ServiceMaster Global Holdings (NYSE:SERV), a leading provider of essential services to residential and commercial customers in the termite, pest control, cleaning and restoration markets, has been performing well since April. The stock is up more than 50% in the last quarter. Over the past three months, stock has jumped 52.8%.
Servicemaster is a compelling long investment opportunity with a potential for multiple catalysts over the next 6-12 months that should unlock meaningful value for shareholders, according to an investment thesis posted on ValueInvestorsClub.
The thesis, by a user named 85bears, has a bullish viewpoint on SERV. The investor – who does not hold a position in the company or owns its shares – believes that there is ~30% more upside.
According to the thesis, the stock catalysts are: a sale of Servicemaster Brands franchise business unit and strategic interest. The sale of Brands, should it happen would create a debt-free or near debt-free balance sheet for SERV – a company whose competitors maintain 2x+ of leverage and who has in its own history easily carried 4-5x of leverage
A sale of the Brands would likely be a material positive event, if it happened. The closest comparison to Brands is SERVPRO, a franchisor purchased by Blackstone for $1 billion in March 2019 for approximately 6x revenue and about 15-20x EBITDA (estimates based on limited public financial disclosure). Applying similar valuation framework implies a value for Brands of $1.5-2.0 billion. This compares to net debt as of Q1 2020 of approximately $1.6 billion. Therefore, the after tax proceeds to SERV of a sale of Brands, should it happen would create a debt-free or near debt-free balance sheet for SERV – a company whose competitors maintain 2x+ of leverage and who has in its own history easily carried 4-5x of leverage. This would provide a substantial $800-1,500+ million of capital (20-40+% of current share price) to use in a shareholder friendly way as this business model is cash generative and requires minimal capital. Also, should a Brands sale not proceed, this may actually be an even better outcome for existing shareholders if COVID-driven cleaning service business truly accelerate. It would be another growth angle to a very profitable franchise model. Time will tell.
Finally, SERV may choose to combine with another strategic as mentioned above rather than finding another management team to try to execute its operational improvement plan. I would assume this drives upsides for shareholders in excess of the numbers above, but will not speculate on the magnitude of upside from synergies or premium.