No question about it: Richard Harpin, chief executive of HomeServe, has an uplifting tale to tell about entrepreneurial success in the unfashionable business of fixing pipes and boilers and selling parallel insurance policies via utility companies.
He co-founded the business in 1993 with £500,000 of backing from South Staffordshire Water. Now HomeServe has 9,000 staff in 10 countries. Agreeing a £4.1bn sale – or £4.8bn including debt – to Canadian property and infrastructure giant Brookfield is an achievement and a half. Harpin will see his stake valued at £300m and his wife’s at almost £200m.
Yet it’s hard to describe the takeover terms as supremely generous given how far HomeServe had already travelled during its 18 years on the London stock market, a period in which it paid £800m in dividends to shareholders. Yes, at first glance, a 71% premium to the share price before the Canadians turned up in March looks lovely. But it’s also true that HomeServe’s shares had traded above the take-out price of £12 a share before Covid. This is not a case of going out on a high.
The pre-Brookfield drift in the shares seems to have been caused by little more than a sense that lockdown is over, that repairs insurance is a deferrable purchase and that tradespeople are in short supply for HomeServe’s Checkatrade platform. Nothing fundamental, in other words. As the document put it: “HomeServe has emerged from the Covid pandemic with all three business divisions performing strongly and well positioned for continued growth.”
So why sell? There may be a clue in Harpin’s reference to how Brookfield is “committed to providing long-term capital”. If that was a dig at short-termist fund managers, it seems a little unfair on this occasion. HomeServe has been able to conquer the US – now its biggest market – while in listed form, so the public market shareholders weren’t entirely safety-first plodders.
Stockbroker Davy values the sum of HomeServe’s parts at £11 a share, and had a long-term cashflow-based estimate of £15.50, so an exit at £12 doesn’t feel terrific. Nor does Harpin’s current refusal to say whether he’ll stay with the business under new ownership, which is surely information that shareholders could expect to be told.
They’ll take a cash bidder’s money because they (almost) always do, but there’s still an unsatisfactory air of opportunism about this takeover. It doesn’t really need to happen.
Royal Mail still trying to sort itself out
“We are at a crossroads with the transformation of Royal Mail,” says Keith Williams, the postal service group’s chairman. A version of that statement has been heard most years since privatisation in 2013. Unfortunately, it’s usually accurate.
Two years ago Williams himself, recruited to inject life into a stalled restructuring programme, issued a thunderous “we need to change” message as the pandemic accelerated the rise of parcels and the decline of letters. Now the call is for more urgency under post-lockdown conditions.
That is partly because the group hasn’t delivered all the intended savings under its key “pathway to change” agreement. A theoretical £100m-plus has become £59m on arrival, an outcome that jars with the refrain only six months ago that “improved colleague and trade union engagement” was allowing efficiencies to flow.
The next engagement with the CWU is a pay round that has entered a disputes process. There hasn’t been a strike at Royal Mail since privatisation, so a deal is the way to bet, but a backdrop of general inflation at 9% adds intensity to the talks. The company’s basic offer is only 2%, even if it would prefer to emphasise the conditional elements that allow an “up to 5.5%” description.
The stock market, meanwhile, is doing its own sums and has concluded that a miracle in Royal Mail’s fortunes did not occur during Covid’s parcel boom. The share price, having soared from 125p to 527p between April 2020 and May 2021, is back at 300p, down 12% on Thursday.
Automation of parcel-sorting is happening, allowing chunkier savings of £350m-plus to be generated if all goes to plan this time. And last year’s pre-tax profits for the group (half of which is the GLS international business) of £707m, up 6.5%, are not to be sniffed at. The group may even get away with price rises.
But the phrase that resonated in the statement was the warning of a “downside risk” to estimates of operating profits of £303m for the UK Royal Mail business. The risk currently looks real: momentum seems to have evaporated very suddenly.