- December 15, 2021
- Posted by: Dan Gordon
- Category: Articles
By: Daniel S. Gordon, CPA
Dec. 14 was a huge day for the pest control industry, as a watershed deal was announced. If it closes as expected next year, it will make Rentokil, the world’s largest pest control company, also the largest in North America, leaving Rollins (Orkin) as the only public pure-play pest control company.
The deal calls for each Terminix shareholder to receive 1.069 shares of Rentokil’s ADR plus $11 of cash, valuing the deal at $55 per Terminix share, which is a 47 percent premium on their closing price on Monday, Dec. 13. For those pest industry M&A junkies, that’s 3.6 times revenue.
As I write this article, I’m watching shares of Terminix in real time at $43.86, significantly below the $55 valuation but up $6.44 or 17 percent. And I’m seeing Rentokil’s ADRs at $36.43, down $5.79 or 14 percent. The deal is subject to regulatory approval, and there are antitrust issues that need to be sorted out. So, if Rentokil shares are falling, what does that do to the price of the deal? Obviously, it drops the value of the deal. Is that normal? Yes, when one company acquires another, usually the buyer’s and seller’s stock prices diverge with the buyer taking a dip and the seller’s stock price increasing. However, in many cases an acquisition tends to boost the acquiring company’s stock over the long term.
What does this mean for shareholders and customers?
Rentokil estimates annual cost saving synergies of $150 million by year three with significant profit addition in the first year post-close. This values Terminix at 19.3 times its 2021 estimated EBITDA. The combined group will have 4.9 million customers worldwide, significantly enhanced route density and post-completion, Terminix and Rentokil intend to open a new science and innovation center in the U.S. focused on termite and residential pest control. The combination will result in Terminix’s existing shareholders owning approximately 26 percent of the combined group.
What does this mean for the friends and clients of PCO M&A Specialists and PCO Bookkeepers?
Terminix will finally get the direction and discipline it needs in terms of building a high-quality brand and developing a positive culture. In recent memory, Terminix has been meandering through strategic initiative after strategic initiative, including several leadership changes over the past decade or so. Rentokil has the team and the skill set to build the culture that’s needed to make Terminix a respected brand. However, this can’t happen overnight. It will take time and there will be some fallout of technicians, management and salespeople.
Plus, the deal requires Department of Justice approval. In going through the antitrust process, the proposed combined entity will likely need to divest lines of business in certain markets. So it’s likely there will be good people available and probably some shuffling of customers that may fall off and become available for independent pest control companies to pick up.
What does this mean for the pest industry’s M&A frenzy?
For the next several months, Rentokil, which has been a catalyst in the M&A frenzy, will be busy making this deal a reality. An acquisition of this size takes up human capital and financial resources that could distract them from M&A activities. While I believe Rentokil will still be in the game, I think they will be much more selective in the companies they buy and probably not push valuations any higher. Once this powerful force in upward valuation goes on hiatus, we may see the others follow, and therefore we may have seen the top of the M&A market for a while.
However, over the past year or so, we have seen some very powerful private equity firms start to become comfortable with valuations and make competitive bids on quality companies. While Rentokil works through this high-profile integration, it may allow private equity to fill the void. In the meantime, it also allows other big players in the M&A space (Certus, Orkin and Anticimex) to reevaluate their strategy on acquisitions and start to duke it out with private equity.
Where do valuations go from here?
This 3.6 times revenue valuation (19.6 times projected EBITDA, which may change based on how the stocks trade in the period until the deal closes) would have been an unheard-of valuation several years ago. But recently this valuation has been hit several times for quality companies, and in fact we have done several deals higher than this amount.
The joke around the PCO M&A Specialists office today is that we should have brokered the deal and could have gotten a higher number. But it’s not us or the other brokers in the pest space that get to do deals like this; it’s the powerful investment banks. Rentokil worked with Barclays and Goldman Sachs, while Terminix was advised by Lazard. Overall, I think the value is fair based on the assets purchased and may set the standard for the next chapter, reeling in extremely high valuations for the immediate future. But time will tell.
Over my 30-year and counting career in the pest space, we are seeing the industry grow up in terms of operational sophistication, attractiveness to Wall Street and its recognition of the valuable assets in the industry. While this deal is a watershed event that may slow valuations for the near term, I see it as a pivotal deal in the further consolidation.
But as we consolidate and because the financial barriers to entry are so much lower than other industries, we will continue to see young people start, grow and exit the industry with millions of dollars, and I could not be more bullish on the pest space.