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ServiceMaster goes private with buyout



ServiceMaster goes private with buyout

ServiceMaster hopes the grass will be greener as a private company. The home-services firm in March accepted a $5.5 billion buyout offer from the New York-based private equity firm Clayton Dubilier & Rice (CD&R).

Franchisees will find some of those lush pastures, too, at least according to company officials. CD&R is likely to keep the company in tact as it invests in customer service and other plans to improve ServiceMaster’s operations. And CD&R has a history of good relationships with franchisees through its ownership the last three years of the water-quality company Culligan.

“We really are very excited about CD&R’s purchase,” said Mike Isakson, president and chief operating officer of ServiceMaster Clean and current chair of the International Franchise Association. “They have owned franchise businesses in the past. They understand franchising. As we have visited them, we feel good about them.”

ServiceMaster has more than 5,500 company-owned and franchise locations around the country. It employs 32,000 people and its brands include TruGreen LawnCare, Terminix pest-removal, the home warranty company American Home Shield and the inspection business AmeriSpec. Its franchises are mostly in two segments: ServiceMaster Clean, a home and commercial cleaning business, and cleaning company Merry Maids.

Revenues last year grew 6 percent, to $3.4 billion, yet net income fell 16 percent, to $169.7 million. Bowing to pressure from large shareholders, ServiceMaster in November announced plans to look at “strategic alternatives.” In March the company turned to CD&R, which agreed to pay $15.63 in cash for each share—16 percent above ServiceMaster’s stock price on March 16—while assuming existing ServiceMaster debt.

In announcing the deal, ServiceMaster CEO J. Patrick Spainhour said the new owners would be free to make improvements without the burdens of satisfying Wall Street investors as a public entity. Donald Gogel, CD&R’s chief executive, said his firm would invest in ServiceMaster’s plans to grow its business units. Isakson said those efforts are largely focused on customer retention.

Existing franchise agreements will transfer to ServiceMaster’s new owners once the deal is finalized, Isakson said. ServiceMaster’s franchised segments’ revenue grew 12 percent last year, according to the company’s financial reports, and that growth should protect them from significant changes. “Our franchise businesses...generate good cash flows. That’s certainly attractive to CD&R. They just spent $5.5 billion for something that works. They’re not about to screw it up.”

CD&R is a nearly 30-year-old, private equity firm with a history of buying and selling companies. Its purchases have included Kinko’s, which it sold to FedEx in 2004 for $2.4 billion, and the Hertz rental car business, which it bought with two other firms for $15 billion in 2005.

Its franchise experience comes from its ownership of Culligan, which it bought for $610 million in 2004 and includes more than 700 franchisees, or dealers, around the country. The water quality company at the time had gone through a succession of different owners. “They have brought a strong desire to improve the system,” said Don Karger, president of the Culligan Dealers Association who owns a dealership in Northern Ohio.

CD&R is credited with improving relations with dealers, which had deteriorated under the succession of owners. The firm re-endorsed the company’s well-known “Hey, Culligan Man!” slogan—a move franchisees applauded—and it worked with dealers on a new 20-year franchise agreement.

The new deal brought existing franchises under a single agreement. Thanks to the ownership changes and a succession of new franchise deals, dealers at the time operated under several different agreements.

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