Description

Valuation:

Market Cap: $115 million

Net Debt: $507 million

Enterprise Value: $622 million

EV/2006 Net Revenue: 0.8x

EV/2006 EBITDA: 18.3x

Price/EPS: NA

Investment Thesis

Sirva Inc. provides global relocation services to corporate and government customers including the sale of employees’ homes, movement of household goods, and purchase of new homes. Sirva operates a mostly fee-based, asset-light, high return business model that was unfortunately saddled with too much leverage by its private equity sponsor during an acquisition spree. Importantly, Sirva does not inherently require debt to operate its business.

Assuming a sale of the moving services business, Sirva will be able to retire most of its debt. Assuming 9x normalized EBITDA, Sirva would receive $400 million in proceeds and would be left with about $60 million in debt. At the current equity value, this would imply an enterprise value of $172 million yielding a valuation of about 7x 2006 EBITDA and 5x normalized EBITDA for the remaining relocation services business. Below is a sensitivity analysis on the valuation pro forma for the sale of moving.

PF Valuation (in millions)

8x 9x 10x

Proceeds $400 $450 $500

Equity Value $115 $115 $115

PF Enterprise Value $222 $172 $122

EV/2006 EBITDA 9.0x 7.0x 5.0x

EV/Normalized EBITDA 6.3x 5.0x 3.5x

Normalized EBITDA is a more reasonable measure in evaluating the Sirva’s earnings power of the business as the company will reset its fixed pricing model to reflect the changes in the residential real estate market. The company has continued to work through its homes for resale inventory selling down another $20 million of relocation properties during the first quarter. Sirva’s remaining relocation services business should reasonably trade at a high single digit multiple of normalized EBITDA given recent precedent transactions, specifically Apollo’s purchase of Realogy (H), yielding close to 100% upside to the equity. Even without a sale of moving services, Sirva should begin to trade on normalized earnings power once liquidity concerns abate.

Company Background:

Sirva was formed by Clayton, Dubilier, & Rice in 1999 to acquire North American Van Lines from Norfolk Southern. Subsequently, Sirva also acquired Allied, Picksford, and Transguard (a leading provider of insurance to moving agents, fleet owners, and owner/operators) from what is now Exel plc. The company continued to piece together a global relocation business by making several other acquisitions over the ensuing several years including Cooperative Resource Services to anchor its relocation services business. CD&R was attempting to capitalize on the trend of corporations and government entities outsourcing the entire employee relocation process to third parties while also trying to realize efficiencies by combining disparate moving related businesses into a single asset.

Sirva was taken public in late 2003 to allow CD&R to sell down its stake and de-leverage the balance sheet. While the initial response to the offering was positive, fundamentals began to deteriorate in late 2004. Sirva missed analyst expectations for 3^rd quarter earnings with net revenue falling 18% and guided down earnings for the year. The revenue and earnings shortfall was driven primarily by weakness in its insurance business and its European segment. Part of the significant negative reaction to the shortfall had to do with transports investors who probably didn’t realize the exposure they had to the embedded insurance business that had been terribly mismanaged. The following quarter, Sirva reported an unexpected loss and also announced it had discovered accounting irregularities. This was followed up by an SEC investigation.

Sirva has since divested its insurance segment and several other non-core businesses (including European moving) and has reorganized into three remaining segments: global relocation (46% of net revenue), North American moving (29% of net revenue), and Europe/Asia Pacific moving (25% of net revenue).

Current State of Business:

The timing of Sirva’s woes couldn’t have been any worse. After managing to divest its insurance segment and dealing with accounting irregularities and the SEC, the bottom fell out of the residential real estate market. Sirva had significant exposure through its inventory of homes held for resale for its corporate customers. Unfortunately, part of Sirva’s relocation services business involved taking risk through fixed price contracts in its residential real estate portfolio i.e., paying the client for the property at a fixed price and attempting to sell it at the same or better price. The company began to realize greater than expected losses on its portfolio culminating in $40 million in losses on the home portfolio in 2006. Additionally, the moving segment experienced declines as housing turnover slowed significantly. Weakness in both segments increasingly made debt service a challenge. In 2006, Sirva’s cash flow did not cover its interest expense. To improve its liquidity position, Sirva arranged a $75 million convert with two of its largest shareholders, ValueAct and MLF Investments.

The prevailing concern seems to be that Sirva will be forced into bankruptcy and the stock trades at new lows every day. The reality is that has Sirva sought and received covenant relief on its debt through 2008. Sirva also renegotiated terms on the recently issued convert with ValueAct and MLF.

The most reasonable solution to the current liquidity situation would be a sale of the moving business. Importantly, the thesis that there would be leverage in owning relocation services AND moving assets has proven to be untrue. The only strategic value of owning moving is guaranteeing moving capacity through its agents.

Sirva’s North American moving segment has significant value with its ubiquitous Allied and North American van lines brands. It is an asset-light agency based model that provides services similar through a network of independent agents, similar in operating structure to Landstar (LSTR). While the macro environment continues to be difficult for residential housing, the variable cost model allows the segment to remain profitable even through significant downturns. While this segment generated EBITDA of $27.6 million in 2006 on revenues of $1.3 billion, normalized EBITDA should be closer to $50 million. The moving segment could sell for 8-10x normalized EBITDA given the comps and the current private equity environment. Sirva could realize $400-500 million from the sale of the segment and retire most of its debt. Hopefully, as a precursor to the sale of its North American moving business, Sirva recently sold its ex-UK European moving services operations.

There have also been recent significant changes to management. Brian Kelley decided to head to greener pastures and became the head of Coca-Cola’s North American noncarbonated group in March 2007. He had served as CEO since 2002. Shortly after Kelley’s resignation, the board then decided to let the CFO, Mike Kirksey, go. Importantly, Kelley and Kirksey did not have direct operating roles in the subsidiaries, but operated the “holding” company.

ValueAct owns about 10% of the company outright and more through a recent convert offering. MLF Investments owns about 8.5% and also participated in the convert. Part of the thesis is certainly that ValueAct and MLF have a strong history of creating value in otherwise dire situations.

Consolidated (in millions)

2003 2004 2005 2006

Services Revenue $1,646.1 $1,845.4 $2,012.1 $1,977.9

Net Services Revenue $588.6 $705.5 $766.7 $808.3

Gross Margin $284.7 $319.4 $317.5 $320.2

Margin 48.4% 45.3% 41.4% 39.6%

EBIT $61.9 $44.4 $1.9 $1.6

EBITDA $92.3 $79.4 $42.2 $34.0

Margin 15.7% 11.3% 5.5% 4.2%

Interest Expense $41.8 $18.2 $31.9 $51.2

Coverage 2.2x 4.4x 1.3x 0.7x

Global Relocation (in millions)

2003 2004 2005 2006

Services Revenue $169.3 $242.0 $320.3 $372.6

Net Services Revenue $169.3 $242.0 $320.3 $372.6

Gross Margin $61.4 $79.4 $102.5 $100.3

Margin 36.3% 32.8% 32.0% 26.9%

EBIT $17.8 $27.3 $19.1 $11.8

EBITDA $24.0 $35.8 $33.1 $24.6

Margin 14.2% 14.8% 10.3% 6.6%

North American Moving (in millions)

2003 2004 2005 2006

Services Revenue $1,215.7 $1,312.8 $1,414.6 $1,323.5

Net Services Revenue $228.0 $251.0 $250.9 $232.3

Gross Margin $127.0 $133.0 $128.7 $125.6

Margin 55.7% 53.0% 51.3% 54.1%

EBIT $37.1 $32.2 $17.5 $18.3

EBITDA $48.1 $43.6 $28.0 $27.6

Margin 21.1% 17.4% 11.2% 11.9%

UK/Asia Pacific Moving (in millions)

2003 2004 2005 2006

Services Revenue $261.2 $290.6 $277.3 $281.9

Net Services Revenue $191.4 $212.5 $195.5 $203.4

Gross Margin $96.7 $108.3 $89.0 $97.3

Margin

EBIT $11.8 $(5.1) $(21.8) $(5.5)

EBITDA $25.0 $10.0 $(6.1) $4.9

Margin 13.1% 4.7% (3.1%) 2.4%

Risks:

- The residential housing market continues to deteriorate causing pressure on selling prices for the properties held inventory and a decrease in demand for moving services.

- The company is unable to establish better fixed price terms for its relocation services business.

- The company fails to draw interest in its moving services segment continuing near-term liquidity concerns.

Catalyst

- Sirva sells its moving services business and retires debt with the proceeds. Liquidity risk aside, Sirva will get credit for the intrinsic value of its relocation services business.

- Sirva’s financial statements will become current with the 2nd quarter 2007 10-Q filing. Restated 10-Ks have been already been filed for the last 3 years as has the 10-Q for the 1st quarter of 2007.

- Announcing appointment of new a CEO and CFO (this may not be necessary in the case of the sale of the moving segment).