The ServiceMaster Company (Nachrichten) recently announced plans to acquire InStar Services Group in the first quarter of 2006 and sell its business units American Residential Services (ARS) and American Mechanical Services (AMS) by the end of this year. ServiceMaster's issuer default rating (IDR) and senior unsecured ratings of 'BBB-' are not affected by the announced transactions. The Outlook is Stable. ServiceMaster had approximately $769 million of consolidated debt outstanding at Sept. 30, 2005.

Fitch believes the size and debt-funded nature of the InStar Services acquisition will have minimal impact on the overall risk profile of ServiceMaster. Fitch expects fiscal year-end 2005 and 2006 operating performance and capital structure to generally be in line with prior expectations. Fitch believes the company will utilize the proceeds from the divestiture of ARS and AMS along with free cash flow to reduce the higher debt levels by year-end 2006. InStar is expected to add positive free cash flow beginning in 2006 which should almost completely offset any lost cash flow from the divested ARS/AMS segment. Importantly, InStar Services adds a commercial line of business that generates approximately $130 million in revenue and complements ServiceMaster's residential disaster recovery service. Fitch expects ServiceMaster to continue to search for small tuck-in acquisitions that will allow it to grow its cash flow and achieve synergies with its existing business lines.

Fitch's rating continues to reflect ServiceMaster's diverse portfolio of primarily consumer services that generates stable revenues and operating earnings. ServiceMaster continues to generate consistent discretionary cash flows, primarily due to modest capital expenditures and working capital usage, which Fitch expects to be utilized toward supporting the company's strategic initiatives. These initiatives include a continued focus on brand development, improving customer retention, and successful diversification of its marketing strategy. Free cash flow will also support the company's tuck-in acquisitions and share repurchases. ServiceMaster is a U.S. market leader in providing such services as lawn care (TruGreen), termite and pest control (Terminix), plumbing (American Residential Services), home warranty (American Home Shield), and maid services (Merry Maids). The rating also considers how seasonal weather patterns affect TruGreen and Terminix operations, given the outdoor nature of the pest control and lawn care businesses as well as the company's sensitivity to the business cycle due to the discretionary nature of some of its services.

Internal liquidity is supported by free cash flow over the latest 12 months (LTM) ending Sept. 30, 2005 of $71 million, which includes the net impact of the settlement of the IRS tax exam of approximately $106 million. Also at Sept. 30, 2005, the company had cash balances of $231 million and $268 million of availability under its $500 million revolver, maturing in 2010. This availability does not include any amounts drawn for the InStar acquisition. Debt maturities are manageable at $49 million due in 2007, $179 million due in 2009, and the remainder due thereafter. Share repurchases have been a steady use of free cash flow over the past few years with approximately $51 million being repurchased as of Sept. 30, 2005 and additional amounts planned for 2006. However, Fitch believes the company will manage its equity distributions in conjunction with its free cash flow availability.

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