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Buy Ahead of Oct 1 Separation to Own Both Market-Leading Companies Post-Spin

In a major corporate overhaul, Business Support Services provider ServiceMaster Global Holdings, Inc. (SERV) announced on July 26, 2017 the retirement of its former CEO Rob Gillette and the tax-free Spinoff of its home warranties business Frontdoor, Inc. (FTDR). The transaction will create two market leading entities, with the Parent focused on the Terminix Pest Control business and the Spinoff on the Home Warranty business. The Spinoff was approved on August 27, 2018 and is due to be completed on October 1, 2018.

We are positive on SERV’s upcoming Spinoff and believe that the separation will bring much needed strategic and operational flexibility to the two new companies. As a result of the separation, SERV (Parent ex-Spin) will position itself closer to its pest control peers. We like that both Frontdoor, Inc. (AHS business, Spinoff) and SERV (Parent, ex-Spin) are leading players in their respective spaces and we believe the separation will unlock value for shareholders. SERV plans to distribute roughly 80.2% of its stake to shareholders and retain the remaining 19.8% stake to be later divested by June 14, 2019. Here are several angles we have examined regarding SERV and the upcoming transaction:

The Separation Creates Two Industry-Leading Entities: The Spinoff of FTDR (AHS business) from SERV creates two industry leading businesses that are leaders in their respective markets. FTDR is the largest player in US home warranties and SERV (through its Terminix business) the largest player in the US pest extermination market. SERV’s management expects the Spinoff will allow the Parent (post-Spin) to focus on Terminix and its transformation initiatives while allowing FTDR to pursue growth opportunities.

Strong Fundamentals: SERV is fundamentally strong despite recent challenges in the pest control market, with the company increasing revenues by mid-single digits over the last few years and maintaining a stable EBITDA margin of 23-24%. For FY17, the company’s revenues increased +6% while EBITDA margins were maintained at 23%. For 2018, the company increased its revenue growth outlook to between 7% and 9% from the earlier estimate of 6% to 7% and maintained EBITDA margins at 22%.

M&A Strategy Will Fuel Growth: In its 88-year history, SERV has grown through numerous acquisitions. The company has evolved over the years in terms of service and product offerings, with strategic acquisitions playing a very important role in that evolution. As examples of this strategy, SERV’s two major revenue contributors today (Terminix and AHS) were both acquired in the 1980s. There is potential for further tuck-in acquisitions post-Spinoff as each company extends their product offerings and expand into new markets.

New Management Team / Spinoff Nabs ex-Lyft COO: SERV’s new management team, led by CEO Nikhil Varty, has a proven track record of implementing strategic reforms. Prior to joining SERV, Mr. Varty served as President of the Americas and Global Vice President of M&A at WABCO. Likewise, the newly appointed board member Naren Gursahaney brings Spinoff experience via Tyco’s (TYC) 2012 break-up. On the Spinoff side, FTDR will be led by Rex Tibbens, who served as the COO of the fast-growing ridesharing company, Lyft.