Rentokil’s US bug invites management fumigation
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Sept 11 (Reuters Breakingviews) -Rentokil RTO.L makes money helping people get rid of unwanted pests. The $13 billion group now needs to find a solution for a similarly persistent problem: disappointing growth in its U.S. business. That may mean waving goodbye to CEO Andy Ransom, the architect of the $6.7 billion 2021 Terminix deal that is now causing many of the company’s problems.
Ransom’s credibility is on shaky ground after three warnings of disappointing topline growth. It started last October when he first flagged poor performance in Rentokil’s U.S. business, which accounts for around 60% of the $13 billion company’s revenue. Since then Rentokil’s shares have collapsed by 35%, with an 18% fall on Wednesday alone when Ransom warned that the company’s full year adjusted pre-tax profit would only be about 700 million pounds, versus the 766 million pounds it delivered last year.
Ransom’s problem is that Rentokil’s woes can’t just be blamed on U.S. consumer weakness. Rollins ROL.N, its $25 billion rival, has seen its shares rise 17% this year alone, and trades on 46 times its expected earnings in 2024. Rentokil’s 19 times equivalent is substantially down to the impact of integration costs and management time, which have made it harder to retain staff and drive sales.
The latest slump implies two things may now happen. Activist Nelson Peltz, who revealed a stake in June, is on firm ground to argue for a new CEO. A new broom would have more credibility to look at things afresh.
The other clear signal is to potential private equity buyers. Antitrust concerns may prevent the likes of Rollins pitching in with an opportunistic bid. But according to Breakingviews calculations it’s feasible to assume a buyout shop can achieve an internal rate of return exceeding 20% if it bought and then sold out in five years’ time, and Wednesday’s drop in Rentokil’s shares makes the numbers all the more enticing. The group’s investors should be anticipating a new boss, a new owner, and potentially both.
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CONTEXT NEWS
Rentokil Initial on Sept. 11 warned of lower annual profit after weaker than expected sales in its largest market, North America.
The company, which made approximately 60% of its revenue in North America in 2023, said it would cut jobs but did not specify how many. It said that was needed to address cost overruns as it moved past the peak season.
Rentokil said full-year adjusted pretax profit was now expected to be about 700 million pounds ($916 million), versus the 766 million pounds it reported in 2023.
Analysts at RBC Capital Markets had expected pretax profit of about 777 million pounds.
Shares in Rentokil were down 18.1% by 0853 GMT on Sept. 11.
Editing by George Hay and Oliver Taslic
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