The Aerial Tree Trimmer was revolutionary for four key reasons: safety, speed, ease of use, and accuracy.

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   Rather than working 70 feet in the air, subjected to the elements, operators stay safe in a climate-controlled cab on the ground. It's not an exaggeration to say that this innovation has probably saved tens of thousands of lives since its 1980 invention. An aerial tree trimmer performs 5-10 times the daily work of traditional methods like bucket trucks, lifts, and climbers. A Jarraff trimmer can clear an average of 2 miles of vegetation in a day vs. a 0.5 mile average with a bucket truck. The Aerial Tree Trimmer also significantly reduced the necessary crew size from three or four with a bucket truck to just requiring one- or two-line workers.

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Disciplined Nepotism Drives 30 Years of Growth for Asplundh
 

   Asplundh’s third generation began to take over in the mid-80s and early 90s, and quickly  made three critical decisions that transformed Asplundh into one of the most successful private companies in the country, growing revenues 11% per year for 40 years. 40 years of double-digit revenue growth. Just incredible.

               

1. They quickly implemented aerial tree trimmers nationwide. These machines vastly improved profitability, workplace safety, and employee morale.  From the line worker’s point of view, it’s a lot more fun to sit on the ground in a climate-controlled cab moving an automated saw arm than it is to have to climb up in a bucket truck and potentially get hit by branches that were sawed manually.

2. They grew Asplundh’s customer base by introducing new service lines to diversify outside of the core vegetation management / tree trimming services. This was done both organically and via acquisition. For the last two decades, Asplundh has acquired a new company every two to three years. In addition to vegetation management, they expanded Asplundh into a family of subsidiaries that as whole design, build, and maintain all aspects of networks for utilities, developers, departments of transportation, and municipalities. In 2015, commercial landscaping and snow removal services were added via acquisitions throughout the U.S. and Australia / New Zealand region. In 2019, infrastructure services were added to the fold with the acquisitions of Power Delivery Solutions and Burlington Electrical Test Company (see acquisition commentary within the Asplundh Investment Thesis section for further discussion).

3. They used a unique form of disciplined nepotism to ensure that they didn’t put at risk the success their family had built for them.

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   After estate taxes, a family business’s most lethal enemy is internal squabbling over the wealth piled up by previous generations. To avoid this kind of discord, Asplundh used a method that turned out to be simultaneously both creative and incredibly effective. They called it the "Sponsor System." The roughly 20 Asplundhs family members working at the company, even the CEO, had to oversee and sponsor different lines of business. There were no cushy spots in personnel or marketing. If you didn’t manage a profit center, then you didn’t work at Asplundh. CEO Matt Asplundh says: "No one in the family is above failure and success."

 

   This is unabashed nepotism, because only an Asplundh family member can become a sponsor, but it is highly disciplined form of nepotism. To this day, any family member that wants to work for the company must first finish college, then do something else for three years before they can apply for a position at the company. They can spend those three years either working for another company, traveling, or working towards a graduate degree. The aspirant must then get recommendations from three different family members, and at least one must be a board member.

 

   The successful candidate still doesn't have it made. They must then complete a rigorous eight-year training program. Does everyone pass it? No way. Three Asplundhs have dropped out or been asked to leave in the last decade. The recently appointed CEO's experience is pretty typical. The 56-year-old nephew of Chris Asplundh (Asplundh’s legendary CEO from 1992-2010) originally started working for the company as a tree-trimmer servicing Philadelphia Electric Co.'s lines. He then supervised Asplundh crews in Minnesota and Texas. After four years of that, he was sent to oversee 200 workers in Iowa, before moving to Nebraska as the director of a 300-employee division.

 

   He eventually worked his way up from Nebraska Group Executive all the way up to the top job over the span of 23 more years, when he became CEO in 2021. "The company is extremely demanding. If you don't want to do it, then this isn't the place to be" says Chris.  It’s no surprise that barely one in ten of the Asplundh family shareholders work for the company. Other family members have inherited the stock and are simply passive investors. Just under 20% of the company is technically owned by employees, but it's more like a traditional pension, because workers must sell back their stock at book value upon leaving the company.

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   The fourth generation of Asplundhs are now beginning to take the helm; there are over 60 of them. How much longer can the company maintain its unique and highly successful nepotism? Under the Sponsorship System, only a few will retain jobs at the company. Some younger family members currently receive less than $50,000 a year in dividends. Most of the earnings, estimated at roughly $1.5 billion per year, either get plowed back into the business or are used to pay down the modest amount of long-term debt Asplundh took out to fund some recent acquisitions.

 

   Because Asplundh is so profitable, historically the family didn’t have much need for outside capital. But as more members of the family wanted to realize some liquidity over the years, the only likely buyer was Asplundh Tree, and the company had a policy of only paying a conservatively stated book value.

 

   Being an Asplundh certainly was no guarantee of affluence. This changed in 2017, when the Luxembourg-based behemoth CVC Capital Partners finally convinced the Asplundh family to sell them a minority stake. While the official price and ownership percentage CVC purchased was never released, it was a minority deal that valued Asplundh at roughly $10B, or about 14x its trailing EBITDA at the time.

 

   To reduce a potentially massive tax bill for certain members of the family, the Asplundhs made CVC purchase its stake within a specific buyout fund dedicated to retaining holdings for at least a decade or more (rather than the typical three-to-five-year private equity hold period). While I’m by no means a tax expert, if I had to speculate, the book value of Asplundh’s shares prior to the CVC investment was likely astronomically lower than the implied $10 billion valuation because Asplundh’s business model is so fixed asset heavy. They can (and should) use all sorts of depreciation write offs to report very little taxable income. It’s a cash-flow gusher of a business model.

 

   Family businesses are notoriously fickle. I’ve heard from a few different people that the family’s decision to take outside capital for the first time was primarily driven by two factors – tax reduction and capital markets expertise.

 

1. Tax reduction. At the time, investors and business owners like the Asplundhs were concerned about potential upcoming changes in the tax code. Remember, the investment was made in 2017/2018. This was right around all the hoopla of whether Trump’s tax reform would end up getting repealed if Biden won the next election. Didn’t end up happening (yet) but it was a valid concern at the time.

2. Capital markets expertise. While I’m sure a bit of the driving force was some family members understandably wanting to take some chips off the table and realize some liquidity, I’m told they were even more interested in bringing in some financial “deal guy” expertise to accelerate Asplundh’s recent acquisition spree. Having a tenured investor like CVC on their side of the negotiating table changes the game when you're raising billions of publicly-traded debt financing. Even for a wonderful business like Asplundh, raising capital in the public markets can be a headache, especially if you’ve never done it before. Just recently, Asplundh used some of the capital from its recent bond offering to acquire Voltyx Energy Solutions (May 2024) and Chevron Group (June 2024).

 

Asplundh Investment Thesis

 

   PE firms have been salivating for a shot at owning Asplundh for decades. The business is an LBO wet dream for a multitude of reasons: (a) they hold the dominant #1 position within a highly fragmented market, (b) the revenue base is highly recurring, (c) trees still grow in a recession, making the vast majority of Asplundh’s business completely independent of economic cycles, (d) its end market grows at a high single digit rate due to accelerating regulation and other climate-related factors, (e) they enjoy a highly variable cost structure, and (f) they operate in an industry with extremely high barriers to entry.

 

a. They hold the dominant #1 position in a highly fragmented market. Asplundh is the #1 player in the vegetation management space by a mile. To give you some context, Asplundh is three times larger than its nearest competitor, Kendall Tree. Asplundh has roughly 50% market share within the $8 billion Utility Vegetation Management sector. They employ 33,000 people and are one of only three service providers that have a truly national presence. Although vegetation management is inherently a local business, national scale is a huge competitive advantage when it comes to servicing larger commercial and industrial clients that tend to have a very broad geographic presence (think electric utilities, rail roads, power producers, municipalities, etc.).

 

   Like in most industries, scale provides better leverage when negotiating long-term contracts with large customers who generally seek national providers with a strong safety record, longevity, and a turn-key solution. Asplundh’s scale also enhances its profitability by allowing for more operating efficiencies. Being able to afford expensive equipment (i.e., aerial tree trimmers) makes Asplundh crews 5x more efficient than a single-crew sized company could ever achieve. In an industry as highly fragmented as vegetation management, this scale translates to multiple percentage points (and billions of dollars) to Asplundh’s bottom line.

 

   Over time, the combination of the sizable addressable markets in vegetation management ($8 billion), construction services (~$25 billion), and commercial landscaping ($153 billion), and Asplundh's scale, safety records, and long-standing relationships, the company will have a ton of opportunity to grow its market share organically and expand through more tuck-in acquisitions. With all due respect to long-standing family businesses, there is also typically a lot of unnecessary fat that trickles in over the years. It’s the nature of any bureaucracy. CVC will likely be a huge value add in this area as well.

 

b. High level of recurring revenue with a long-tenured customer base. After major national power outages like the 2003 Midwest and Northeast Blackout, the Federal government implemented a new regulatory framework layered with harsh penalties to incentivize (force) electric utilities to protect their infrastructure assets from ever encroaching vegetation growth (see Appendix for further regulatory discussion). These regulations have made vegetation management spending (i.e., Asplundh’s revenue base) completely non-discretionary and 100% independent of the economic cycle.

 

   Approximately, 90% of Asplundh's revenue is derived from recurring maintenance-related work projects rather than highly cyclical heavy infrastructure construction projects, so Asplundh’s cash flow is a lot easier to underwrite then a typical investment.

 

   Throughout all its growth over the past two decades, Asplundh hasn’t neglected its old clients. Four of the company's first five customers have contracted with Asplundh continuously since its inception. 20 more utilities have been customers for the past 50 years. Asplundh’s safety and quality records have allowed the company to maintain essentially the same customer base for nearly a century. Contracts last an average of three to five years and are rarely not renewed. This business is a debt underwriter’s matchmade in heaven.

 

c. Trees still grow in a recession. As mentioned, RoW maintenance is mandated by federal, state, and local regulatory authorities. Utilities must always maintain clearance distances, requiring ongoing tree trimming throughout the year, regardless of the economic environment.

 

   U.S. transmission / distribution and operating / maintenance (“T&D O&M”) spending declined only 2% in 2009 and grew 5% in 2020. Utilities have one job–providing reliable electricity, and they are 100% reliant on Asplundh to make this happen. Vegetation grows regardless of the economic cycle, providing a consistent, stable source of demand for RoW maintenance.

 

   Regulators set electricity rates based on a “bottom-up” estimate of utility expenses, including the cost of RoW maintenance. As rates are typically set on a multi-year basis, RoW maintenance spending does not correlate to year-over-year economic changes. RoW maintenance is typically the largest single maintenance expense for a utility. According to CNUC, a utility consulting firm, investor-owned utilities spend $5 billion a year on tree trimming. Utility transmission and distribution operations and maintenance spending has steadily grown 4.4% annually since 2006 (of which RoW maintenance is a significant component).

 

   This resiliency is further evidenced by Asplundh's performance through previous cycles. For example, during the Great Recession, Asplundh kept plugging away, organically growing its revenue from $2.2 billion to $2.3 billion in 2008-2009.

 

d. Multiple end market tailwinds will drive long-term market growth. A variety of long-term market trends have driven steady investment—to the tune of tens of billions of dollars a year—on initiatives to replace, upgrade, maintain, and expand T&D infrastructure. These include the increasing age of the networks, more stringent regulations, increased demand for power delivery, a greater focus on renewable energy, smart grid initiatives, and utilities’ involvement in the deployment of 5G wireless telecommunications networks (see Appendix for further discussion on end markets).

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e. Highly variable cost structure. Asplundh clearly has a very attractive business model from a topline revenue standpoint, but it also enjoys a highly variable, labor dominated cost structure. When you combine that with relatively low capital spending requirements (around 7.0% of revenue per year) and modest working capital needs, Asplundh is clearly a highly capital efficient business. Being able to flex a large portion of your cost structure at will is a powerful arrow to have in your quiver and is a key reason free cash flow grew even in the very severe economic decline during the GR in 2008/2009.

 

   In addition, Asplundh’s can utilize heavy levels of depreciation deductions to significantly reduce its taxable income, given the high-ticket price and long useful lives of their fixed asset base (aerial tree trimmers cost roughly $300,000 per machine and can last upwards of 20-30 years with proper maintenance). Asplundh owns thousands of these, which translates to tens of millions of annual depreciation expense they can use to report less taxable income.

 

f. High barriers to entry. Asplundh's safety records, large operating scale, national footprint, massive employee base of experienced tree trimmers, and long-standing customer relationships make it damn hard (if not impossible) for a potential new competitor to enter the space in any meaningful way. Given the contractual nature of the industry, I find it hard to see a potential future where Asplundh’s market share is threatened in any serious way.

 

Asplundh Business Overview / Acquisition History

 

   Asplundh operates through three primary segments: Vegetation Management ($4.2 billion, 60% of revenue), Utility Infrastructure Services ($2.0 billion, 30% of revenue), and Commercial Landscaping ($300 million, 5% of revenue). 

 

   Since bringing in CVC in 2016, Asplundh has done a number of acquisitions on the infrastructure service side to diversify the business away from its core vegetation management segment.

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Infrastructure Services Acquisitions:

• Chevron Group (June 2024). New Zealand-based provider of traffic management, planning, and training services to the utility, construction, government and event sectors.

• Voltyx Energy Solutions (May 2024). Asplundh bought Voltyx, a Maryland-based provider of engineering, design, commissioning, installation, repair, and maintenance services for the electrical grid, from private equity firm Arcline. Given Arcline’s typical investment check size, it’s fair to say to this was a pretty large acquisition (I’m told Asplundh’s largest ever), likely in the $1 billion range.

• Burlington Electrical Test Company (“BET”) (September 2019). Purchased through Asplundh subsidiary UtiliCon Solutions Ltd. (Asplundh’s Infrastructure Services arm that maintains overhead and underground power systems, roadway lighting, traffic signals and intelligent transportation systems by doing testing and commissioning, pole inspection and treatment, AMI/AMR deployments, and storm and emergency recovery). BET is a services firm that accredits electrical technicians with certain certifications and other various tests.

• Power Delivery Solutions (“PDS”) (April 2019). The first acquisition that Asplundh made after bringing in outside capital from CVC, when they first showed signs of expanding more on the infrastructure services side. PDS is a utility outsourced services provider that does cost estimates, permitting, surveying, drafting, project management, and reliability/feasibility/ line assessment studies.

 

Vegetation Management Acquisitions:

• Rotor Blade (April 2016). Rotor Blade is a South Carolina-based provider of airborne vegetation management services. They have a patented aerial saw method where a helicopter flies over a tree with a line of saws dangling down on a string. The video of these things in action is pretty wild.

 

Commercial Landscaping Acquisitions:

• T.R. Gear Landscaping (September 2015). Asplundh’s acquisition of T.R. Gear helped to continue building out its commercial landscaping subsidiary Aspen Grove Landscaping, which now represents about 5% of total revenue (~$300 million). This is a crowded space with a ton of private equity competition for deals so if I had to guess they will probably focus more on the infrastructure service side in future acquisitions, as landscaping in general is commoditized and is more of a race to the bottom on pricing. T.R. Gear provides landscaping and snow services for commercial clients in Cincinnati, Dayton, and Northern Kentucky.​​

Aspen Grove Landscaping Subsidiaries