Terminix Shareholder Asking Board to Continue Shopping Rentokil Deal

LONDON - Franchise Partners, a top 20 shareholder in Terminix, released a statement on Feb. 9 that it “does not find the value or the structure of the proposed [Rentokil Initial] offer attractive” and that the Terminix Board of Directors should immediately add a “go-shop” clause to their agreement with Rentokil Initial. Franchise Partners said the board should “openly invite and actively engage with other parties who might offer better value to Terminix shareholders.” Rentokil Initial announced on Dec. 14 that it will buy Terminix Global Holdings for $1.3 billion in cash and 643.3 million new Rentokil Initial shares in a deal that values Terminix Global Holdings at $6.7 billion.

Franchise Partners is a global equity manager that places value on businesses built around intangible assets (e.g., brand patents, licenses and network effects). They own 1.55% of Terminix’s issued share capital and have been a shareholder since 2020.

Franchise Partners noted several reasons it did not find the Rentokil Initial bid compelling, including:

The process. Instead of Terminix shopping the deal around, Terminix was approached by Rentokil Initial.  Thus, Terminix agreed to terms without shopping the transaction or engaging in any other price discovery.

The value. In its statement, Franchise Partners wrote that the Rentokil Initial offer values Terminix at a 16x multiple of 2022 expected EBITDA and at 12x expected EBITDA including the conservatively estimated synergy target. Franchise Partners believes this is a very low multiple in their view in comparison to other multiples being paid out in the pest control industry.

The structure. A very high portion (80%) of the stated value of the bid is being paid in a fixed number of shares of Rentokil. This transaction will materially dilute Terminix shareholders’ economic exposure to the attractive U.S. pest control category, Franchise Partners stated in the release.

Terminix is trading about 10% below the price Rentokil Initial would pay shareholders who elect cash and stock in the deal. A Feb. 12 Wall Street Journal article noted the recent trend of investors who trade on deal news “feeling nervous” over growing global antitrust scrutiny. The Wall Street Journal article cited Terminix as one of several companies “trading well below their agreed-upon acquisition prices, a sign that investors are more worried than usual that the deals could fall apart.”

In a Feb. 9 report, Tim Mulrooney, equity research analyst at investment bank and financial services company William Blair, wrote that it was unlikely Terminix will receive a better bid than Rentokil Initial. Mulrooney wrote, “We do not expect one of the other large strategic acquirers — which include Rollins, Ecolab and Anticimex — to bid on Terminix. We do not believe Rollins is interested, and regardless would present a higher likelihood of raising antitrust flags. Ecolab only entertains pure-play commercial pest assets. We believe only one of the three strategics (Anticimex) would consider a bid, and we assign a low probability outcome to a higher bid coming from Anticimex at this time.”

A Franchise Partners spokesperson told PCT that whether or not a better deal is out there, “there's an obligation on the board to at least explore whether there are other potential bidders who might be interested. In our experience, it’s very unusual to run a process that is not open to other parties. Given how attractive this asset is — and given the scale of M&A in the pest control industry the last decade — we would be surprised if there weren’t other bidders who might be interested. When you couple that lack of openness in the process with the very low premium, we think it raises some questions for the board

A Terminix spokesperson told PCT, “We appreciate the perspectives of all of our shareholders and have a long history of acting in their best interests. The Terminix Board of Directors carefully considered the transaction with Rentokil and unanimously concluded that it is the best path forward to continue our growth trajectory and maximize shareholder returns.”

The Terminix spokesperson added, “As part of a larger and stronger organization, we will offer superior service and an even more comprehensive range of solutions for customers, while accelerating our investments in growth and technology. Leveraging our strong combined residential and commercial capabilities and enhanced customer density, we also expect to realize both cost and revenue synergies. The equity component of the consideration allows Terminix shareholders to participate in and benefit from the substantial upside potential of the combined company, while the cash consideration component provides value certainty. Following completion of the transaction, the combined company will be differentiated by its strong focus on people, customers and ESG, and it will be well-positioned to drive continued growth and value creation.”