HomeServe’s latest stock price slide shows buyer as opportunistic | Nils Pratley

NA question on the subject: Richard Harpin, CEO of HomeServe, has a heartwarming story about entrepreneurial success in the not-so-trendy business of repairing pipes and boilers and selling parallel insurance policies through utility companies.

He started the business in 1993 with £500,000 support from South Staffordshire Water. Now HomeServe has 9,000 employees in 10 countries. Selling £4.1bn – or £4.8bn including debt – to Canadian real estate and infrastructure giant Brookfield is a success in a half. Harpin will see his stake worth £300m and his wife around £200m.

Still, it’s hard to describe the terms of the takeover as supremely generous given how far HomeServe has come in 18 years on the London stock market, where it has paid out £800m in dividends to shareholders. Yes, at first glance, the 71% premium to the share price looks pretty cool before the Canadians arrive in March. But it’s also true that HomeServe’s shares are trading above the pre-Covid £12 per share selling price. It’s not about getting to the top.

The pre-Brookfield slide in stocks is due to little more than a sense that the quarantine is over, repair insurance is a deferrable purchase, and shopkeepers are in short supply for HomeServe’s Checkatrade platform. In other words, nothing fundamental. As the document states: “HomeServe emerged from the Covid pandemic as strong and well-positioned for continued growth in all three business segments.”

So why sell? There may be a clue in Harpin’s reference to how Brookfield is “committed to providing long-term capital.” If this is a dig at short-term fund managers, it seems a little unfair on this occasion. HomeServe was able to conquer its now-largest market, the US, while it was listed, so public market shareholders weren’t entirely security-prioritized looters.

Stockbroker Davy values ​​the sum of HomeServe’s parts at £11 per share and has an estimate of £15.50 based on long-term cash flow, so a £12 exit doesn’t feel great. Nor is Harpin’s refusal to say whether he will remain in business under the new ownership, which is certainly information that shareholders can expect to be told.

They’ll take the cash bidder’s money because they (almost) always do, but there’s still an air of unsatisfying opportunism about this takeover. It really doesn’t need to be.

Royal Mail is still trying to figure itself out

“We are at a crossroads with the transformation of Royal Mail,” says Keith Williams, head of the postal service group. A version of this phrase has been heard most years since privatization in 2013. Unfortunately, it’s usually true.

Two years ago, Williams himself, hired to inject life into a stalled rebuilding program, issued a thunderous “we need to change” message as the pandemic accelerated the rise of parcels and the fall of letters. The call now calls for greater urgency under post-quarantine conditions.

This is partly because the group has not delivered all the savings intended under the key “path to change” agreement. £100m in theory plus £59m on arrival; This is a result that contradicts the refrain only six months ago that “enhanced peer and union involvement” allows productivity to flow.

The next relationship with the CWU is a payout round that goes through a dispute. There hasn’t been a strike at Royal Mail since privatisation, so there’s a deal to stake, but a 9% overall inflation in the background adds intensity to the talks. The company’s core offer is only 2%, even if it chooses to highlight the conditional elements that allow for a “up to 5.5%” disclosure.

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Meanwhile, the stock market is doing its own calculations and has concluded that a miracle in Royal Mail’s fortunes did not occur during the package explosion of Covid. The share price, which rose from 125p to 527p between April 2020 and May 2021, fell 12% to 300p on Thursday.

Automation of parcel sorting is taking place, resulting in even greater savings of £350m this time if all goes according to plan. And the group’s pre-tax profit (half of which is the GLS international business) is not to be underestimated, up 6.5% to £707 million. The group may even survive price hikes.

But the wording echoed in the statement was a warning of “downside risk” in the £303m operating profit estimates for the UK Royal Mail business. The risk now looks real: the momentum seems to have evaporated so suddenly.