Apparently Rentokil Initial has been looking at buying Steritech in the United States for six or seven years, but the opportunity has only just arisen. The company was founded in 1986 by John Whitley, who before that ran Rentokil’s North American operations. Andy Ransom, Rentokil’s chief executive, has indicated his willingness to expand into pest control there, a $7.5 billion market that accounts for half the global total.
It was the subject of a seminar for City analysts in May. This set out the advantage of increasing its footprint in various cities, which means greater productivity on the part of those operatives working on the ground.
This explains the hefty multiple that Rentokil is paying. The price, $425 million in cash, compares with an earnings figure before interest and tax of $15 million in the most recent financial year. Rentokil, though, believes that it can gain cost savings of $25 milion at least each year, along with further efficiencies. The business, therefore, should generate profits of between $25 million and $30 million by next year and more thereafter, suggesting a more reasonable price earnings multiple of less than ten by 2018, when the business has fully bedded in.
The deal will mean that the North American operation, including plant rentals, will be the biggest part of the group, with $800 million of revenues. Steritech also brings with it another business, brand standards auditing. This provides certification for restaurants, bars, hotels and the like to comply with the relevant legislation on food safety, for example, and this side has been growing by 14 per cent a year. It is a new business for Rentokil and Mr Ransom insists it is a useful diversification.
There is significant customer overlap, about a fifth of Steritech’s clients taking both services, and there is the prospect of cross-selling them Rentokil’s other offerings. This is the second deal done in recent days in American pest control, a much smaller acquisition in Chicago having been announced last week.
Rentokil shares, as the graph shows, have been strong performers so far this year. Up 3½p at 151¾p. they sell on 19 times earnings. The Steritech deal looks a good one, if pricey, but on that multiple there seems little upside left for the shares.
Cost of buying Steritech $425m
Total revenues from US operation: $800m
MY ADVICE Avoid for now
WHY The deal looks attractive, if pricey, but the shares have come up a long way and most of the good news already looks to be in the price
Punch Taverns
Punch Taverns has until this Friday to reach a deal with Conviviality Retail to offload its half-stake in Matthew Clark, the drinks wholesaler, before the exclusivity agreement between the two expires. There is no urgency, though, and no reason why that agreement should not be extended. There are reckoned to be other buyers around, too.
Punch’s trading update for the financial year to August 22 was confident enough. Income from the core estate, excluding various pubs that are being sold, was up 0.3 per cent. This is hardly a stellar performance, but it is set against the previous year, which included the World Cup, always a boost for drinks-led businesses such as Punch. The year also saw the final conclusion of the long, drawn-out debt restructuring.
The shares have been dismal performers since. Up a penny at 126p, they sell on a barely relevant five times’ this year’s earnings. The good news is that henceforth about 95 per cent of earnings will come from that core estate, so the painful reshaping of the group is largely complete. This still looks far too early to buy into the Punch recovery story, though.
Net debt: £1,406m
MY ADVICE Avoid for now
WHY Reshaping over, but no reason for shares to rise
Vertu Motors
As I have suggested recently in the context of Pendragon, Britain’s largest motor dealer, it is hard to imagine a more benign environment in which to sell motor cars. The low euro means that continental manufacturers have a built-in advantage. Financing is cheap and there is a plentiful supply of new cars coming on to the market.
The big car dealers are also gaining increasing service revenues as they retain customers, much higher-margin business than merely selling new cars at a discount. So Vertu reckons to have approaching 100,000 customers paying monthly for servicing, against almost none five years ago. The standout number from its trading update for the five months to the end of July is a 6.4 per cent rise in service revenues on a like-for-like basis, well ahead of a 0.4 per cent increase in new vehicle volumes.
The figures cover the period up to the new license plates issued at the start of September. This looks like setting a new record for deliveries, given the level of interest last month, so there is no sign of the market running out of steam.
Vertu can continue to expand by adding on new dealerships, at a rate of perhaps up to 15 a year to add to the 117 it owns already. The trading update suggests that the market’s expectations for the financial year that runs to the end of February will be met. Along with others in the sector, the shares have been strong performers, although they fell ¼p to 65p in yesterday’s soggy market conditions. They sell on a reasonable 12 times’ this year’s earnings and look to have further to go.
Rise in total group revenue: 13.8%
MY ADVICE Buy long term
WHY UK Motor market shows no signs of going off the boil
And finally . . .
Farewell, then, Innovation Group. This column has tipped the shares for several years, believing that the market does not properly understand or value them. Plainly Carlyle, the American private equity group, agrees. A 40p-a-share offer duly arrived yesterday, valuing the company at just short of £500 million. This suggests a price earnings multiple of about 23. Innovation provides outsourcing services and software that allow insurers to handle claims. It’s a hefty price, but another offer cannot be entirely ruled out.
