Frontdoor CEO explains a $585M cash deal to buy a Denver metro-area company - Denver Business Journal (2024)

Frontdoor Inc. announced on Tuesday, June 4, the largest potential acquisition the company has made since it spun out from ServiceMaster Global Holdings in 2018.

The Memphis-based home warranty giant reached an agreement to buy Denver-based 2-10 Home Buyers Warranty in an all-cash transaction valued at $585 million, the companies said in a news release. The agreement includes a potential $30 million termination fee.

2-10 Home Buyers' main business is selling structural warranty protection plans for new homes. It provides insurance-backed options for builders’ coverage for structural failures.

The deal for 2-10 Home Buyers is expected to close in Q4 2024, pending regulatory approval and additional customary closing conditions.

The Memphis Business Journal, a sister paper to the Denver Business Journal, spoke to Frontdoor chairman and CEO Bill Cobb about how the 2-10 Home Buyers deal came together, why it made sense for Frontdoor, and how it helps Frontdoor’s long-term aspirations.

The following Q&A has been edited for brevity and clarity.

How did acquiring 2-10 Home Buyers come about?

Bill Cobb: They were owned by a private equity firm, so they engaged an investment banker who reached out to logical candidates — people in the industry, other private equity firms, etc. I don't know how many people participated in the bid, but I know it was a competitive bidding process. So that happened some months ago.

What made 2-10 Home Buyers the right fit for Frontdoor?

It does a couple of things for us. Their product line is new home structural warranty, which we don't participate in today. So it's a new adjacency for us. The other part of it is that we do traditional home warranty, so we know how to execute that. The new home structure warranty will give us an entry into a new category.[2-10] is a company that has almost 300,000 customers, almost $200 million [in revenue], and actually higher adjusted EBITDA margins than we have, at about $43 million. When you can get a chance to add that many customers at a rate where they're more efficient than in your business, it's something to jump at.

Plus, I think what also attracted me to this specific [deal] was we could do it in such a way that it was the right size. Yet we still have room to continue to buy back shares, which is a program we've been on. We bought back about 10 million shares since we spun out from ServiceMaster. Many of our investors like that. We call this kind of a "yes and" strategy. Yes, we want to purchase something for growth, and we want to continue to maintain our consistent share purchase schedule.

How many employees does Frontdoor hope to add as part of this acquisition?

They are based in Aurora, Colorado, which is a suburb of Denver. They have, throughout their company, about 540 employees, about half of whom are in the Denver area. We haven't gotten to the specifics of how many would remain, how many would stay, but they have some really good talent there. They run the company well, so we'll figure that all out down the road.

What is it like to get to this point as a company, celebrate a moment like this, and what can this do for Frontdoor’s aspirations?

I had a series of meetings today with my extended executive leadership team with about 100 folks or so. Then I had a town hall with everybody. I think there's a lot of excitement within the company. We had calls with investors and analysts. Generally, they think we're doing the right thing.

It's a great day to celebrate how far we've come and that we had the financial flexibility to do this. But this also marks the beginning of a lot of work to do because the integration process is one that's going to be extensive and intensive. All we did was sign a purchase agreement, we haven't closed, and we have to go through a regulatory process. So we'll see how that plays out. I think the sentiment is very good, and we think it's a great deal for our company.

What are the next steps in the immediate future following this week’s announcement?

Our legal team is hard at work, doing the filings with the Department of Justice and the state regulatory agencies. While at the same time, we have what we call an integration team that's going to work closely with 2-10 and 2-10 management to put together how we want to run the company on a go-forward basis. So I think there are ways that we're going to keep 2-10 separate, and then there are some things where we'll look to combine the operations.

So there are aspects of 2-10 Home Buyers you plan to keep separate from Frontdoor?

Absolutely. Especially with regard to the business. We don't know what we're not in, which is the new home structural warranty.

How does this potential acquisition help align with the goals you have for Frontdoor?

I think it aligns beautifully. We now have a portfolio of businesses. We have the largest business, American Home Shield, which is the cash generator for us, with over 50 years in business. It's a very well-run business, very profitable, [and] turns up a lot of cash.

We have a fledgling business called Frontdoor, which has a variety of aspects to it. Essentially, the essence of Frontdoor is on-demand or in-person services. Our most successful product is what we call the New HVAC Program, where we replace aging HVACs. We put in the system, our contractors do all the work, and we can buy HVAC systems [from] original equipment manufacturers [OEMs] because of the amount of business we do with them. We've done a nice deal with our contractors. The consumer gets a great deal because of that buying power and contracting power of about a 30% to 40% discount. So it's really proven well, but it's business that we want to do in person.

Now with 2-10, we're going to add not only additional power in the traditional home warranty business but also bring us into this new business of new home structural warranty. So we think the portfolio of businesses is such that I think it's going to enable us to really drive significant shareholder value. I think we're going to have efficiencies in both driving additional revenue over what they're doing now and reducing costs over what they're doing now.