Is Rentokil Initial (LON: RTO) stock a buy after its sudden crash?

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Is Rentokil Initial (LON: RTO) stock a buy after its sudden crash?

 Is Rentokil Initial (LON: RTO) stock a buy after its sudden crash?
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Highlights 

  • FTSE 100 listed pest control and hygiene service provider Rentokil Initial has announced the acquisition of US-based Terminix Global Holdings, Inc.
  • Upon successful acquisition, Rentokil Initial will become a global leader in the pest control and hygiene & wellbeing industry.

FTSE 100 listed pest control and hygiene service provider Rentokil Initial Plc (LON: RTO) announced a major acquisition deal. Rentokil Initial will acquire its US rival company Terminix Global Holdings, Inc. The deal will be completed through a combination of stock and cash. As per the deal agreement, Rentokil Initial will issue close to 643 million new shares to Terminix shareholders and approximately USD 1.3 billion in cash. The existing shareholders of Terminix will have a 26% stake in the combined group.

The entire acquisition deal is a combination of 80% stock and 20% cash valuing the share capital of Terminix Global Holdings at USD 6.7 billion, which is equivalent to USD 55 per share of Terminix common share.

Upon successful deal completion, Rentokil Initial will become a global leader in the pest control and hygiene & wellbeing industry. In addition, it will become the market leader in the North American market. The Combined Group will have 56,000 employees across 790 locations worldwide.

The pro forma revenue of the combined entity is estimated to be USD 5.7 billion, with an EBITDA of USD 1.2 billion and a free cash flow of USD 608 million as of 31 December 2021. The company also expects mid-teens increase in earnings per share following the first full year of completion post the acquisition.

Third-quarter business update

The company witnessed a strong business performance in the third quarter of 2021. It reported a revenue of £761.9 million. The pest control category continues to grow at an excellent pace despite witnessing lockdown in some countries, with revenue growth of 18.3%. The core hygiene business of the company delivered a 6.4% rise in revenue.

During the third quarter, the company completed a total of nine acquisitions, including seven in the pest control category, one in the hygiene category, and one acquired company operating in both pest control and hygiene business.

Rentokil Initial Plc and its share price performance

Rentokil Initial Plc provides pest control and hygiene services to commercial and residential clients in the United Kingdom, North America, and other European countries. In addition, the company also offers waste management services to the healthcare sector, which includes the collection, disposal, and recycling of hazardous waste.

 Rentokil Initial stock movement

(Image Source: Refinitiv)

After the acquisition announcement, the stock price initially went up to give a new 52-week high at GBX 662. However, in the latter part of the day, the company’s stock saw profit booking from investors. It has a market cap of £11,609 million as of 14 December 2021. In the last one year, the stock has given a 10.5% return to its shareholders.

Bottomline

Rentokil Initial’s price offering for Terminix is around 47% premium to its Monday’s closing, which has been considered high along with the cash for the shareholders leading to a sharp correction in stocks. However, Rentokil is hopeful of the deal generating $150 million of cost savings by the third year from the closure and also to add earnings per share immediately.

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