What’s In: Selective Acquisitions. What’s Out: Sky-High Multiples

The M&A market may be changing in 2023. Those surveyed and interviewed by PCT believe the big buyers will be more selective.

istock | AndreyPopov

istock | AndreyPopov

Anne Nagro

Published January 20, 2023

Editor’s note: PCT’s January cover story package “What’s Hot? What’s Not” is a series of articles and research findings on major pest control industry issues from a recent PCT/NPMA survey. The following Online Extra is a look at how the industry views M&A in the coming year.

For the last two decades, mergers and acquisitions in the pest management industry have been on a tear. Most PMPs (59 percent) said they expect this pace to increase over the next five years, found the 2022 PCT-NPMA industry survey.

Private equity (PE) will lead the charge. Through October 2022, at least 15 PE firms had purchased at least one pest control company in the United States; some had acquired many and one – Anticimex (owned by PE firm EQT) - had purchased hundreds of companies, said Stuart Aust, principal and founder of The Aust Group, an M&A advisory.

Nearly half (49 percent) of PMPs expected even more private equity to enter the market. In fact, several PE firms not currently in the industry had earmarked funds – one had $1.3 billion – to do so, said Aust. “It’s just a matter of time before they get in,” he said. 

Through August 2022, M&A advisory firm Potomac had about 75 percent -- $825 million -- of its global active and pending pest control M&A volume going to private equity, “something we’ve never seen before,” wrote Managing Director Paul Giannamore in a company email.
 
PMPs in follow-up interviews said they were contacted weekly by PE firms wanting to buy their companies and this interest helped drive up prices paid by PE and strategic buyers, alike.
 
Economic factors could upset this dynamic going forward, however. “On the private equity side, as interest rates continue to rise that’s going to compress their ability to pay and not meet seller expectations potentially,” said Mike Givlin, former CEO of Certus Pest, a pest control platform owned by private equity firm Imperial Capital.
 
Even if the valuation multiples paid to acquire companies stay the same, sellers may not realize the same gain with higher labor, fuel, vehicle and insurance costs eating into profit margins. “As profitability shrinks, so does the value of your business,” explained Givlin. 
 
According to the survey, 62 percent of PMPs agreed that high inflation and interest rates will negatively impact M&A transactions. One third (33 percent) said lower transaction multiples and valuations will have a negative impact.
 
The merger of Rentokil and Terminix -- two of the industry biggest strategic buyers – also will affect the pace of large acquisitions over the next year or so. “They’re going to be way more selective because their priority is going to be integrating,” said Givlin.
 

Even so, PMPs were upbeat. More than half (51 percent) said buyers recognize the value of the industry’s recurring revenue model and economic resilience, which will positively impact M&A activity.

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