HomeServe/Brookfield: scouting for bids results in another UK buyout

Businesses are leaking from the UK stock market like water from a faulty tap. Home repairs insurer HomeServe may be the latest. Brookfield has made a recommended offer worth £4.6bn including net debts. That would end HomeServe’s two decades as a UK public company.

The Canadian buyout group is offering £12 a share. That represents a generous 59 per cent premium to the three-month undisturbed share price. But there is still a whiff of opportunism — and conflicted interests — about the deal.

Smart entrepreneur Richard Harpin built the FTSE 250 business and later sponsored a UK Scout Association entrepreneur badge. He realised the best way to market insurance to repair broken boilers, plumbing and water damage was via utility companies.

Investors have cooled on the stock in the past two years. The offer price is more than a tenth below a 2020 all-time high. That reflects the UK market’s inability to value mature business containing growth units.

The racy proposition is on Brookfield’s home turf of North America. A fragmented US market is ripe for consolidation. The division might be worth as much as 19 times forward ebitda, thinks Berenberg. The 13 times ebitda takeout multiple for the whole business looks accordingly low.

Brookfield could pay more. It has extensive utility investments in the US. Its ownership of peer Enercare Solutions could mean significant cost savings from duplicated overheads.

Adding even a modest 2 percentage points to group ebitda margins over the next five years would create a 20 per cent annualised return on investment at exit, with standard buyout assumptions. Likely revenue crossovers would boost that further.

Are Harpin and his board right to recommend the deal? The chief executive stands to make £300mn on top of £250mn from share sales since 2005, Lex calculates. Fair enough. But he has not disclosed whether he would continue to work for HomeServe after the buyout, or on what terms.

He should do so to meet the scout promise to “do your best”. The UK cost of living crisis may meanwhile discourage discretionary purchases of insurance, however well-marketed. The buyout appears inevitable.