On January 8, 2014, ServiceMaster filed a Form 8-K Current Report with the Securities and Exchange Commission which included a situational assessment of TruGreen and the rationale for the proposed spin-off of TruGreen.
The presentation describes the situation as follows:
“Unlike ServiceMaster’s other business segments, TruGreen experienced a significant downturn in recent years:
• Since 2010, TruGreen has lost nearly 500,000 customers (23%)
• Operating margins have eroded due to production inefficiencies, chemical costs, and inflationary pressures compounded by lower fixed cost leverage as falling customer counts drove revenue down.
• Recovery may take several years and may not achieve historical performance levels, particularly given the need to repair customer confidence and reverse the three-year downward trend in customer counts.
• ServiceMastewr incurred significant, successive, impairment charges in 2012 and 2013 of $1.6 billion to the book value of TruGreen’s goodwill and trade name, reflecting several declines in actual and projected financial performance
• TruGreen’s 2013 adjusted EBITDA and cash flow are projected to be negative
• TruGreen 2014 adjusted EBITDA is projected to improve slightly, but cash flow is projected to be negligible”
The report also stated that “TruGreen is an obstacle to the potential 2014 IPO of ServiceMaster.”
According to the presentation, the spin-off of TruGreen:
• “Enhances ServiceMaster’s ability for an IPO within one year.
• Allows more intense management focus
• Spin is leverage neutral
• ServiceMaster’s earnings and cash flows less cyclical/more predictable.
• Proceeds from ServiceMaster’s anticipated IPO would be used primarily to reduce debt.”
The presentation states that ServiceMaster’s board of directors had made a good faith determination of the fair value of TruGreen of $399 million, at the high end of its financial advisor’s valuation range.
The report reiterates the Company’s assertion that the spin-off is prudent and in the best interests of all ServiceMaster stakeholders.