Rentokil has gone after a bigger beast than usual with its acquisition of Terminix in America. Jason Sinclair tracks the pursuit.
As Andy Ransom, CEO of pest control giant Rentokil Initial, told a certain salmon pink newspaper recently, “rats don’t read the Financial Times” – if they did, they might be slightly worried about the acquisition spree and five-year 60% share hike enjoyed by a company that’s dedicated to destroying them.
Rentokil’s acquisition strategy is global and energetic, with around £250m earmarked for purchases every year. Ransom explained to the Financial Times (with the comforting knowledge that his rodent enemies weren’t reading about his strategy) that his company targets businesses in the “cities of the future” in nations where public intolerance for pest infestations are likely to surge: Latin America, Indonesia, China and India. “If you can identify which cities are going to have a massive influx of population, you can pretty much conclude that they’re going to have significant rodent problems,” he said.
A run of 300 acquisitions since 2016 has not only grown the pest business, but included an expansion of its adjacent wellbeing and hygiene division, and even took in the December acquisition of Israeli tech provider Eitan Amichai, so they can use facial recognition to track and target rodents’ habits.
But Rentokil’s major acquisition was that of US competitor Terminix, in a deal valued at $6.7bn, first announced in December 2021 and completed in October 2022. But the deal was years in the making, according to Chris Hunt, Rentokil’s group M&A director: “Terminix was a respected and large competitor that we’ve known for many years,” he says. “We considered a merger with it in 2018, followed by spin-off of one of its non-core businesses.”
Rules and regulations
With issues around reverse mergers and US companies redomiciling, it was “a complicated deal to achieve”, with the navigation of a “whole series of fairly technical rules”. But, after Terminix completed some non-core spinoffs itself, Hunt says: “We were able to start to consider the deal really seriously.” That was in late 2020. COVID-19 delayed full engagement until late 2021 and the deal was finally announced just before Christmas 2021.
While Hunt describes the Terminix acquisition as a “big beast” compared with the majority of his bolt-ons, he also says: “We’ve had a very active M&A programme in North America over the past decade. We know the challenges of integration and, to be honest, we think of this as a series of bolt-ons.”
Hunt joined Rentokil in 2012 from AstraZeneca, where he worked in business development and M&A. He had previously worked in transaction services at KPMG, where he also trained as an ACA. When he joined Rentokil, it was in “a relatively unloved part of the FTSE 250”. His task? “To professionalise the M&A function after it had done some fairly ill-advised deals to chase growth.” And his strategy since then has been “clearing out the bits that didn’t add value and acquiring bolt-ons to boost density where we currently operate and building our presence in emerging markets”. He makes it sound pretty simple.
Just do it
“Terminix was a business with potential, but with organic growth levels that were below the market,” he says. “It had a lot of bright plans to ‘do it’ – it’s just that they hadn’t done it. But at Rentokil, we have written the playbook in the past decade. And with that, the questions were how quickly can we restore the business to market norms in organic growth, and what levers could we pull to do that? Was it customer retention rates? Was it colleague retention rates? Was it incentivising different frontline behaviours through different types of pay plans? Was the management structure right? Were the operating systems hindering rather than promoting growth? Did it have enough innovation and new things to offer its customer base? How strong was its digital marketing?”
Terminix had around 350 branches across North America, compared to Rentokil’s 250. The combined footprint is being optimised and streamlined to around 400 branches because of much geographic overlap. Integration will be improved under a common IT structure and branding will be gradually unified.
In the months since the merger completed, a lot of time has been spent concentrating on pay and service harmonisation, says Hunt, while the complementary areas of the businesses have been learning from each other – Rentokil being largely commercial and Terminix having mostly residential expertise.
The recession-proof nature of the business – “I’ve never heard a customer saying that they’re going to wait until the economic environment improves before dealing with a rat running round their kitchen” is another of CEO Ransom’s aphorisms – means that if the back-office integration goes well, profits should surely follow. In that sense, Rentokil’s share price – up 20% in the year to date – can be of little surprise, and neither is the ease with which financing for the deal was achieved.
Mind the gap
Most due diligence was conducted in-house. Terminix had “the common post-COVID-19 issue of a lot of vacancies it needed to fill and therefore a lot of service gaps”, says Hunt. “In the services industry, that means you have people scrambling to cover and they might not be familiar with the customers, particularly if the systems aren’t great. That can lead to lower-quality service, demotivated technicians and a greater staff retention challenge. So we majored on that to get ourselves comfortable that this was an asset we felt we could pay a premium for and drive some value from the off.”
As Terminix CEO Brett Ponton says: “Our aim is to create a world-class organisation in North America with best-of-breed technologies, systems and operations, driven forward by the hugely talented people of both organisations.”
Terminix began life in 1927 in Memphis, Tennessee, developing an insecticide specifically to protect hardwood floors from termites. It expanded into wider pest control, with a series of sales, partnerships and acquisitions over its 95-year history, ultimately becoming a 10,000-employee company with nearly $2bn in annual revenues.
Shadowing that story on the other side of the Atlantic, Rentokil was established in 1925 with the creation of a woodworm-destroying fluid (first used in the Houses of Parliament) and kept its name when acquired by rodent control company British Ratin in 1957. A hostile takeover of hygiene group BET in 1996 led to the formation of Rentokil Initial.
International outlook
For the next chapter, after the Terminix deal, Rentokil has found areas to be more opportunistic, says Hunt, particularly with branch co-locations and back-office consolidation: “We’ve also said, hey there are five things we wish we’d known before we went into it, so let’s take a little bit more time and adapt our plan to cope with them properly.
“We’ll continue to look for choice assets and infills in the States,” he says. “I think we’ve done five already this year and we’ll end up doing more. But also, because we’re a global business, we’re operating in around 90 countries and we recognise that while North America is quite busy integrating, we cannot wait on acquisitions elsewhere.”
The rodent populations of Jakarta, Shenzhen and other “cities of the future” would do well to reconsider their boycott of the Financial Times.