deal expand United Industries reach geographically, it added a number of brands, including CIL, Wilson, Vigro, Pickseed, So-Green, Plant-Pro, Greenleaf, and Green Earth. Nu-Gro had been a consolidator in the Canadian market, completing 13 acquisitions in the previous 15 years, but it had reached a crossroads, unable to grow much larger in Canada. The obvious next move was to enter the U.S. market, and merging with United Industries was the path chosen.

The addition of Nu-Gro was an important step in preparing United Industries for an eventual public offering or sale to a larger concern, but the composition of the company still required tweaking before investors or corporate suitors would express strong interest. Although United Industries offered a strong line of lawn-and-garden and insect-control products, it was very much a seasonal company. Over 70 percent of its sales came in the first six months of a given year, and its bottom line for that year depended to some extent on the vagaries of weather. Moreover, United Industries was highly dependent on three customers. Lowe's, The Home Depot, and Wal-Mart accounted for 71 percent of the company revenues in 2003. To help compensate for these factors, the company completed a second acquisition in 2004, paying $360 million to buy Cincinnati-based United Pet Group Inc., a pet supplies company with annual sales of $250 million. United Pet's top brands included Dingo rawhide-and-meat chew products for dogs, Nature's Miracle pet stain remover, and Marineland aquarium supplies. The pet supply industry was expected to grow at a 6 to 8 percent annual rate, making it a desirable market to enter. The acquisition also provided year-round sales and expanded United Industries' customer base. Combined sales were expected to reach the $1 billion mark.

To better manage its business lines, in September 2004 United Industries implemented a strategic realignment and established three divisions: Home and Garden, Canada, and Pet. Each group would be run by its own president and report to Caulk as CEO and chairman. The goal, however, remained the same: to grow the business to the point it could either be taken public or sold, thereby turning a profit for Lee Partners.