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Wrong turnings that led into a trap
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Posted by: forwardone
It made its name in the mucky business of catching mice and cleaning corporate toilets. Now Rentokil’s shares are being dragged through the dirt.
The company issued its second profit warning in three months on Thursday and said Brian McGowan was stepping down as chairman, after disclosing that the group’s parcels business had fallen into the red.
“[Chief executive] Doug Flynn and Brian McGowan made a big bet on the pest control and parcels businesses,” says Robert Morton, analyst at Investec. “This disaster is firmly at their door.”
Rewind six months and Rentokil appeared to be putting earlier problems right. The company seemed to be growing again after three-and-a-half years of declining profits and downgrades. Analysts had upgraded their ratings.
But following what has been described by one analyst as “a catastrophic and monumental screw-up” at the company’s City Link parcels business, profits will be significantly lower this year.
The reason for the disaster? Poor management and strategy, say analysts.
In 2005, Rentokil’s new management – Mr McGowan and Mr Flynn – announced they were buying up the franchise network of its Initial City Link parcels delivery business to boost profits as part of the company’s recovery plan.
Then Rentokil made the transformational acquisition of Target Group for £210m ($418m) in December 2006, doubling the parcels operation. But integration has been a disaster.
Mr McGowan, the first casualty in this debacle, is to leave in May but pressure is likely to remain on Mr Flynn.
Under Mr McGowan and Mr Flynn, Rentokil cut the number of markets in which it operates, with the sale of the manned guarding, electronic security and conferencing businesses.
At the same time, they expanded existing businesses, buying a US pest control business and a clutch of companies in Asia Pacific, as well as Target.
The bulk of Rentokil’s revenues now come from its textiles and washrooms services division and building management, but it also remains big in parcels and pest control.
Some analysts believe an incoming chairman is likely to refocus the business on one core activity – either washrooms or pest control.
Calls for the group to be broken up go back years, though previous suggestions that it could be bought out by private equity and then split seem to have faded.
“Six months ago maybe [that might have happened],” says Kevin Lapwood at Seymour Pierce. “But they have sold some prime assets. That was one of the things that private equity wanted. What is left is very unappealing. At least three private equity firms have done proper due diligence on Rentokil but there are so many problems.”
Gerry Robinson, who tried to buy the company in 2005, told the FT on Thursday he was unlikely to look at the business again.
It has been a four-year fall from grace for Rentokil, after Sir Clive Thompson, the then chairman, and James Wilde, his chief executive, were ousted from the company over plans to sell two of Rentokil’s non-core businesses.
They wanted to use the proceeds to make acquisitions in Rentokil’s core areas of security and hygiene or to return cash to shareholders but were unable to obtain the backing of the board.
In 2004 Rentokil’s pre-tax profits were £347m on sales of £2.4bn and its market capitalisation topped £3bn. Last year profits were £142m on sales of £2.2bn, and the company’s value has halved.
ft.com