How Will Rentokil-Terminix Deal Shake Up M&A Market?

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I recently dug through the PCT archives to find our April 2006 issue. On the cover was the headline “The British Are Coming.” Our cover story explored how Rentokil’s acquisition of J.C. Ehrlich gave the global pest control provider a platform for North America expansion.

In subsequent years, Rentokil Initial has indeed reshaped the pest control industry, ushering in a robust M&A period that has included the purchase of numerous large, regional service providers. All of this M&A activity has had a ripple effect on industry stakeholders. The National Pest Management Association (NPMA), for one, underwent dues restructuring three years ago to account for the increased/sustained M&A activity. NPMA CEO Dominique Stumpf told PCT that beyond the fiscal impact to the association, “the area that [M&A] leaves a lasting impact is the loss of people that may or may not be engaged any longer for various reasons, e.g., serving on committees, boards and participation in programs.”

NPMA is just one of many groups impacted by M&A. So, when Rentokil announced it will be purchasing Terminix, the marketplace wondered: How will this shake up the red-hot M&A market? In addition to potentially removing one of the industry’s largest M&A players (Terminix), Rentokil will have its hands full integrating Terminix, something Rentokil Initial CEO Andy Ransom alluded to in a Dec. 14 conference call. During the next two to three years, while Rentokil will be integrating Terminix, Ransom said, “the likelihood of us doing lots of deals in the U.S. … we’ll back off if it makes sense, because we’re going to be busy. We’re going to have a lot of things to do.” However, he added, “there’s still 20,000 businesses out there, and we’d hate to miss a really good opportunity.” PCT asked several industry M&A advisers how they think the deal might impact M&A activity.

“I always tell people buyers aren’t paying these crazy valuations because they’re nice people or good hearted. They’re paying them because there’s a motive and the scales are tilted in favor of the sellers. Buyers are trying to generate share and it’s super competitive. But at some point, the scales will probably tilt to the favor of the buyers.” — Lance Tullius, financial adviser, LR Tullius

“I think that it’s going to require a lot of human and financial capital on Rentokil’s part. Rentokil and Anticimex are the ones who drive the market — the valuations. Not that it’s going to dry up or die, but (Rentokil is) definitely going to be more selective and not do as many deals next year because they have this thing that they’ve got to get done, which is far from done.” — Dan Gordon, owner of PCO Bookkeepers & PCO M&A Specialists

“It’s definitely going to have some reverberations from a valuation perspective in this market. I can see the biggest acquirers saying, ‘Hey, Terminix was just bought for 19 times, so why do you think I should pay you 18 or 19 times?’ So, it’ll be interesting to see how this plays out.” — Paul Giannamore, managing director, Potomac Pest Control

“I don’t have a crystal ball, but I don’t think it is going to change that much. In my opinion, Rentokil is just going to get bigger. With these bigger companies, for them to outpace the industry CAGR (compound annual growth rate), they have to grow organically — which is marketing, branding and sales — but that growth has to be layered with mergers and acquisitions.” — Kemp Anderson, Kemp Anderson Consulting

“I think the effect of this deal will be fairly subtle in terms of affecting the industry nationwide. It may slow the pace at which Rentokil acquires for at least a little while. They will be busy assimilating this one after it is closed. For the smaller companies, this may create opportunity to increase their customer acquisition and market share in their individual footprints. It also may create opportunity for the smaller companies to open up locations in new markets for them.” — Greg Clendenin, CEO of The Clendenin Consulting Group

Regardless of the impact, the Rentokil-Terminix deal is yet another reminder that the “business of bugs” is a good one. As NPMA’s Stumpf noted, “This acquisition [in addition to the many over the past decade] demonstrates the essential nature of our industry and our services in protecting people, places and food.”

The author is senior digital editor and managing editor of PCT magazine.