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CFDs are complex instruments. 70% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

Could the Rentokil share price look cheap a year from now?

The Rentokil share price soared to a record 636p in November. While overpaying for rival Terminix has seen it fall to 570p for now, this proposed new entity will be the largest pest control company in the world.

Bull Source: Bloomberg

The Rentokil (LON: RTO) share price has been volatile over the past few days. This isn’t normal for a FTSE 100 stock, much less one that specialises in the essential, but prosaic world of pest control.

The company has been enjoying a stellar run over the past two years. In line with the rest of the FTSE 100, it fell 29% from 508p on 21 February 2020 to 362p on 27 March 2020. While the rest of the index has yet to completely recover from the mini-crash, Rentokil’s share price soared to a record high of 636p by 12 November 2021, as pandemic-driven demand for its hygiene services rocketed.

The stock then dropped slightly, to 624p by the morning of 14 December. Then Rentokil announced a takeover deal with competitor Terminix. While the initial reaction saw its share price rise, by the end of the next trading day, it had fallen 16% to 522p.

However, it was the top FTSE 100 riser yesterday, recovering to 570p. But it’s clear some investors were not happy with the detail of the proposed merger.

Rentokil share price: Terminix takeover

Rentokil has agreed to buy Terminix for $6.7 billion. And encouragingly, this is no hostile takeover, as both boards have approved the deal. 643 million new Rentokil shares will be created and handed over to Terminix shareholders, along with $1.3 billion in hard cash.

The scale of the deal spooked some investors — as it values Terminix shares at $55 apiece, a 47% premium over Terminix’s closing price on 13 December, and a 32.5% premium over its previous 90-day volume-weighted average. Moreover, Terminix shareholders will own 26% of the merged company.

But if the deal gains regulatory and shareholder approval, it will allow Rentokil to massively expand its business in the key North America region, which represents 51% of the global pest control market. Furthermore, the new company will be the largest pest control services company in the world, with 56,000 employees and a five million-strong customer base.

In its regulatory filing, Rentokil said that North America has a ‘fragmented market comprising over 20,000 pest control companies.’ There is a significant opportunity for the new entity to use its ‘complementary and synergistic combination’ to grow market share in the lucrative $11 billion region.

And in October’s Q3 results, Rentokil said that ‘our pest control business in North America continued to demonstrate very strong momentum, growing revenues by 24.6%’ despite ‘some (pandemic-caused) labour shortages.’

coronavirus Source: Bloomberg

The future of pest control?

Rentokil Chairman Richard Solomons and Terminix CEO Andy Ransom will retain their roles in the combined group. Solomons commented that it ‘will have a highly talented and experienced management team able to more effectively create value and enhance long-term growth.’ And Ransom argues that the deal ‘will create the global leader in commercial, residential and termite pest control.’ He further believes that they are ‘two highly complementary businesses,’ and that ‘this is a win-win-win for colleagues, customers and shareholders.’

According to both companies, the global pest control market has an estimated 2020 worth of around $22 billion and is ‘estimated to grow at between 4.5% and 5%+ over the medium term.’ Analysts at Peel Hunt hailed the deal as a ‘transformational acquisition.’

Meanwhile, the Omicron variant of coronavirus is starting to chill the spines of leaders worldwide. In the US, White House Chief Medical Adviser Anthony Fauci believes that ‘it is quite likely that we are going to see in some sections of the country a significant stress on the hospital system.’

And in a press conference yesterday, PM Boris Johnson told the public that ‘we are looking at all kinds of things to keep Omicron under control, and we will rule nothing out.’ With travel and social restrictions being reimposed across Europe, Rentokil’s services will remain in strong demand.

In Q3, ongoing revenue, excluding disinfection services, grew by 14.5% to £750.2 million. And the companies expect to generate at least $150 million in cost savings within three years of merger completion.

And while the Rentokil share price has dipped slightly, it’s up 158% over the past five years. And a year from now, it plans to be the global market leader. Of course, the best laid plans of mice and men often go awry…

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