BIRMINGHAM, Ala., Jan. 24, 2020 /PRNewswire/ -- While the warning sirens are screaming "Iceberg!", the leadership at ServiceMaster Global Holdings, the parent of Terminix International, appear to be simply shuffling deckchairs on the Titanic – once again. From the outside, it would also appear that the rats may be jumping ship.
In the last 13 weeks, as its stock price sunk like the doomed ocean liner, Matt Stevenson, the President of Terminix Residential, and Nik Varty, the CEO of ServiceMaster, have both either abandoned ship or were asked to walk the plank.
So, here's what investors need to know: Can and will ServiceMaster correct Terminix's course?
The beginning of the exodus.
On October 21, 2019, ServiceMaster announced its preliminary results for Q3 2019.
The news was not good.
The company announced that it expected third-quarter 2019 net income of $25 million versus $71 million for the same period in 2018.
It also reported that Terminix had "$2 million in termite damage claims arising primarily from Formosan termite activity."
However, in the same report, ServiceMaster claimed that "[t]he increase in termite damage claims include[d] the resolution of a single $2 million termite damage claim from 2016."
For those reading closely, ServiceMaster seemed to be suggesting that the country's largest termite service provider paid $2 million in termite claims in Q3 2019, all from a single termite damage claim.
In the same report, ServiceMaster claimed that "Formosan termite activity has been increasing over the last few years, however due to a number of climatic and environmental factors it remains largely concentrated in the Mobile, Alabama area of the country."
However, these factors should be similar across the entire Gulf Coast region, unless, perhaps, by "environmental factors," ServiceMaster was suggesting that Terminix had allowed the homes under its "protection" in Mobile and Baldwin counties to go decades without providing necessary termite treatments, creating the perfect "environment" for massive termite infestations. In reality, Terminix has suffered routine losses of $1,000,000 or more in numerous arbitration or jury trials since June of 2018 with one law firm that has eight experienced trial lawyers devoting almost allot their time to fraud cases against Terminix. Terminix still has avoided a full disclosure of those losses to shareholders and analysts. It has escaped a $1,000,000 to $2,800,000 loss in only one trial since June 2018.
ServiceMaster's Q3 report also seemed to suggest that Terminix's contingent liability problems were about to get much worse, stating that "[s]tarting in 2018, the company initiated mitigating actions to limit our future exposure, including third party claims management, reinforcement of effective processes, improved documentation, and a change in pricing structure."
ServiceMaster's Q3 report raises two obvious questions: 1) why aren't any of the announced changes intended to reduce the number of homes infested with termites? and 2) How could a change in pricing structure possibly reduce the number of termites destroying houses in Alabama?
ServiceMaster's 2019 Q3 report answered the second question, stating that Terminix expected $10 million of "targeted revenue reductions principally in the Mobile, Alabama area" and that its organic revenue growth should more than offset "a reduction in termite renewals driven partially by managed reductions from price increases in the Formosan termite market of Mobile, Alabama."
In other words, ServiceMaster was stating that its "solution" for Terminix's contingent liability problem was to target certain customers in Alabama with extraordinary price increases, with the expectation that these customers would not be able to pay and, thus, would have to cancel their lifetime contracts.
In other words, rather than providing the services that it promised, Terminix decided to gouge its south Alabama customer so they would leave.
According to numerous complaints from Terminix customers in Mobile and Baldwin Counties, they have begun to see annual renewal charges of thousands of dollars to tens of thousands of dollars per year.
As expected, Terminix effectively ran off many customers in south Alabama.
Arousing more concern, ServiceMaster announced that same day that Matt Stevenson was off the team and that Nik Varty would be acting as interim head of Terminix's Residential Termite operation, further blurring the line between ServiceMaster Global Holdings and Terminix International. Weeks later they hired Kim Scott, the CEO of a wood storage pallet-making company as the new leader of the troubled company. This raised concern that the problems at Terminix were so serious that experienced talent cannot be attracted to the country's largest termite prevention provider.
The Stock Price Fallout
Following the publication of its Q3 report, Wall Street financial analysts began reaching out to Campbell Law PC, a Birmingham, Alabama law firm that focuses its practice on exposing termite services fraud, to better understand the fraud claims being made against Terminix.
The first thing they learned was that the $2 Million dollar claim mentioned in the Q3 report was not for the resolution of a termite damage claim, but rather was a $2 million dollar arbitration award, obtained by Campbell Law against Terminix for defrauding just one of its customers. Before talking to Campbell Law, none of the investors knew that dozens of similar cases were on file and that scores more are in line to be filed.
Consequently, the Q3 report set off the first wave of warnings across the financial market.
At the same time, the analysts also asked Campbell Law for help drafting questions to ask Varty at the November 5, 2019 earnings call. Consequently, the word "Mobile" appears in the transcript of the call 19 times.
A review of the transcript shows it was not a good day for Varty.
Worse still for Terminix, the analyst also asked Varty whether Terminix's litigation problems could extend to cities outside of Mobile; Varty continued to assert that Terminix had not seen heavy Formosan termite activity outside Mobile.
However, according to Campbell Law, Terminix's own experts agree that Formosans are found in east Texas, all of Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina, and the southern portions of North Carolina, Arkansas and Tennessee (and all of Hawaii).
On the day of its Q3 report, ServiceMaster stock was trading at $56.14; the following day it plummeted to $44.70.
It is currently trading at $36.87.
Since the filing of its Q3 report, several high-ranking officers at ServiceMaster, including its General Counsel, Michael Bisignano, have divested blocks of their common stock.
The Deceptive Trade Practice Act Investigation
Receiving over 800 consumer complaints, the Alabama AG's office is currently investigating Terminix's business practices as possibly violating Alabama's Deceptive Trade Practices Act.
According to Campbell Law, "intentionally targeting customers who were sold a home-protection warranty with unconscionable price increases is likely a violation of Alabama's Deceptive Trade Practices Act, which, if handled appropriately could result in real and equitable damages in the hundreds of millions of dollars."
Based on south Alabamians current distrust of "Montgomery politics," it is unlikely the state officials would enter into a quick and incomplete settlement, as this could potentially leave over 100,000 Alabama homeowners without an appropriate remedy. Especially seeing as how the head of Alabama's regulatory body recently testified that Terminix's wrongful conduct pretty much stands alone.
Nik Varty is Out
On Jan. 21, the company announced that CEO Nik Varty had stepped down. Naren Gursahaney, current board chairman, is serving as interim CEO while the company searches for Varty's replacement.
The Fire Sale
In announcing Varty's departure, Gursahaney stated that ServiceMaster will explore strategic alternatives for its ServiceMaster Branded businesses, "including potential sale of the segment."
If it follows through with the sale, the money ServiceMaster raises could be used as a bandage to help cover Terminix's contingent liability problem in Alabama.
However, according to Tom Campbell of Campbell Law, "if the Alabama Deceptive Trade Practices Act claim is expanded to hold Terminix accountable for all of its deceptive trade practices, Terminix not only would have to reinstate contracts that were cancelled due to its price increases, refund money collected when it was faking its prevention service and it would be required to provide or pay for comprehensive chemical retreatments for most, if not all, homes under contract with Terminix."
Campbell also stated that "Terminix has routinely failed to correctly treat its customers' homes, leaving them open to an infestation and then, as a matter of practice, Terminix allowed the chemicals to wear off without replacing them, sometimes for decades; this is a serious problem because Terminix's Termite Prevention Plans typically state that Terminix agrees to re-apply necessary chemicals at no additional charge for as long as the contract is in force. This means Terminix's cost structure will change dramatically because it will be paying out-of-pocket to do millions of termite treatments across America every few years."
According to Campbell, "Terminix has never directly addressed its liability problem in any sort of global sense; instead, it has made poor choices on a piecemeal basis that have, thus far, only made matters worse for Terminix, its customers, and ServiceMaster. With proper leadership and by directly and seriously addressing, in a global sense, the single contingent liability problem that ServiceMaster reports is the largest drag on its future claims exposure, ServiceMaster can perhaps sufficiently satisfy investors that it has heard the warnings and is promptly changing course. Until then, I imagine investors will likely continue to remain cautious. Raising cash by selling its non-pest control businesses is a start. But it isn't going to be enough cash. On the plus-side, ServiceMaster has substantially reduced in debt-load over the past five years so it also has room to borrow as long as creditors are patient and see a plan to fix this self-imposed disaster."
SOURCE Campbell Law PC