A roll-up strategy promised riches, but harvested mainly bitterness.

Pameco Corp. was known as Pameco-Aire and headquartered in South San Francisco, Calif., when this picture was taken in 1974. The building included a branch and was 25,000 sq. ft.

Pameco Corp. didn't fall easily. After joining the rarefied ranks of publicly traded HVAC distributors, it found itself in financial trouble wavering within a restructuring plan until it could no longer stand. The light at the end of the tunnel had all but turned off when the company filed for bankruptcy in June 2003.

Pameco's history dates back to 1936, when it was formed as a wholesale refrigeration division of Pacific Metals Co. in Southern California. But it spent its later years in Norcross, Ga., and its final few years in Golden, Colo.

The HVAC distributor attained its peak of success after filing for an initial public offering in May 1997, backed by Three Cities Research and underwritten by Donaldson, Lutkin & Jenrettle Securities Corp., Robinson-Humphrey Co., and Schroder Wertheim & Co.

After this, Pameco started scooping up companies until 1999 - creating the management position President of Acquisitions in 1997 and obtaining an expanded credit line of $240 million in 1998. Its acquisition strategy ranged from just grazing a new market with companies like Heating Cooling Distributors, a one-branch operation in Indianapolis, to buying into a whole region with 13 branches of Kansas City, Mo.-based Superior Supply.

After encountering a year full of “operational problems,” the company was forced to enter a restructuring plan. The recapitalization of $185 million was funded by private investment firms, Littlejohn Fund II, L.P. and Quilvest American Equity Ltd.

Pameco first reported a loss in the second quarter of fiscal year 2000, citing restructuring and operational losses as reasons. While it had done well with revenues of $625 million in the 1999 fiscal year, these revenues dropped 3.4% to $603.7 million in the 2000 fiscal year. It was delisted on the New York Stock Exchange on Dec. 29, 2000. Littlejohn took over complete ownership after buying up all outstanding shares of the company in May 2001 and the company moved its headquarters from Norcross, Va., to Golden, Colo.

A disclosure statement made by Steven Lister, who was vice president of finance and CFO at the time of its bankruptcy, described the restructuring plan in detail. The plan concluded that its remaining assets, estimated at around $50 million after it sold 132 locations, would be best utilized to recover its debts through the sale of all parts of its business. The disclosure statement specified Pameco's unsecured claims totaled $37 million and deficiency claims at $20.5 million. It now had 78 locations in 48 states. Lister was unavailable for comment on this story.

Vendor Problems

While Pameco claimed in court documents that its continual efforts of recapitalization to climb out of its hole were repeatedly knocked down by its suppliers, outsiders claim the company was muscling its vendors. Either way, the wholesaler/manufacturer relationship was not operating at the give-and-take level that makes the supply chain work.

Part of Pameco's restructuring plan involved borrowing $20 million in subordinated notes from four of its vendors - International Comfort Products Corp., Emerson, Mueller Industries Inc. and E.I. du Pont De Nemours and Co. In its background description of the case, Pameco said it continually attempted to achieve financial stabilization only to have a vendor revoke its distribution rights in key markets or to be threatened by a vendor if it tried working with one of its competitors.

However, Barry Logan, senior vice president of Watsco (Coconut Grove, Fla.), which acquired 52 Pameco branches, has a different take on the company's vendor relationships. “Pameco believed it was big enough to manhandle and muscle the vendor community,” he says. The distributor would hold auctions and tell vendors what they had to do if they wanted Pameco's business, he notes.

One of Pameco's former vendors says that throughout the restructuring process it resisted the temptation to completely pull its products out of the company, because it felt Pameco's business made up a large percentage of accounts receivable for a number of suppliers of equipment within the industry. The vendor, who requested anonymity, says his company was concerned that if it cut itself off from Pameco, that act could lead to the wholesaler's demise and counter creditors' efforts to collect the money owed.

Logan says Watsco attributes its success with the branches acquired from Pameco to its not trying to strong-arm vendors. “If you keep them all happy and all intrigued,” he says, “and they realize you're investing heavily in the growth of the business, they want to do business with you.”

Branch-Level Relationships

Tension resonated down to the branch level for Pameco. Dean Blackley, a former Pameco manager who joined the Buffalo, N.Y., branch in 1971, says he had trouble retaining customers because he was unable to guarantee he would have what they needed in stock.

He is still manager of the branch now owned by Philadelphia-based United Refrigeration Inc., which acquired several locations just before Pameco filed for bankruptcy. According to Blackley, the main problem was the distributor's centralized management. Pameco told its branch managers how to run their branches from its headquarters in Colorado, without allowing for unique issues that could arise at individual locations, he points out.

On top of that, he says, the management was constantly changing. “Every new boss had a new grand scheme.”

In an industry that demands consistency, Pameco delivered the opposite. “Customers just couldn't understand why we were changing equipment lines every three years,” Blackley says.

Pewaukee, Wis.-based Gustave A. Larson, which acquired 14 branches just before Pameco filed for bankruptcy, had to overcome problems with inventory levels, according to Scott Larson, CFO and vice president of finance. One of the reasons Gustave A. Larson has been able to turn the failing branches around is because it is a long-term, stable player in the industry and committed to stocking the branches properly, he says.

Larson estimates that sales have picked up in the double digits since Gustave A. Larson took over the branches in May 2003. After the company invested in beefing up the inventory and updating the technology to a real-time system, it started on rebuilding employee confidence in the local branches. It worked on reviving the relationships with customers and vendors that had been established by Pameco's employees over the years but had deteriorated, probably due to lack of inventory and cutbacks in personnel, Larson says.

Watsco also used this return-to-the-roots approach with its acquired branches, according to Logan. Two of the branch groups it acquired have reverted back to their original names - Belleville Supply in Virginia and Thermal Supply in Texas. Logan uses an analogy to describe this approach: imagine walking into the corner grocery store and all of the products are new and everything has been moved so it's hard to find anything. So, instead of trying to homogenize these acquisitions into a large executive-dictated entity, Watsco permitted the branches to operate under their original names and let them determine what they need on an individual basis.

Blackley, who manages the Buffalo branch now owned by United Refrigeration, says this type of autonomy is all he needs to make him happy. “I used to rant and rave with my purchasing division because I couldn't even get one of the most popular compressors in stock to sell,” he says. Now he is continually surprised to find what he needs on the shelf when he receives a customer's order.

Pameco's approach to its big-company existence caused problems in its relationships with both its branch managers and its vendors. When the HVAC distributor filed for bankruptcy, it owed millions to several manufacturers.

The branches that survived have succeeded with the help of already established networks at the local level and a stable investment in inventory.

“I never thought I'd say I wish a company would stop sending me stock,” Blackley says. “I'm loving life.”

After all, you can't sell a compressor if you don't have it.