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VOL. 128 | NO. 223 | Thursday, November 14, 2013

ServiceMaster to Spin Off Struggling TruGreen

By Bill Dries

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The ServiceMaster Co. plans to spin off its TruGreen lawn care business at the end of 2013 after several years in which the Memphis-based collection of residential- and commercial-services companies has struggled with the right business model for the TruGreen brand.

ServiceMaster CEO Robert Gillette announced the spinoff of TruGreen Thursday, Nov. 14, in advance of an afternoon quarterly earnings call to investors and analysts.

In a written statement, Gillette, who became CEO of ServiceMaster in June, said separating TruGreen from the ServiceMaster portfolio give TruGreen “the time and focus it needs to make the changes necessary to complete the turnaround of its business.”

The spinoff will be a tax-free transition through a pro rata dividend to ServiceMaster Global Holdings Inc. stockholders.

ServiceMaster hopes to close at or near the end of the year in a complex transaction that will make TruGreen an independent private company. ServiceMaster’s financial advisers in the action are J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. and Natixis.

Gillette is the third ServiceMaster CEO in two and a half years to struggle with TruGreen’s business model.

Patrick Spainhour, the company’s CEO, started in April 2011 with ServiceMaster’s sale of its commercial landscaping business, TruGreen LandCare to Aurora Resurgence Group, a private investment firm based in Los Angeles. The sale happened as Spainhour was leaving as CEO.

Spainhour said the sale allowed the separate TruGreen business that remained at ServiceMaster to “focus on being a partner with the landscape business.”

Spainhour’s successor, Hank Mullany, said the sale allowed TruGreen to focus on core residential and commercial business service. Mullany also announced changes in TruGreen leadership immediately.

Mullany attempted to fix the company’s service and sales operations by moving the head of the company’s Terminix division in to overhaul TruGreen’s approach. It was supposed to be a temporary move but became permanent.

Mullany’s move on TruGreen was the first action he took in his year and a half tenure at the top of the ServiceMaster management chart.

But TruGreen became the exception in quarterly earnings calls to the other parts of ServiceMaster and ServiceMaster executives repeatedly configured their earnings reports with statements that pointed out that except for TruGreen’s numbers, the other brands were performing as expected or better.

The preliminary third quarter 2013 earnings reported Thursday for ServiceMaster show net income of $46 million for the quarter compared to a net loss of $704 million a year ago. That loss was attributed to goodwill and trade name impairment charges ServiceMaster took at TruGreen.

The company said the higher revenue across the company in third quarter 2013 was offset by several factors including higher selling expenses primarily at TruGreen.

Gillette, in his first earnings call with investors and analysts this past August, was as blunt about TruGreen as Mullany had been in his first earnings call about TruGreen.

“TruGreen is going through some challenges,” Gillette said. “But it’s largely self-inflicted. Unfortunately we did this to ourselves.”

Gillette began by undoing some of Mullany’s moves.

David Alexander, who remains as TruGreen president, said in August that the fix to “operating systems” issues at the company would take “longer than previously expected” and probably affect ServiceMaster’s financials for the rest of the calendar year.

For the quarter that ended Sept. 30, TruGreen posted operating income of $27 million. But for the first nine months of calendar 2013, TruGreen has a $686 million loss in operating income.

Gillette, in the company’s written statement, acknowledged another change in TruGreen was needed.

“It has now become clear that while we’re making progress, TruGreen is on a different earnings growth timeline than the rest of ServiceMaster,” Gillette said.

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