Shares in business services group Homeserve (HSV) have jumped 11% to 894p, following news that Brookfield Infrastructure was in the early stages of considering a possible offer for HomeServe.
Today’s share price rise only partly reflects the magnitude of the recent re-rating. Over the past five days the share price has risen by 28%.
Brookfield Asset Management is one of the world’s largest alternative investment management companies with $688 billion of assets under management
A NATURAL PRIVATE EQUITY TARGET
There are a number of factors which make Homeserve a natural target for private equity ownership.
These include its inflation protected, annuity like income streams. Specifically the defensive and recurring nature of its profits enable it to support higher levels of debt.
Moreover as a private company there are a number of actions that could be undertaken, that would potentially be harder to execute as a listed company.
These could include the disposal of the Home Experts business to either another private equity fund or a trade buyer.
TRANSACTONS SUGGEST FURTHER UPSIDE
A recent transaction, whereby American Water disposed of its US Homeowner Services Group suggests there could be further upside in Homeserve’s share price.
The sale in 2021 for $1.27 billion, equated to enterprise value per customer of $850, and an EV to EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortisation) multiple of 15 times.
Using this same multiple it would imply a Homeserve share price of £10. Alternatively using the $850 value per customer generates a value of £14.50.
OTHER BIDS POSSIBLE
There is also the potential that Brookfield’s initial indication of interest, prompts interest from other parties.
Homeserve’s US operation is the jewel in the crown and is forecast to generate 47% of the group’s 2023 earnings.
Management are confident in the group’s ability to increase the number of US customers from the first half 2022 level of 4.8 million to a Milestone 2 target of six-to-to seven million.
Liberum believes double that figure is achievable over the long term.
