Project Description

Spin-off Overview

On July 26, 2017, ServiceMaster (NYSE: SERV) announced  its intention to separate its American Home Shield (home warranties and home service marketplace) business through a tax-free spin-off that would be complete by the end of Q3 2018.  ServiceMaster has named the new company “frontdoor, inc.” with the ticker: FTDR.  Shareholders of record on September 14, 2018, will receive shares in the spin-off.  The distribution ratio is 1 share of frontdoor for every 2 shares of SERV. The first day of trading will begin on October 1, 2018. 

Source: Service Master Slide Deck

Background:

From Seeking Alpha:

ServiceMaster Global operates three home-related businesses, Terminix being the best known. The stock has been a winner since coming public.

The company is spinning off its American Home Shield business, which will be incorporated as frontdoor inc (yes, all lowercase letters). SERV shareholders will receive .5 shares for each SERV share they own. SERV will maintain about 19.8% ownership after the spin, and then intends to exchange those shares for debt by June 14, 2019.

The spinco business is an interesting one. As I understand it, it’s a mix of insurance and a service marketplace. They sell home service plans, commonly called home warranties. 90% of plans cost between $435 and $780 a year and cover the repair costs for covered items (systems or appliances are the two plans, it appears), though clients still have to pay $75-$125 per contractor visit as sort of a co-pay. Frontdoor then turns to a network of contractors to offer them business from the paying customers. The value proposition, as the company describes it, is that contractors get steady business while Frontdoor is able to negotiate lower contracting rates.

The company tells a reasonable story of under-penetration. The key stats about the underlying business – “From 2007 to 2017, our customer base has grown from 1.3 million to two million, representing a CAGR of four percent, our customer retention rate increased from 73 percent to 75 percent, and the annual revenue we generated from renewals grew from 60 percent to 66 percent.” So, on the one hand, secular growth as more consumers become aware of the opportunity. On the other hand, 75% retention is not great.

I presume FTDR is levered to home ownership rates and growth and has exposure to disaster risk. Though I guess that could cut both ways – as more disasters or everyday storms wreak havoc, perhaps more customers decide they want to pay up front to lock in “the peace of mind, convenience, repair expertise and guarantee provided by a home service plan,” as the filing puts it.

The company has produced 10-14% net margins, per the filings. Recurring capex requirements are “typically less than two percent of our annual revenue”, and they have a negative working capital model. If you squint, you could call this something not far from an SAAS (software as a service) model – recurring revenue, capital-light, and bringing two sides of the market together on a platform, delivering value to both ends.

Company Resources:

Press Release – July 26, 2017

Slide Deck – July 31, 2017

Articles

Seeking Alpha – Spin-off September with KLX Energy and Frontdoor– September 4, 2018