Leaky taps and insurance: how HomeServe built a $2B revenue HVAC rollup... and why public markets couldn't handle it

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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I am on the road a lot these days: meeting businesses that could become part of Baltic Family Capital. To fill the tedium of plane / car / train travel, I listen to music and sometimes, podcasts. Here is one podcast I can definitely recommend: “Buy and Build” by Paul Quirk.  

Two weeks ago, Paul put out an excellent interview with Jeremy Middleton, an early investor in HomeServe. If you are not familiar with HomeServe, it is a $2B+ revenue home repairer / insurance broker. HomeServe’s largest markets are the US; the UK (where it is headquartered); France; and Spain. It is a prolific acquirer of HVAC businesses, with c.90 acquisitions completed since 2019.  

Hang on, why should you care if you are NOT in the plumbing business? 

I will give you two reasons. 

Number one, HomeServe was taken private by Brookfield in January 2023 in a c.$6B enterprise value transaction. Not too shabby for a business founded in 1993 with a £500,000 seed investment from a regional water utility! 

Number two, HomeServe offers a masterclass in survival skills. It is like a cat with 9 lives, constantly adapting its business model to escape death.  

What can we learn from Jeremy’s early experience with HomeServe, and its subsequent journey as a public company and, more recently, a private equity PortCo?

I wrote it up for you - in 3 parts:

1. The pertinent insights from Jeremy Middleton’s interview 

2. HomeServe’s business model

3. Brookfield’s rationale for acquiring HomeServe - and what it might do next

1. What Jeremy told Paul: 3 key insights on HomeServe’s (humble) beginnings

If you have the time, you can go and listen to the interview directly on the podcast. If you are rushed, here were my 3 key takeaways:

Insight #1. Home repairs insurance seems so obvious in retrospect - but it really wasn't!  

Jeremy met Richard Harpin, HomeServe’s future founder, in the 1980s at a Procter & Gamble graduate programme in Newcastle upon Tyne, in the northeast of England. Their business partnership started with a buy-to-let portfolio. As the number of apartments grew, so did the number of plumbing emergencies. You can see why Jeremy and Richard thought that going into plumbing and heating repairs (under the FastFix brand) was a great idea. Or perhaps not: the business very nearly went bust as they “were trying to collect after the fact”. 

Their first break came in the early 1990s. Britain’s newly privatised water utilities were hungry for new revenue streams. Why not plumbing? A regional utility called South Staffs Water agreed to a 50/50 JV, with Richard as the CEO. 

FastFix 2.0 was a way bigger venture - but equally cash-draining. There had to be a way to stop that working capital from ballooning. Thus HomeServe Membership was born: a home repairs insurance broker. In just 3 years, HomeServe had gone from 0 to 1,000,000 policyholders. 

By the early 2000s, Richard had become known as the CEO who commuted by helicopter. Suddenly, the UK felt too small for his, and HomeServe’s ambitions. It was time to go shopping.  

Insight #2. HomeServe’s international strategy was a hit and miss 

Curiously, for someone who spent half the podcast plugging his HoldCo, Jonathan is an avowed M&A skeptic. I suppose that’s scar tissue from a number of failed launches. Let’s hear it firsthand:

“Our first country we went to was Australia…We were seen as the people who were going to cost the plumbers their jobs. It was highly unionised and politicised. And do you know what? Australia is quite hot. Roots grow particularly long and strong there. That makes for a lot of claims on water pipes.”   

Similarly, according to Jonathan, HomeServe’s forays into entirely new products like gas maintenance and furniture protection didn't quite work out because “something came along and bit us in the butt”. HomeServe’s response was to go back to the roots. Grow by acquiring policy books from water utilities, the way it had done it in the UK. But hey, let’s not get ahead of ourselves!    

Insight #3. Think selling to Enterprise is great? Think again! 

Group-wide, Membership customer retention rate was 82% in 2023. Put differently, a consumer facing business with 18% churn doesn't look too appealing, does it?  

Well, yes and no. Again to quote verbatim from Jeremy:

“Our business was b2c. And the consumers, provided good service, are very loyal. We thought we would do the same business selling to companies. What could be different? Well guess what - corporates will go and tender. And when there is an economic crisis, other people will tender competitively”. 

Now, you have got a taste for what went wrong at HomeServe in its early days - and why. But surely we wouldn't be here discussing HomeServe if it turned out to be an abject failure? Let me tell you what HomeServe did right - especially on the M&A front.   

2. HomeServe’s business model 101

HomeServe consists of 3 businesses: Membership, HVAC and Home Experts. The first two are closely connected; the third one isn’t and has thus struggled.  

• Membership: emergency assistance cover for the breakdown of electrical, gas, heating, cooling, and water systems in the home. In return for a monthly fee, customers have 24/7 access to HomeServe’s engineers. In FY 2022, net policy income represented 54% of group revenue, followed by 22% for repair income

• HVAC: a rollup of boiler installers: the centerpiece of HomeServe’s buy & build strategy since 2017. Lower margin compared to Membership, but an excellent driver of cross-sell. Recently, M&A activity has been focused on Spain and the US. In FY 2022, HVAC installations brought c.10% of revenue

• Home Experts: a loose federation of tradespeople marketplaces. HomeServe acquired Checkatrade (UK) in 2017, followed by Habitissimo (Spain/LatAm) the same year and eLocal (US) in 2019. At the time of take-private, the division was barely profitable on an adjusted basis. Unlike Membership, which caters to emergency repairs, the Home Experts offering is aimed at the home improvement crowd. In FY 2022, Home Experts brought c.11% of revenue. 

Let’s review Membership and HVAC in detail - and what role M&A has played in shaping these divisions. 

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