Rentokil – Terminix deal truly transformational

Rentokil, the pest control specialist, has announced its full year 2022 results:

• Organic revenue grew by 6.6% while adjusted operating profit increased by 22.7%.
• Operating margin was up 45bps to 15.4%. The group targets margins of greater than 19.0% by FY25.
• “Excellent progress” on Terminix integration with cost synergy guidance increased to at least $200m, from $150m.

Charlie Huggins, Head of Equities at Wealth Club commented:

“This is a solid performance from Rentokil. Encouraging early progress on the Terminix acquisition has led to increased cost saving targets. This underpins group expectations to grow revenues and profit margins strongly over the next few years, despite the gloomy economic environment.

Rentokil ought to be better placed than most to weather an economic downturn. Rats need dealing with, no matter what’s happening to inflation or the economy. Add this to a large slug of recurring revenue from long term contracts and it adds up to a resilient business with decent pricing power.

The Terminix acquisition is truly transformational. It establishes Rentokil as the leading Pest Control business in North America, the world’s largest Pest Control market. Moreover, the deal should open up substantial cost savings. If all goes to plan this should allow Rentokil to deliver significant margin growth over the next few years, even if costs like labour and fuel keep rising.

However, transformational deals like this always carry risk. Rentokil has a fine track record of integrating acquisitions, but it has never swallowed a deal as large as this one. Terminix’s performance prior to the acquisition left a lot to be desired and the need to improve its operations and align its culture with that of Rentokil adds further complexity.

As always, there are no free lunches. Rentokil’s acquisition of Terminix could bring substantial rewards, but it will need to execute flawlessly to realise the full benefits. The early signs are encouraging. But, with investors in an unforgiving mood following the Silicon Valley Bank collapse, there is little room for error.”