A Historic Merger

While the pest control industry has seen its share of mega mergers the past 15-plus years, nothing could prepare the marketplace for the Dec. 14 announcement that London-based Rentokil Initial — whose Rentokil North America business is the third-largest pest control provider on the continent — will buy Terminix Global Holdings, the second-largest pest control business in North America.

Terms of the deal are as follows: Rentokil will pay $1.3 billion in cash and 643.3 million new Rentokil Initial shares in a transaction that values the U.S. company at $6.7 billion. The deal is expected to close in the second half of 2022, subject to approval by Rentokil Initial and Terminix shareholders, as well as regulatory approval. Barclays and Goldman Sachs acted as Rentokil’s financial advisers, while Lazard advised Terminix.

The acquisition represents Rentokil’s largest North American deal, bringing together 56,000 colleagues in more than 87 countries, serving 4.9 million customers. It also will mean that Rentokil will overtake Rollins — a $2 billion business with more than 15,000 employees — as the largest pest control provider in North America.

Rentokil CEO Andy Ransom, in a Rentokil Initial announcement about the transaction, said, “This is an exciting and transformational combination that will create the global leader in commercial, residential and termite pest control and a leader in North America, the world’s largest pest control market.”

In a Terminix press release, the company said combining Terminix’s position in residential and commercial pest management services in the U.S., with Rentokil Initial’s strong international operations and global commercial pest control offerings, is a “win-win for our teammates, customers, partners and shareholders.”

REGULATORY & DIVESTMENT. In the United States, acquisitions of a particular size must meet certain regulatory requirements and file premerger notifications with the FTC and/or the Department of Justice. According to the FTC, the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 establishes waiting periods that must elapse before such acquisitions may be consummated and authorizes enforcement agencies to stay those periods until the companies provide certain additional information about the likelihood that the proposed transaction would substantially lessen competition.

That means the U.S. government will look at the acquisition to see if the combined company will be considered a monopoly. Rentokil executives said they don’t think there will be an issue.

“There’s 20,000 pest control companies across the United States (in) hundreds of cities and towns. And in any one of those cities and towns, if you look in the online or good old-fashion(ed) Yellow Pages, you will find a long list of available pest control companies…in your local area,” Ransom said during a call with investors. “So, I guess probably all I can say at the moment, because I’m not at liberty to go into details, all I can say is we’ve done a lot of work as you’d obviously expect at this stage. We’re comfortable that the transaction gets cleared and we get through this ultimately. But you know, as you say, this is an administrative process and obviously we will follow due process.”

But what about divestment of other service lines, particularly in Europe? In 2019, Terminix re-entered the UK when it completed the purchase of Mitie Pest Control Limited’s national accounts. Those accounts became available as the result of the UK’s Competitions & Market Authority (CMA) requiring Rentokil to divest them before its acquisition of the rest of Mitie. Ransom said “this is not a business that we would be allowed to buy under the conditions of the Competitions & Market Authority back in the time that deal was done. So, prior to completion, the Terminix team will need to sell the UK business, and it’s likely they will need to sell the Norwegian business as well, both of which are small assets in the grand scheme of things.”

Other than European divestments, Ransom said, “We are confident that we will get the approvals required. We only need the anti-trust approval in the United States of America. Our analysis says we will get the approvals we need, but we have to go through due process.”

A COMPLETE PACKAGE. It’s easy to see how the two businesses complement one another from a residential and commercial service offering perspective; both brands have a strong presence in their respective areas (Rentokil, commercial and Terminix, residential and termite).

Industry insiders PCT talked to said on first blush, it makes sense to retain both brands, at least in the United States.

Ransom said as much during the Dec. 14 investor call. “The Terminix brand is very well known in the U.S., and we intend to continue to use it for residential and termite control.”

Terminix, which had a 73 percent residential and 27 percent commercial business split in 2020 according to the PCT Top 100, is well known to homeowners. But the firm has been steadily increasing its commercial presence via strategic acquisitions like McCloud Services, Assured Environments and the Copesan network. “Through their acquisitions in the U.S., Terminix has been very focused on building its commercial focus. And that’s one of the reasons why Terminix acquired Assured — to get that commercial and urban capability,” Andrew Klein, vice president, Business Development, Terminix, told PCT.

Rentokil already has a strong commercial presence. “Rentokil has had a very established commercial component to it internationally. Rentokil is very city focused across the globe. That is a complementary thing from the Terminix perspective because Terminix has historically been more suburban focused,” Klein said.

The addition of Terminix does two things for Rentokil Initial’s mix of revenue. First, it increases the business’s total overall service mix of pest control vs. other services, like hygiene. In 2020, pest control accounted for 62 percent of Rentokil’s revenues, which was made up of a mix of commercial (50 percent) and residential (12 percent). The new group (combined Rentokil and Terminix) would increase the company’s share of pest control to 75 percent of group revenues. Second, the acquisition provides a more even split of residential and commercial revenue. “(There will be) a far greater balance between commercial and residential,” said Rentokil Chief Financial Officer Stuart Ingall-Tombs on the investment call.

INTEGRATION QUESTIONS. It’s one thing to close a mega deal — it’s another to successfully integrate one company into the other. Whatever structure is chosen, with both companies each having more than 300 branch offices, integration will be a big ship to navigate, one that Ransom said will be done “branch to branch, and that is something that we’ve done hundreds of times successfully around the world.”

In terms of possible forthcoming changes, Ingall-Tombs noted synergies will be achieved from a broad range of sources, including operational and route density, procurement leverage, property rationalization, reduced corporate costs and efficiencies in administrative functions and overheads. Specifically, he said, “Back- office synergies from reduced corporate costs, and scale efficiencies in administrative functions and overheads, will represent around 50 percent of total synergies; and combining our branches and routes will drive service productivity and savings in property costs, and this will also represent around 50 percent of total synergies.”

Ransom said that during the first few weeks and months, a large focus will be on building a powerful joint team, with a joint culture. “We’ve got new products and services to sell. We’ve got innovations to bring to the table. We’ve got digital offerings to bring to the table. But we’ve also got a powerful brand in Terminix, in terms of residential and termite, and we think that with even greater investment and support behind the Terminix brand, we think there’s great opportunities there as well.”

Ransom added that team-building does not mean replacing top Terminix positions with Rentokil employees. “I likened it to picking the team, picking the first 11 in football, if you like, and that’s going to take us a few months, but I’m confident we’re going to have a really world-class top team and there’s going to be characters from both Terminix and Rentokil on that team,” he said.

FINAL THOUGHTS. Of course, both sides are optimistic they’ll be able to jump through any required regulatory or financial hoops to make the deal happen in the coming months. But no one has a crystal ball to know yet what actions governments on either side of the pond will require.

One thing is for certain: The companies’ “to do” list is long and complex. Bringing together 56,000 employees across two continents is difficult for any organization, even one as large and experienced as Rentokil Initial. But most in the industry seem hopeful that this is a good thing for the pest management industry and for Rentokil.

“Rentokil got a great deal for the Terminix assets,” said Dan Gordon, an M&A expert. “But they have their work cut out for them. You know, you could build a house or you can retrofit a house, right? And they’re retrofitting a mansion.”

The authors are managing editor and editor-in-chief, respectively, of PCT magazine.