IPO Report: ServiceMaster Global Holdings (SERV)

ServiceMaster Global Holdings ($SERV) is a leading provider of essential residential and commercial services, operating through an extensive service network of more than 7,000 company-owned, franchised and licensed locations. It is headquartered in Memphis, TN,

Fourteen other companies are scheduled for the week of June 23, 2014. The complete IPO calendar is available at IPOpremium.

The manager and co-managers are J.P. Morgan, Credit Suisse, Goldman Sachs, and Morgan Stanley

Joint Managers: BofA Merrill Lynch, Jefferies & Co., Natixis, RBC Capital Markets, Baird, Piper Jaffray, and Ramirez.

SERV scheduled a $700 million IPO on the NYSE with a market capitalization of $2.5 billion at a price range midpoint of $19.50 for Thursday, June 26, 2014. SEC filings

ServiceMaster Global Holdings IPO Report

Overview

SERV is a leading provider of essential residential and commercial services, operating through an extensive service network of more than 7,000 company-owned, franchised and licensed locations.

Q1 '14 income was down because of cold weather but revenue was up 3.7% for Q1 '14 vs Q1 '13.

Valuation

Conclusion

SERV is a stable consumer services-oriented business with top line revenue growth around 3.5% annually.

Customer retention rates are high.

But the P/E of 61 based on 2013 year results seems high for a business with no obvious growth drivers.

The rating on SERV is neutral minus.

Business

SERV is a leading provider of essential residential and commercial services, operating through an extensive service network of more than 7,000 company-owned, franchised and licensed locations.

SERV’s mission is to simplify and improve the quality of its customers' lives by delivering services that help them protect and maintain their homes or businesses, typically their most highly valued assets.

SERV’s portfolio of well-recognized brands includes Terminix (termite and pest control), American Home Shield (home warranties), ServiceMaster Restore (disaster restoration), ServiceMaster Clean (janitorial), Merry Maids (residential cleaning), Furniture Medic (furniture repair), and AmeriSpec (home inspections).

Seasonally slow Q1 '14

Colder weather conditions in early 2014 adversely affected the traditional termite revenue in the three months ended March 31, 2014.

SERV expects the colder weather to continue to affect consolidated revenues in the second quarter of 2014 and throughout the remainder of the year, particularly in the Terminix segment.

Leading market positions

SERV has leading market positions across the majority of the markets it serves, as measured by customer-level revenue.

SERV serves five million residential and commercial customers through an employee base of 13,000 company associates and a franchise network that independently employs an estimated 33,000 additional people.

Income statement summary

For the year ended December 31, 2013, SERV had revenue, Adjusted EBITDA, and income from continuing operations of $2.293 million, $450 million, and $42 million, respectively. For the three months ended March 31, 2014, SERV had revenue, Adjusted EBITDA, and losses from continuing operations of $533 million, $115 million, and $18 million, respectively. Terminix, SERV’s largest segment, represented 57% and 60% of its revenue in 2013 and the three months ended March 31, 2014, respectively.

Retention rates

In 2013, within its Terminix segment, customer retention rates for its termite and pest control businesses were 85% and 79%, respectively, and in its American Home Shield segment its retention rate was 74%.

SERV has significant size and scale, which SERV believes gives it a number of competitive advantages.

Terminix

Terminix is the largest termite and pest control business in the United States, as measured by customer-level revenue, and serves approximately 2.8 million customers across 47 states and the District of Columbia through approximately 285 company-owned and 100 franchised locations.

American Home Shield

Additionally, SERV estimates American Home Shield to be approximately four to five times larger than its nearest competitor, as measured by revenue.

American Home Shield serves approximately 1.4 million residential customers across all 50 states and the District of Columbia through a network of approximately 10,000 pre-screened independent home service contractor firms.

Dividend Policy

No dividends are planned.

Competition:

Termite and Pest Control

Competition in the segment for professional termite and pest control services in the United States comes primarily from smaller regional and local, independently operated firms, as well as from Orkin, Inc., a subsidiary of Rollins, Inc. (ROL) ; and Ecolab, Inc. (ECL) , both of which compete nationally. SERV estimates that there are approximately 20,000 termite and pest control companies in the United States, nearly all of which have fewer than 100 employees.

Home Warranties

Competition for home warranties that cover household systems and appliances comes mainly from regional providers. SERV’s two largest national competitors are First American Financial Corporation (FAF) and Old Republic International Corporation (ORI) . SERV estimates American Home Shield to be four to five times larger than each of these companies, as measured by revenue.

Disaster Restoration, Emergency Response and Related Services

Competition in the markets for disaster restoration, emergency response and related services comes mainly from local, independently owned firms and a few national professional cleaning companies, such as Servpro Industries, Inc.; Belfor, a subsidiary of Belfor Europe GmbH, BMS CAT, Inc.; Stanley Steemer International, Inc.; and Sears Holdings Corporation (SHLD) .

Janitorial

Competition in the market for janitorial services comes mainly from local, independently-owned firms and a few national professional janitorial firms such as ABM Industries Incorporated (ABM) and Jani-King International, Inc. The market for janitorial services is highly fragmented with more than 800,000 companies.

Residential Cleaning

Competition in the market segment for residential cleaning services comes mainly from local, independently owned firms, and from a few national companies such as The Maids International, Inc., Molly Maid, Inc., and The Cleaning Authority, LLC.

5% stockholders

Clayton, Dubilier & Rice Fund VII, L.P. and related funds             65.8%

StepStone Group LP managed funds     14.4%

JPMorgan Chase Funding Inc.    7.3%

Ridgemont Partners Secondary Fund I, L.P.       5.4%

Use of proceeds

SERV expects to net $656 million from its IPO. Proceeds are allocated as follows:

redeem $210.0 million in principal amount of the 8% 2020 Notes (representing 35% of the outstanding principal amount thereof) at 108% of the principal amount thereof, plus accrued and unpaid interest estimated to be approximately $7.0 million;

redeem $262.5 million in principal amount of the 7% 2020 Notes (representing 35% of the outstanding principal amount thereof) at 107% of the principal amount thereof, plus accrued and unpaid interest estimated to be approximately $7.7 million;

repay $112 million in principal amount of borrowings outstanding under the Existing Term Loan Facility;

and pay certain of the Equity Sponsors aggregate fees of $21 million in connection with the termination of its consulting agreements with each of them upon the consummation of this offering.