Story Stocks®
Updated: 02-Sep-20 12:20 ET
ServiceMaster wipes slate clean by selling off ServiceMaster brands business (SERV)
With shares down 33% yr/yr due to the company's lackluster financial performance, ServiceMaster (SERV) needs a shake-up. Acknowledging the underperformance, SERV believes the solution to its troubles is to split the business into two separate entities: Terminix and ServiceMaster Brands.
SERV announced in late January that it's exploring strategic alternatives, including a possible sale of its ServiceMaster Brands business. This segment includes the ServiceMaster Restore, ServiceMaster Clean, and Merry Maids brands.
The timing of the announcement was peculiar because it came while SERV's former CEO, Nikhil Varty, resigned. Board chairman Naren Gursahaney, who stepped in as interim CEO, would be charged with navigating the company through this major transformation.
When SERV brought in former Monro (MNRO) CEO Brett Ponton as its new CEO on August 6, it was an indication that SERV was getting closer to making a move.
With leadership now in place, SERV announced this morning that it's selling ServiceMaster brands to an affiliate of Roark Capital for $1.553 bln. The remaining company will become a pure-play pest control business and will change its name to Terminix.
Strategically, the company believes that the divestiture will allow it to sharpen its focus on Terminix's growth opportunities, while also streamlining and simplifying the business. At nearly 90% of total revenue, Terminix is the engine that drives SERV's business, making the decision to hone in on that segment quite sensible.
Additionally, the ServiceMaster brands business has been a laggard, weighing on SERV's financial results. In Q2, revenue for the unit fell by 4% yr/yr to $63 mln and Adjusted EBITDA declined by 11% to $24 mln. Comparatively, Terminix reported revenue growth of 5% (flat organically) and Adjusted EBITDA growth of 14% to $120 mln.
Both businesses have suffered from the pandemic as business closures and health concerns about bringing in outside workers have prompted service postponements. However, after peaking in April, service postponements have moderated as businesses reopened, enabling SERV to reaffirm its Q3 revenue guidance of $495-$515 mln and continuing operations Adjusted EBITDA guidance of $80-$90 mln.
The stabilization of business conditions provided a solid footing for this deal to materialize. In fact, we believe that SERV received a generous offer. At $1.553 bln, Roark Capital is paying roughly 15-18x estimated FY20 adjusted EBITDA for the ServiceMaster brands.
Investors seem to be pleased with the offer as SERV shares rally sharply higher. With $1.6 bln in long-term debt on the books, the idea of paying down some debt is especially appealing. The company may also use some proceeds for accretive acquisitions and/or to bolster shareholder returns.
The status quo wasn't achieving desirable results for SERV or its shareholders. The divestiture provides SERV with a clean slate to optimize the performance of the Terminix business, while also implementing earnings-enhancing actions.
SERV announced in late January that it's exploring strategic alternatives, including a possible sale of its ServiceMaster Brands business. This segment includes the ServiceMaster Restore, ServiceMaster Clean, and Merry Maids brands.
The timing of the announcement was peculiar because it came while SERV's former CEO, Nikhil Varty, resigned. Board chairman Naren Gursahaney, who stepped in as interim CEO, would be charged with navigating the company through this major transformation.
When SERV brought in former Monro (MNRO) CEO Brett Ponton as its new CEO on August 6, it was an indication that SERV was getting closer to making a move.
With leadership now in place, SERV announced this morning that it's selling ServiceMaster brands to an affiliate of Roark Capital for $1.553 bln. The remaining company will become a pure-play pest control business and will change its name to Terminix.
Strategically, the company believes that the divestiture will allow it to sharpen its focus on Terminix's growth opportunities, while also streamlining and simplifying the business. At nearly 90% of total revenue, Terminix is the engine that drives SERV's business, making the decision to hone in on that segment quite sensible.
Additionally, the ServiceMaster brands business has been a laggard, weighing on SERV's financial results. In Q2, revenue for the unit fell by 4% yr/yr to $63 mln and Adjusted EBITDA declined by 11% to $24 mln. Comparatively, Terminix reported revenue growth of 5% (flat organically) and Adjusted EBITDA growth of 14% to $120 mln.
Both businesses have suffered from the pandemic as business closures and health concerns about bringing in outside workers have prompted service postponements. However, after peaking in April, service postponements have moderated as businesses reopened, enabling SERV to reaffirm its Q3 revenue guidance of $495-$515 mln and continuing operations Adjusted EBITDA guidance of $80-$90 mln.
The stabilization of business conditions provided a solid footing for this deal to materialize. In fact, we believe that SERV received a generous offer. At $1.553 bln, Roark Capital is paying roughly 15-18x estimated FY20 adjusted EBITDA for the ServiceMaster brands.
Investors seem to be pleased with the offer as SERV shares rally sharply higher. With $1.6 bln in long-term debt on the books, the idea of paying down some debt is especially appealing. The company may also use some proceeds for accretive acquisitions and/or to bolster shareholder returns.
The status quo wasn't achieving desirable results for SERV or its shareholders. The divestiture provides SERV with a clean slate to optimize the performance of the Terminix business, while also implementing earnings-enhancing actions.
