How Peltz’s Trian may help enhance shareholder value at Rentokil

Business: Rentokil Initial is a United Kingdom-based company that operates globally. It’s engaged in pest control, hygiene and well-being services. Rentokil offers a complete range of pest control services, from rodents to flying and crawling insects, to other forms of wildlife management. It offers a range of hygiene services, including the provision and maintenance of products, such as soap and hand sanitizer dispensers, hand dryers, air care and purification, cubicle and surface sanitizers, feminine hygiene units, toilet paper dispensers and floor protection mats. Its connected devices, PestConnect, help provide customers with a complete pest detection solution and full traceability.

Stock Market Value: about 11.3 billion pounds (4.47 pounds per share). Shares also trade in the U.S. under the ticker “RTO,” closing at $29.01 on Friday.

Trian has amassed a top-10 stake in Rentokil Initial and has reached out to discuss initiatives to improve shareholder value.

This is an excellent company that has taken quite a bit of the global market share for pest control. For 10 years, from 2011 through 2021, Rentokil was a highflyer, delivering a total return of 932%, far superior to the UK FTSE 100 benchmark and S&P 500. In October 2022, the company increased its scale in North America by acquiring Terminix for $6.7 billion, increasing its revenue from $2.96 billion to $3.71 billion. It has had trouble integrating the Terminix business and on Oct. 19, 2023, Rentokil’s UK-traded shares fell 18% after the company warned of weakness in the U.S. market, challenges to residential customer acquisition and a slowdown in earnings growth. It also lowered guidance on its North American adjusted operating margins from 19.5% to a range of 18.5% to 19%. Since then, the company announced its 2023 earnings, in which North America did register an 18.7% adjusted operating profit, but shares continued to trade 30% lower than the pre-warning price. 

With the stock down 36% from its 2021 highs, Rentokil caught the attention of Nelson Peltz and Trian, who has acquired a large stake and reached out to the company to discuss ideas and initiatives to improve shareholder value. Trian is largely thought of as a U.S. activist investor, and it is. However, when it has engaged with UK companies, the firm has consistently been able to create shareholder value. Trian has taken board seats at Janus Henderson, Pentair and Unilever, and it has successfully advocated for strategic divestments at Pentair, Unilever and Ferguson. In its four previous activist campaigns in the UK, the firm has averaged a 32.01% return versus 9.79% for the MSCI EAFE Index.

However, Trian’s campaign at Ferguson may be the best example of its intentions at Rentokil. At Ferguson, Trian built a 6% stake in the company, agitated for a sale of its UK business in order to focus on the U.S. and ultimately succeeded in doing so. In May 2022, Ferguson shifted its primary listing to the New York Stock Exchange. Ferguson has delivered a 72% total return since the shift. Rentokil appears to be an excellent candidate for such a shift, considering that it generates the majority of its revenue in North America. The company also appears preeminently focused on expansion there, given its “Right Way 2” growth plan for the region and acquisition of Terminix.

A shift in listing location away from London in order to close the valuation gap would not be unfounded, as Rentokil trades at a discounted valuation (17x NTM earnings) compared to U.S. peers Ecolab (35x), Cintas (41.5x) and Rollins (46x), all of whom are domiciled in the U.S. Listing location change has been a major theme for other activists recently, including Palliser’s encouragement of Rio Tinto to collapse its dual-listed structure in favor of an Australian primary listing. There is also Cevian’s successful persuasion of CRH to move to New York — and its encouragement of Pearson to do the same. Incidentally, Pearson’s CFO is on the board of Rentokil.

Shifting the listing to the U.S. is the low-hanging fruit of value creation and potentially divesting the European business could create additional value. Trian is an excellent income statement activist. It could be very helpful to Rentokil and shareholders in improving the company’s operating margins, stimulating revenue growth and integrating the Terminix acquisition. In this situation, we would expect that Peltz and Trian will work collaboratively behind the scenes with management regarding value improvement and will likely seek board representation. At three of its four prior UK engagements, Trian has secured a board seat for a firm insider amicably without launching or publicly threatening a proxy fight. If the Rentokil board looks at Trian’s other UK experiences and how it worked constructively with the boards of Pentair, Janus and Unilever, the company will likely invite a Trian executive to serve on the Rentokil board.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.