Property services: floods, fires, and foreclosures

As climate change heats up and the economy cools down, non-discretionary property services attract investor interest.

Anchored by a number of blockbuster transactions, the property restoration, maintenance, and disaster recovery services sector is on fire.  The oxygen stoking the industry’s flames is largely coming from investors’ renewed search for a-cyclical investments in a bull market that has eclipsed over 10 years, the longest on record dating back to 1854.

Of course, fires don’t burn without fuel.  The sector is highly fragmented, providing literally thousands of M&A targets for interested acquirers.  Relevant sector services include property restoration, emergency and catastrophe response, building & facility maintenance, and asset preservation of both residential and commercial real estate.  These sector participants will continue to benefit from increasingly inclement weather patterns and rising mortgage delinquencies and defaults across the U.S., particularly if climate change continues and the economy slips back into recession, which is being predicted by a number of economists and leading indicators.

Recent Deals

As the saying goes, “when it rains, it pours”, and recent sector activity points to a continued trend of M&A-driven consolidation.  Several noteworthy deals highlight the continuation, and perhaps acceleration, of sector deal activity.  This trend is expected to be fueled by both existing and new entrants for the foreseeable future.

• June 2019, publicly-traded FirstService acquired private equity backed Global Restoration Holdings.  At the time of the deal, Global Restoration was the second largest commercial and large loss property restoration firm in North America.  FirstService operates both company-owned and franchise-model Paul Davis Restoration locations, which focus primarily on residential property services.  The combination will enhance FirstService’s scale and capabilities in the property restoration sector.  FirstService acquired a 95% stake in Global Restoration for $505m, implying total enterprise value of $530m.  As of fiscal year end December 31, 2018, Global Restoration generated revenue and operating income of $436m (1.2x revenue deal multiple) and $40m (13.25x operating income deal multiple), respectively.
• April 2019, BELFOR Holdings Inc., the global leader in damage recovery and restoration with operations in 29 countries, was acquired by American Securities, a mid-market private equity sponsor based in New York.  BELFOR employs more than 8,400 team members, and self-reported nearly $2bn of revenue in 2018.  BELFOR grew to its position by completing well over one acquisition per year for the last two decades.  Based on public information, American Securities financed the transaction with approximately 4.5x of total debt, implying total enterprise value of 9x to 10x EBITDA, or $1.5 to $1.8bn.
• March 2019 (announced), SERVPRO, North America’s leading franchisor of residential and commercial property mitigation, restoration, and reconstruction services, announced recapitalization and long-term partnership with Blackstone, one of the world’s leading investment firms with over $472bn of assets under management.  Since its founding in 1967, SERVPRO has grown to over 1,700 individually owned and operated franchisees in the U.S. and Canada.
• August, 2018, Xome Solutions (f.k.a., Assurant Mortgage Solutions Group or “AMSG”) was sold by publicly-traded Assurant, Inc. to Xome, a subsidiary of publicly-traded Mr. Cooper Group Inc.  Xome provides a wide range of real estate services that include seasonal and corrective asset preservation services to maintain property conditions.  To acquire AMSG, Xome paid $35m of cash as well as additional consideration dependent on achieving certain future performance.

Interested Buyer Universe

Property Services Strategics

Consistent with themes in other highly fragmented markets, participants in the sector see acquisitions as a path to incremental growth.  The rationale for making acquisitions includes eliminating competitors, picking up new customers, gaining density in existing markets, establishing a foothold in new markets, increasing capacity, and consolidating operations to realize operating advantage.

Most large sector players, and particularly those backed by institutional capital, are actively involved in evaluating and executing on M&A opportunities. This trend is expected to continue for the foreseeable future.

Adjacent Services Strategics

Not surprisingly, related industries’ service providers see the sector as a fertile hunting ground to service line expansion.  These interested parties often operate businesses with similar attributes, including remote labor management, project-based nature of work, similar or overlapping client base, and facility or industrial services.  Examples of parties considering investments in the sector include providers of industrial services, janitorial services, landscaping services, mortgage services, and insurance claims services.

Private Equity Investors

The private equity universe is attracted to many of the sector’s characteristics, including relatively a-cyclical (e.g., storms or unexpected disasters) or counter-cyclical (e.g., foreclosures) revenue drivers, a highly fragmented competitive landscape, low capex and high free cash-flow business models, and ability to scale once an SG&A foundation is established.  This class of investors will continue to be interested in the sector for the foreseeable future.

In the US, evidence of financial investor interest in the sector can be found in the recent  BELFOR (American Securities) and Servpro (Blackstone) deals mentioned above.  Other examples of PE sector investors include Gladstone Investment-backed Basset Creek Restoration (parentco of J.R. Johnson, Inc.) (April 2018), Dominus Capital-backed BluSky Restoration Contractors (August 2018), PNC-backed RESCON Group (December 2017), and Soundcore Capital Partners-backed Utah Disaster Kleenup (June 2019).

In Europe, the largest provider of property damage restoration, Sweden-based Polygon International AB, has been backed by Triton since 2010.  On average, Polygon has made over two acquisitions annually during Triton’s holding period.

Considering what’s next 

If you’re an owner considering a sale of your business, we’d welcome a conversation to discuss sector M&A landscape across North America.  We encourage our clients to begin this conversation 8-12 months in advance of their target sale date. Livingstone continues to build relationships with sector participants of all sizes.  Let’s have a conversation to determine how Livingstone can help you with your M&A goals.

This article was originally published in the 2019 Global Business Services Report.

Click here to read the full report.