By Adil Amlaiky and Blake Dal Santo (McGill University), and Saihejpal Ailwadhi, Kian Patel, Rhys Meredith, Nial Nolan, Oliver Platts, Velizar Zlatev (Bristol University)
Photo: Annie Gray (Unsplash)
Overview of the deal
Acquirer: Brookfield Asset Management Inc.
Target: HomeServe Plc
Total Transaction Size: £4.1 billion ($5 billion)
Target advisors: J.P. Morgan, UBS, and Goldman Sachs
The owner of the iconic Canary Wharf and one of the biggest alternative asset managers in the world, Brookfield, will add to its portfolio the British home repair emergency company, HomeServe. With its all-stock transaction worth $4.1bn ($5bn) being one of the largest takeovers in London this year, shareholders are expected to be paid £12 per share - a 71% premium on HomeServe’s price of 704 pence on March 23 when Brookfield’s interest became public and drove the price up. The takeover still awaits a court order, expected to take place in Q4 of 2022. Even though the price looks compelling, HomeServe’s stock was trading at levels closer to the price paid by the fund before it plunged in Q1 2022.
Bought through Hestia Bidco, a subsidiary of Brookfield Infrastructure funds, the acquisition will give the firm access to the EMEA, North America, and Japan markets for home repair. HomeServe Group has generated steady cash flows and has paid more than £800 million in dividends to shareholders since 2004. The company’s clear vision and growing Membership and HVAC business in its 10 operating countries along with other innovative endeavours such as eLocal, provides confidence behind the deal. The long-term ambitions of the merger is to make HomeServe the world’s largest provider of home repairs and improvements and use it to help the decarbonisation agenda of Brookfield.
“Since HomeServe was founded in 1993 with just £500,000 of capital from South Staffordshire Group, the company has gone from strength to strength and now operates in 10 countries with a workforce of around 9,000 employees” - Richard Harpin, CEO of HomeServe
Company Details (Acquirer - Brookfield)
Brookfield was founded in 1899 as the São Paulo Tramway, Light and Power Company by William Mackenzie and Frederick Stark Pearson. At the time, the company focused on the management and construction of infrastructure for transportation and electricity in Brazil. It is one of the largest alternative asset-management firms in the world today and has approximately USD$750 billion in assets under management. They are involved in a wide spectrum of investments including infrastructure, private equity, real estate, and the renewable energy sector. Brookfield operates in over thirty countries across five continents, taking pride in their investments in high-quality and long-life assets.
Founded in 1899, headquartered in Toronto, ON
CEO: Bruce Flatt
Number of employees: 180,000
Market Cap: $102B (as of 9/13/2022)
LTM Revenue: $86B
LTM EBITDA: $18B
LTM EV/Revenue: 3.04x
LTM EV/EBITDA: 14.55x
Company Details (Target - HomeServe)
Established in 1993 by Richard Harpin as an emergency plumbing service, HomeServe is a multinational home improvement and emergency repair business based in Britain, and headquartered in Walsall, UK. They offer their services globally and offer optional service plans to their customers. Their over-25 years of service in North America and Europe have allowed them to establish a strong international customer base in the home repair business. Richard Harpin has held the position of CEO since 2001, and he oversaw their expansion to the North American market in 2003. HomeServe consists of three primary divisions: North America Membership and HVAC, Europe and Asia Membership and HVAC, and Home Experts. These divisions account for 9,000 employees and over 8.4 million customers around the world, concentrated in Europe, France, North America, Spain and Japan.
Founded in 1993, headquartered in Walsall, UK
CEO: Richard Harpin
Number of employees: 9,000
LTM Revenue: $1.9B
LTM EBITDA: $262M
LTM EV/Revenue: 2.44x
LTM EV/EBITDA: 17.74x
Projections and Assumptions
The deal enables Brookfield to support HomeServe in upgrading its critical residential infrastructure with the focus of increasing energy efficiency and decarbonisation.
Moreover, Brookfield is riding the global push toward energy efficiency, with HomeServe aiding homeowners to make their homes more environmentally friendly. Furthermore, the deal enables Brookfield to continue pursuing their plans to invest in infrastructure assets, given a growth in investment demand across Europe – this helped spark their conversations with banks to sell other holdings, such as their 45% stake in TDF Group. Finally, the deal involves adding a residential service business that is fitting with their holdings in home-improvement. This solidifies their position as a long-term player in the industry.
Following the deal, HomeServe would no longer be listed on the London Stock Exchange, after being listed for 18 years. Founder Richard Harpin, his wife, and directors have agreed to tender their shares, allowing Brookfield to further their pursuit towards decarbonisation. This move is significant, as their holdings represent a 12.8% stake in the company.
HomeServe shareholders will also be able to line their pockets with the receipt of 1,200 pence cash per share, representing a premium of approximately 71% to the stock price before the takeover talks with Brookfield in April were disclosed.
Although Homeerve’s business boomed during the pandemic, when people were forced to work from home, this growth has remained resilient. The housing market is constantly demonstrating the appetite for new homes within the UK, illustrated by the 9.8% growth in house prices in March 2022. As a result, with HomeServe providing a complementary good to this sector, connecting consumers with plumbers and handypersons, the market in which HomeServe operates will grow. With a low barrier to entry within the market, strong competition means that the institution needs to remain competitive in both the price and quality of the service. With the backing of Brookfield, Homeserve will have Brookfield’s capital and expertise (as a residential infrastructure business) to innovate and remain competitive within the sector.
Risks and Uncertainties
A large proportion of any risks and uncertainties lie in the purchase price. A 71% premium on HomeServe’s share price on March 23rd begs the question: can a premium of this size, to an undistributed share price, lead to the concern that the price is too high in relation to the realisable economic gains resulting from a merger?
However, several industry insiders are under the assumption that HomeServe’s shares were trading at a severe material discount. Matt Evans, a portfolio manager at Ninety One, a top shareholder in HomeServe, told the Financial Times that Brookfield’s bid came up “opportunistically”, alluding to the fact that risk is being mitigated. This is reflected by the fact that the offer price is more than a tenth below a 2020 all-time high.
Contrastingly, this could be a clear reminder that recently the UK has had the inability to value mature businesses containing growth units. This directly suggests why so many companies have been falling out of the UK stock market, but equally implying that HomeServe’s market value remains skewed.
“As a UK investor it’s rewarding to have UK businesses that stay listed and keep growing and compounding...” - Matt Evans of Ninety One, a top-20 shareholder in HomeServe