You can trace Warren Nielson's desperate purchase of a $14,700 air-conditioner/heat pump back to a little-noticed 2006 deal in the world of high finance.
It was a day of near-record heat on Sept. 17, 2010, with a high of 104 degrees, when Nielson brought his wife back to their east-side home after an operation at Tucson Medical Center. The AC wasn't working.
Nielson called Russett Services, which had installed the system seven years before, but the company now identified itself as ARS Rescue Rooter and sent out technicians dressed in sharp white shirts, he said. They declared the home's ventilation system "completely contaminated," he said, prescribed a replacement system, arranged financing with a Wells Fargo subsidiary and started work the next day.
"I'm 80 years old. I don't know anything about that stuff," said Nielson, who retired from the Air Force after wartime tours in Korea and Vietnam.
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The employees who showed up that day were under intense pressure to sell that can be traced to the purchase of American Residential Services by a private-equity consortium in 2006, seven former ARS employees told the Star in interviews.
Leveraged Buyouts were king
That was a peak year for leveraged buyouts, said Pavel Savor, an assistant professor of finance at the University of Pennsylvania's Wharton School. Cheap credit allowed private-equity firms such as CI Capital Partners to borrow easily to buy companies such as American Residential Services.
But companies bought by private-equity firms often are under pressure to cut costs or increase revenue quickly for the new owners, Savor said. In many cases new owners hope to sell the companies soon for a profit - at least, they must pay off the new debt burden.
One of the ways ARS' new owners planned to boost revenue was to buy local plumbing or heating-cooling companies in cities around the country. The pressure to sell increased sharply at ARS Rescue Rooter's local office on East Benson Highway after the parent company bought a Nevada firm, Yes! Air Conditioning, in 2008.
The new management brought a Las Vegas mentality, focused on selling, to Tucson, former general manager Wayne Thomas and others said.
"We as a team tried fighting some of it, but we weren't successful," former service manager Vic Novack said. "It was sent down that this was how we were going to operate."
The upshot for customers like Nielson was that when they called ARS for help with their plumbing or air conditioning, they were met by employees under pressure to sell.
A Sept. 15 lawsuit by the Arizona Attorney General's Office alleges rampant high-pressure sales to elderly people and other consumer fraud by ARS companies. It asks a judge to shut the company down in Arizona.
How deal was set up
New York-based CI Capital Partners joined with another private-equity firm, Florida-based Royal Palms Capital Partners, to buy American Residential Services from ServiceMaster Corp. in October 2006. To consummate the purchase, the firms, plus two management partners, put in $32.2 million of their own money and borrowed $52.8 million, while issuing $28.7 million in notes.
It was a small- to medium-sized deal in the world of mergers and acquisitions, led by a company that prides itself on long-term investments that increase revenue and profit fast. Two former ServiceMaster Corp. executives, Don Karnes and David Slott, took over management of the company.
ARS had owned Russett Services before the 2006 buyout, but afterward Russett began identifying itself locally as ARS Rescue Rooter. (Russett Southwest Corp., also a Tucson contractor, is not connected to ARS.) It was also about that time that ARS employees in Tucson received an inch-thick book detailing a new price structure, said J. Kelly Zaugra, who handled billing and accounts payable for the firm here.
The book detailed ARS' new flat-rate pricing, which set unwavering prices for all services and equipment, without consideration of time spent doing the work or other individual circumstances.
Previously, Zaugra said, the company had simply charged for parts and labor, as contractors normally do. Now the flexibility was gone and prices were high, she said.
"I didn't like the fact that we would charge clients $10,000 when equipment, parts and labor would cost only $4,000," said Zaugra, who left in 2007. "There's a difference between making a profit and raking people over the coals."
Thomas, the former general manager, tried to resist the changes but retired under pressure in 2008, several former employees said. Though disappointed in the company's turn, Thomas said he thinks it has the front-office talent to make a strong turnaround.
Commission, not wages
Memphis-based American Residential Services followed the plan laid out after the 2006 purchase - increase revenue and profit fast, in part through acquisitions. It bought local firms in cities including Atlanta, Charlotte, Dallas, Phoenix and Las Vegas.
ARS bought 24/7 ServicesCorp., along with its subsidiary Yes! Air Conditioning, in 2008. By January 2009, the effects of that purchase were being felt in Tucson. In 2008, the company put in place a compensation system by which employees were paid on commission, not hourly wages.
In January 2009, a much more aggressive manager, Guy Boehler, replaced Thomas. At morning meetings, employees were confronted with their performance using a statistic of "revenue per call," said long-time technician Richard Hasenohrl.
"If your numbers weren't there, if you weren't selling, you weren't basically doing your job," said Hasenohrl, who left for another company in 2009.
In March of this year, Boehler was hired as general manager of Goettl Air Conditioning, an ARS company in Phoenix.
Goettl praised him in a press release: "Since taking control of the Tucson division in January 2009, Boehler achieved growth in revenue of over 43.3 percent as well as increasing profits by over 430 percent."
Warren Nielson realized how that happened a couple of weeks ago, when he asked another air conditioning company to inspect the split AC/heat-pump system ARS had installed. For an equivalent system, the company wrote in an estimate, it would charge $7,790, about $7,000 less than the sum he is still paying for the ARS system he bought under pressure.
Paying $500 a month, he should be done in four or five years, when he's about 85.
ARS statement
ARS and its employees did not answer specific questions but provided a written statement. Here are excerpts:
"ARS proudly serves the Tucson community with more than 60 local employees. We respond to more than 13,000 service calls annually from customers in Tucson and pride ourselves on offering high quality workmanship and 24 hour availability to help homeowners maintain and improve their homes. We take very seriously the trust that the residents of Tucson have placed in our HVAC and plumbing services, and we are proud that more than half of our customers this year are repeat customers. …
"We want customers to know all of the options available - whether repairing, replacing or doing nothing at all -so we put our recommendations, cost estimates and guarantees in writing so that they can make the best decision for themselves. …
"If a customer is dissatisfied with our service we take deliberate action to make it right. We welcome and encourage anyone who feels that they have not been satisfied with our work to contact our customer service department so that we may immediately attend to their concerns."
Contact reporter Tim Steller at tsteller@azstarnet.com or 807-8427.