ServiceMaster Co., the parent company of green industry service giant TruGreen, agreed to be bought by Clayton Dubilier & Rice, in a cash deal valued at $4.7 billion, or $15.625 per share. CD&R also will assume more than $1 billion in debt.
“Going forward, this transaction will have significant long-term benefits to our business,” ServiceMaster CEO Pat Spainhour said during a conference call today. “Working with CD&R will provide us the ability to pursue our key strategic initiatives without being encumbered by quarterly earning pressures that often influence the timing of investments and actions.”
ServiceMaster’s board of directors outlined those strategic initiatives in November 2006 when it announced it hired Morgan Stanley and Goldman Sachs to seek strategic alternatives for shareholders.
These strategies, as they relate to TruGreen, include accelerating direct marketing campaigns, expanding the lawn quality audit program and investing in technology and training, Vice Chairman Ernie Mrozek said today. “All of those are important drivers of long-term growth and all of them will require time and investments to fully materialize,” he said. “CD&R plans to invest in all business units to accelerate their key strategic initiatives and growth plans that are already in place.”
Rich Schnall, a CD&R partner who oversaw the deal, echoed the firm’s plans to invest in an interview with Bloomberg. “This has been a company that has struggled over the past five years as a public company, and our intent is to invest in the long term,” he said. “The biggest businesses are in a cultural transition, and that’s going to take some spending.”
One example of a “cultural transition” within ServiceMaster is TruGreen’s changing sales strategy from a telemarketing-dominated force to one that uses “neighborhood marketing,” or door-to-door sales, to recruit new lawn care customers. TruGreen made about one-third of its more than a million annual sales this way in 2006, said Tim Ehrhart, TruGreen ChemLawn’s director of sales.
GOOD DEAL. Spainhour said he will stay on as ServiceMaster’s CEO and the rest of top management is expected to remain intact. CD&R has recruited George Tamke, an operating partner, as chairman of ServiceMaster’s board of directors.
Tamke, former co-CEO of Emerson Electric, worked on the firm’s takeover of Kinko’s, which it eventually sold to FedEx Corp. in 2004 for $2.4 billion.
The $15.625 per share CD&R will pay is16 percent more than the March 16 closing price and a 31 percent premium over the closing price on Nov. 27, 2006 – the last trading day before the company announced publicly it was seeking strategic alternatives.
Completion of the transaction is expected to take place in late second or early third quarter, and is contingent upon customary closing conditions, including majority stockholder approval.
“It’s a good deal for them and it’s a full price for a company that has had challenges growing,” analyst James Barrett of CL King & Associate in New York told Bloomberg. Barrett also indicated that one option for ServiceMaster, who’s had difficulty gaining efficiencies across the different business lines, would be to break it up into smaller units. There are no immediate plants to split up the company, Spainhour and Mrozek said.
Leveraged buyout firms like CD&R typically sell their investments within five years, according to Bloomberg.
This transaction is not CD&R’s first taste of the green industry. An investment fund managed by the firm led the purchase of lawn and garden consumer product manufacturer Scotts from ITT Corp. in 1986. Scotts went public again in 1992 by selling 12.5 million shares at $19 each.
Steve Bono, ServiceMaster’s vice president of communications, says the transaction will be good for both TruGreen’s business and the green industry. “As you well know, the green industry can be very seasonal,” Bono said. “I think the advantage of being a privately owned company is you no longer have concerns running exactly quarterly lines. Tha’s an advantage to a seasonal business because, for example, you might want to increase your marketing or your sales or your operations in any one quarter. The timing is much more flexible when you’re a private company. That’s an automatic advantage that particularly is true with the green industry.”