American Water Works Co. Inc. is selling its homeowner services group to funds advised by Apax Partners in a deal valued at approximately $1.275 billion, the company said Oct. 29.
Camden-based American Water will receive $480 million in cash and a $720 million secured Seller’s Note bearing a 7% annual interest rate with a five-year term. The transaction also includes a delayed payment to American Water of $75 million if certain milestones are met by Dec. 31, 2023.
The structure of the transaction enables American Water to deploy the cash into the business to fund near-term incremental capital investments, while interest on the Seller’s Note will provide a stream of earnings over five years. Upon maturity, the proceeds from the repayment of the Seller’s Note are expected to be used to fund a continually growing capital investment in the regulated business.
“American Water has successfully grown our Homeowner Services Group over the last 20 years, creating great value.” said American Water President and CEO Walter Lynch in a statement. “This transaction allows us to capitalize on that value creation by utilizing the proceeds to invest in our regulated businesses. As we have continuously communicated, our strategy is to operate where we can best serve customers, drive efficiencies, invest in our systems and grow our regulated water and wastewater businesses.”
American Water said it will provide more details during its virtual investor day on Nov. 3.
The Homeowner Services Group’s customer-facing brands include American Water Resources and Pivotal Home Solution. This business has nearly 3 million customer contracts across 43 states and Washington, D.C., according to the seller.
“Having tracked the home warranty sector, we identified American Water Resources as a stand-out provider in the space. The Apax Funds have deep domain experience across the home services market and insurance and warranty product dynamics, with prior investments in Authority Brands, Assured Partners and Hub for example,” said Apax Partner Ashish Karandikar in a statement. “We are excited to partner with the team at American Water Resources as we look to build on the Homeowner Services Group’s success to date, leveraging the Apax Funds’ transformational approach, hands-on operational excellence, and deep digital expertise to support the company going forward.”
The companies will also enter into an agreement that gives American Water a portion of revenue generated from previous on-bill billing arrangements with American Water customers. This agreement will also provide an income stream as Apax continues these relationships.
The transaction is expected to close in the fourth quarter of 2021, subject to the satisfaction or waiver of customary closing conditions.
BofA Securities provided financial advice to American Water; Schulte Roth & Zabel LLP and Shearman & Sterling LLP provided legal counsel.