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Rentokil Initial specialises in ridding premises of pests. The London-listed company now has one on its shareholder register. Activist Nelson Peltz’s Trian says it has a top 10 holding in Rentokil. That lit a fire underneath Rentokil’s otherwise soggy share price, which was up 13 per cent by late-morning trading.
That reaction reflects the impact that activists can have in equity markets, like the beleaguered and unloved UK market, that are highly sensitive to any positive catalysts. And Rentokil clearly has some problems that Peltz believes he can solve.
Top line growth looks sluggish at under 4 per cent per year in the two years through 2025. In North America, both the world’s largest market and well over half Rentokil’s business, that pace should be even slower. Acquiring Terminix in the US for $5.4bn back in 2022 gets part of the blame. While that deal meant Rentokil leapt to leadership in the US pest control market by revenue, integration has been slow.
As a result, Rentokil’s share price has underperformed badly, trailing both the broader UK market and its largest US-listed peer Rollins. Whereas Rollins trades at a forward price to earnings multiple around 45 times, similar to three years ago, Rentokil has only gotten cheaper at 17 times.
Whether that gap has to do with Rentokil’s so-so growth profile compared to Rollins or its London listing could offer a topic of discussion between Peltz and chief executive Andrew Ransom. As Lex has noted, it is not clear that simply moving a listing makes a difference. Yet, one can see why Peltz might have questions.
He has something to work with at least. For starters, Rentokil has around 30 per cent market share in the US, followed by Rollins’ one-fifth share by revenue. The former has consistently delivered organic free cash flow, and should manage an average of £600mn annually this year and next, according to Visible Alpha consensus estimates. That easily covers the dividend. But against that financial strength sits a net debt to ebitda leverage of roughly 2.5 times, using S&P Capital IQ data.
More than a change of address is needed for Rentokil. Higher interest rates means Rentokil needs to get its debt down. At a time of sluggish revenue growth, that is a tricky proposition that could benefit from an activist’s insistence on more aggressive changes.
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