Acquisition of Terminix Global Holdings Inc by Rentokil Initial plc for Stock and Cash
Creating the Global Leader in Pest Control and Hygiene & Wellbeing
- Increased scale and leadership in the global pest control market
- Substantially increased scale in North America, providing an enlarged platform for profitable growth
- A complementary and synergistic portfolio combination
- An attractive financial profile
LONDON & MEMPHIS, Tenn.–(BUSINESS WIRE)–$TMX #ESG–Terminix Global Holdings, Inc.(NYSE: TMX) and Rentokil Initial plc:
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AND THE PERSON RESPONSIBLE FOR MAKING THIS ANNOUNCEMENT IS DARAGH FAGAN, GENERAL GROUP COUNSEL AND COMPANY SECRETARY, RENTOKIL INITIAL PLC.
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION.
THIS ANNOUNCEMENT IS NOT A PROSPECTUS AND THIS ANNOUNCEMENT DOES NOT CONSTITUTE OR FORM PART OF, AND SHOULD NOT BE CONSTRUED AS, ANY OFFER, INVITATION OR RECOMMENDATION TO PURCHASE, SELL OR SUBSCRIBE FOR ANY SECURITIES IN ANY JURISDICTION AND NEITHER THE ISSUE OF THE INFORMATION NOR ANYTHING CONTAINED HEREIN SHALL FORM THE BASIS OF OR BE RELIED UPON IN CONNECTION WITH, OR ACT AS AN INDUCEMENT TO ENTER INTO, ANY INVESTMENT ACTIVITY.
THIS IS AN ANNOUNCEMENT AND ANY DECISION TO PURCHASE, SUBSCRIBE FOR, OTHERWISE ACQUIRE, SELL OR OTHERWISE DISPOSE OF ANY SECURITIES MUST BE MADE ONLY ON THE BASIS OF THE INFORMATION CONTAINED IN AND INCORPORATED BY REFERENCE INTO THE PROSPECTUS ONCE PUBLISHED. THIS ANNOUNCEMENT IS NOT A CIRCULAR OR EQUIVALENT DOCUMENT AND INVESTORS AND PROSPECTIVE INVESTORS SHOULD NOT MAKE ANY INVESTMENT DECISION ON THE BASIS OF ITS CONTENTS. A CIRCULAR AND PROSPECTUS IN RELATION TO THE TRANSACTION DESCRIBED IN THIS ANNOUNCEMENT WILL EACH BE PUBLISHED IN DUE COURSE.
Transaction summary
The Boards of Directors of Rentokil Initial plc (“Rentokil Initial”) and Terminix Global Holdings, Inc. (“Terminix”) are pleased to announce that Rentokil Initial and Terminix have entered into a definitive agreement (the “Agreement”) under which Rentokil Initial will acquire Terminix for stock and cash (the “Combination” or the “Transaction”). The Transaction will bring together two complementary businesses (the “Combined Group”) to create the global leader in pest control and hygiene & wellbeing, and the leader in the pest control business in North America, the world’s largest pest control market.
Under the terms of the Agreement, Rentokil Initial will issue to Terminix shareholders at closing aggregate consideration comprised of approximately 643.29 million new Rentokil Initial shares (representing approximately 128.66 million American depository shares (“ADSs”), based on a 1:5 ADS to Rentokil Initial share ratio) and approximately US$1.3bn in cash. Based on Rentokil Initial’s 5-day average daily volume weighted share price and the 5-day average of the Sterling-US Dollar exchange rate both over the period spanning 6 to 10 December 2021 inclusive, this values the entire share capital of Terminix at US$6.7billion, implying a value of US$55.00 per share of Terminix common stock, and represents an aggregate consideration mix of 80% stock and 20% cash and:
- a premium of 47.0% over the closing price of Terminix common stock on 13 December 2021 (being the last trading day prior to this announcement); and
- a premium of 32.5% over the 90-day volume weighted average share price of Terminix ending on 13 December 2021.
Terminix shareholders may elect to receive all cash or all stock consideration, subject to proration in the event of oversubscription. Each Terminix share for which no election or an invalid election is received will be deemed to have elected for all stock consideration.
The value of the per share cash election and the value of the per share stock election will be equalised ahead of closing such that the value of each election choice will be substantially the same.
The total number of new Rentokil Initial ADSs to be issued and the aggregate amount of cash to be paid under the terms of the Agreement will not vary as a result of individual election preferences.
As part of the Combination, Rentokil Initial will list the American Depository Receipts (“ADRs”) evidencing the ADSs on the New York Stock Exchange (“NYSE”). The Combination will result in Terminix’s existing shareholders owning approximately 26% of the Combined Group on completion and sharing the benefits accruing to the Combined Group.
The Transaction will combine two leading brands with a long cultural heritage, outstanding talent and strong focus on people, customers and ESG. Upon completion, the Combined Group will have c.56,000 colleagues serving c.4.9m customers around the world from 790 locations. The enlarged business will have a strong platform for growth, particularly in North America, and an attractive financial profile to support future growth, including through acquisitions and continued investment in innovation and technology. For the year ended 31 December 2020, the Combined Group’s pro forma revenue would have amounted to US$5.7bn1 (£4.3bn), with EBITDA of US$1.2bn (£897m) and Free Cash Flow of US$608m (£458m).
The Combination is expected to create significant value, enhance long-term growth potential, be highly cash generative and present a compelling industrial logic, supported by:
- increased scale and leadership in the global pest control market;
- substantially increased scale in North America, providing an enlarged platform for profitable growth;
- a complementary and synergistic portfolio combination; and
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an attractive financial profile.
The Combination is expected to generate material annual pre-tax net cost synergies of at least US$150m (£113m) by the third full year post completion. Run rate synergies are expected to accumulate c.30%, c.80% and 100% in the first, second and third 12-month periods respectively, post completion. In achieving these synergies, the Combined Group expects to incur aggregate cash implementation costs of approximately US$150m, half of which will be incurred in the first 12 months post completion. The Transaction is expected to deliver mid-teens percent accretion to Rentokil Initial’s earnings per share in the first full year post completion2.
Recommendations
The Boards of Directors of both Terminix and Rentokil Initial have unanimously approved the Transaction and resolved to recommend that their respective shareholders vote in favour of it.
Current trading
Rentokil Initial and Terminix each confirm that current trading is in line with expectations.
Commenting on today’s announcement, Richard Solomons, Chairman of Rentokil Initial, said:
“The Board of Rentokil Initial and I are delighted to recommend this transformational combination which will create the global leader in Pest Control and Hygiene & Wellbeing. Under Andy Ransom’s leadership, our Combined Group will have a highly talented and experienced management team able to more effectively create value and enhance long-term growth. We believe the combination is a compelling opportunity for all stakeholders to participate in the value creation of the Combined Group.”
Commenting on today’s announcement, Andy Ransom, CEO of Rentokil Initial, said:
“This is an exciting and transformational combination that will create the global leader in commercial, residential and termite pest control, and a leader in North America, the world’s largest pest control market. It brings together c.56,000 colleagues, protecting people, enhancing lives in over 87 countries, and serving c.4.9m customers.
“These are two highly complementary businesses with a similar operational playbook focused on supporting great people to provide outstanding customer service across Pest Control and Hygiene & Wellbeing. The combination will deliver further investment and the sharing of best practices to enable our talented teams to better serve customers, protecting them from the growing threat of pests and meeting their future needs. We will open our first innovation centre in the US and provide our industry-leading innovations and digital technologies to a far larger customer base. This is a win-win-win for colleagues, customers and shareholders.”
Commenting on today’s announcement, Naren Gursahaney, Chairman of Terminix, said:
“On behalf of the Board of Terminix, I enthusiastically support this complementary combination of two phenomenal pest management companies. Our Board of Directors is confident that Rentokil Initial is the perfect partner for Terminix and that this Transaction will maximize value for Terminix’s customers, teammates and stockholders. The Transaction delivers a compelling 47.0% premium for Terminix’s stockholders, and the equity consideration will allow Terminix stockholders to participate in and benefit from the substantial upside potential of the combined company. The Terminix Board of Directors has unanimously determined that this highly complementary combination is a win for, and in the best interests of, all of our stakeholders. The combined company will be differentiated by its strong focus on people, customers and ESG and well-positioned to drive continued growth and value creation.”
Commenting on today’s announcement, Brett Ponton, CEO of Terminix, said:
“This is an exciting next step that significantly advances Terminix’s journey toward becoming a global leader in pest management. As part of a larger and stronger organisation, we will offer superior service and an even more comprehensive range of solutions for our customers, while accelerating our investments in growth and technology. I look forward to the opportunity this combination provides for our colleagues and customers. The shared cultural focus on providing our people with the training, tools, and technology necessary to provide world-class customer service will provide new opportunities for our teammates to develop as part of the worldwide leader in pest control. Leveraging our strong combined residential and commercial capabilities and enhanced customer density will bring us closer to our customers and improve the quality of service we provide to our customers.”
Analyst and Investor Presentation
There will be an analysts’ and investors’ conference call and webcast presentation at 9.00am GMT today, hosted by Rentokil Initial’s management. This will be available via a live audio web cast at www.rentokil-initial.com and on www.terminix.com. Rentokil Initial management will also host a second conference call and a webcast presentation will be given at 1.00pm GMT (8.00am EST). This will be available via a live audio web cast at www.rentokil-initial.com. An audio recording will be available at www.rentokil-initial.com for the foreseeable future.
Background
Under current management Rentokil Initial has increasingly focused the business on Pest Control and Hygiene & Wellbeing. For the period from 2013 to 2020, Rentokil Initial delivered a seven-year compound annual growth rate (CAGR) of 9.9% in Ongoing Revenue, a seven-year CAGR of 15.2% in Ongoing Operating Profit, and improved Net Operating Margins from 9.8% to 13.7%. During this period the Group has also increased dividend payments from 2.31p per share in 2013 to 5.41p per share for the full year ended December 2020. The business has also consistently executed a highly value creating programme of acquisitions and since 2016 has acquired 228 businesses (primarily in pest control), 73 of which have been in North America.
Terminix is the most recognised brand in U.S. termite and pest management services and is now a singularly focussed pest management company, with a low cost structure and strong balance sheet.
Rentokil Initial and Terminix are significant players in the attractive, non-cyclical and growing pest control industry. The global pest control market, estimated to be worth c.US$22bn in 2020 (51% in North America, 20% Europe, 21% Asia), has delivered a total market CAGR of 4.7% over the last five years and is estimated to grow at between 4.5% and 5%+ over the medium term.
Pest Control is a largely non-discretionary and essential service and industry growth opportunities show no signs of being diminished by the COVID-19 pandemic. Growth characteristics of the global pest control market include increasing global populations, urbanisation, expansion of middle classes, climate change, greater intolerance to pest incidence and rising transmission of vector borne diseases. Technology developments are also important factors contributing to future pest management growth, including rising demand for remote monitoring systems.
Creating the global leader in pest control
The Boards of Directors of Rentokil Initial and Terminix believe the Transaction has a highly compelling industrial logic:
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Increased scale and leadership in the global pest control market
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Combined, the two businesses will become the leading global pest control company, with a customer base of c.4.9m customers, c.56,000 colleagues globally and presence in 790 locations in over 87 countries. The significantly enhanced network and route density will bring the Combined Group closer to its customers, with its colleagues and teammates able to spend more time directly with customers and less time driving to and from customer visits. Pro forma revenues for the Combined Group would have been US$5.7bn (£4.3bn) for the full year ended December 2020, 75% of which would have been generated from pest control (for the full year 2020, 62% of Rentokil Initial’s revenues were from pest control).
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Substantially increased scale in North America, providing an enlarged platform for profitable growth
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The Combined Group will become the leading player in North America, the world’s largest pest control market (representing 51% of the global market and estimated to be worth c.US$11bn). As such, North America is of significant strategic importance and focus for Rentokil Initial. It is a highly competitive and fragmented market comprising over 20,000 pest control companies. Commercial pest control comprises the largest segment in North America at c.45% of the market, with residential comprising c.35% and termites at c.20%. Rentokil Initial is currently a leading brand in commercial pest control, whilst Terminix is the most recognised brand for termite and pest management in the US, performing c.50,000 customer visits each day from 375 locations across 47 states. It generated pest control revenues of c.US$1.9bn for the year to 31 December 2020. Post completion, the Combined Group will include a leading brand for residential and termite pest control in North America, as well as the leading global brand in commercial pest control.
Upon completion of the Transaction, c.60% of the Combined Group’s total revenues will come from North America. The Combination will create additional scale which will enable further investments in people, service quality, innovation, digital technology & applications and sustainability, to meet the future needs of customers and colleagues. Post completion, Terminix and Rentokil Initial intend to open a new science and innovation centre in the US focused on termite and residential pest control.
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A complementary and synergistic combination
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The Combination brings together two complementary businesses with a strong operational and cultural fit, creating significant synergy opportunities.
Rentokil Initial and Terminix have complementary service lines (combining Rentokil Initial’s expertise in commercial pest control globally with Terminix’s expertise in residential and termite pest control in North America). Their geographic footprints in North America are also complementary, allowing greater route-density to be achieved, presenting further opportunities to enhance operational efficiency. Both companies have similar operating models which will enable the effective sharing of best practices in the future. In addition, Rentokil Initial is a leader in innovation and digital technology, creating services and products which can be rolled out to Terminix’s c.2.9m pest control customers.
Both companies have a strong track record of integrating acquisitions and are committed to creating a high-quality working environment with attractive opportunities for colleagues and teammates from both businesses to develop rewarding long-term careers in the Combined Group. Rentokil Initial and Terminix believe the enlarged business will be able to further differentiate itself from its competitors through its strong focus on people, customers and ESG. (More details on this are given in the ‘Benefits to the Combined Group’s customers’ and ‘Benefits to the Combined Group’s employees’ sections of this announcement.)
The Combination is expected to generate material annual pre-tax cost synergies of at least US$150m (£113m) by the third full year post completion, owing to greater footprint density, procurement leverage, property rationalisation, duplicate administrative and overhead rationalisation, marketing, sales effectiveness, head office synergies and financing. (See ‘Delivering significant value for shareholders’ for further details.)
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An attractive financial profile
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The Combined Group will have an attractive financial profile, with the opportunity to increase Group Net Operating Margins through cost reductions and operational efficiencies by c.100bps in each of the three full calendar years post completion. A strong balance sheet will support growth through continued investments in people, innovation, digital technologies and sustainability, and through further M&A opportunities around the world. The Combined Group will be highly cash generative and on a pro forma basis would have generated Free Cash Flow of £458m for the year ended 31 December 2020.
The Combination will create a larger, highly diversified and more resilient business in Pest Control and Hygiene & Wellbeing. In North America Pest Control, it will be well balanced between residential and termite (60% of revenues) and commercial (40% of revenues) pest services. Revenues from termites, currently 47% of Terminix’s residential pest revenues, will become c.20% of the Combined Group’s North America pest business upon completion of the Transaction.
The Combined Group will also have a strong, complementary international Hygiene & Wellbeing business, with leading positions in 22 of its 65 markets. Revenues from Hygiene & Wellbeing will form 21% of total Combined Group revenues and the category is expected to deliver 4% to 6% Organic growth per annum over the medium term from 2022. The Board of Rentokil Initial remains committed to the growth and development of this business which it believes has the potential to become ‘The New Pest Control’. Terminix and Rentokil Initial will target the opportunity to cross-sell and up-sell both Pest Control and Hygiene & Wellbeing services to its enlarged customer base going forward.
Following completion of the Combination, Rentokil Initial will continue to target the medium-term growth rates set out at its Capital Markets Day on 28 September 2021. These are Ongoing Revenue growth of 6% to 9%, including Organic growth of 4% to 5%, Ongoing Operating Profit growth of 10%+ and Free Cash Flow conversion of c.90%. The medium-term Organic growth target for the Combined Group’s Pest Control category will remain unchanged at 4.5% to 6.5%. Medium-term growth targets for the Combined Group’s Hygiene & Wellbeing and Workwear categories will also remain unchanged at 4% to 6% and 3% to 4% respectively.
The Combined Group will remain committed to Rentokil Initial’s current progressive dividend policy and expects to have leverage metrics consistent with a BBB investment grade rating within two years from completion of the Combination. Net Debt to EBITDA is targeted to be 2.0x to 2.5x in the medium term.
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Terms of the Agreement
Under the terms of the Agreement, Rentokil Initial will issue to Terminix shareholders at closing aggregate consideration comprised of approximately 643.29 million new Rentokil Initial shares (representing approximately 128.66 million ADSs based on a 1:5 ADS to Rentokil Initial share ratio) and approximately US$1.3bn in cash. Based on Rentokil Initial’s 5-day average daily volume weighted share price and the 5-day average of the Sterling-US Dollar exchange rate both over the period ending 10 December 2021, this values the entire share capital of Terminix at US$6.7bn, implying a value of US$55.00 per share of Terminix common stock, and represents an aggregate consideration mix of 80% stock and 20% cash and:
- a premium of 47.0% over the closing price of Terminix common stock on 13 December 2021 (being the last trading day prior to this announcement); and
- a premium of 32.5% over the 90-day volume weighted average share price of Terminix ending on 13 December 2021.
Terminix shareholders may elect to receive all cash or all stock consideration, subject to proration in the event of oversubscription. Each Terminix share for which no election or an invalid election is received will be deemed to have elected for all stock consideration.
The cash election consideration and the stock election consideration will be equalized to the value of the aggregate consideration per Terminix share, as measured by the value of 5.3094 new Rentokil Initial shares and $11 in cash as of the second day prior to closing.
The total number of new Rentokil Initial ADSs to be issued and the aggregate amount of cash to be paid under the terms of the Agreement will not vary as a result of individual election preferences.
As part of the Combination, Rentokil Initial will list ADRs evidencing the ADSs on the NYSE. The Combination will result in Terminix’s existing shareholders owning approximately 26% of the Combined Group on completion and sharing the benefits accruing to the Combined Group.
Delivering significant value for shareholders
Terminix and Rentokil Initial believe that the Transaction will create significant value for shareholders, who will be able to participate in the Combined Group’s continued success through their ownership in the global leader in a high-quality growth market.
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The Combination is expected to deliver substantial value creation for shareholders from annualised pre-tax net cost synergies of at least US$150m (£113m) by the end of year three post completion. Run rate synergies are expected to accumulate c.30%, c.80% and 100% in the first, second and third 12-month periods respectively, post completion.
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In achieving these synergies, the Combined Group expects to incur aggregate cash implementation costs of approximately US$150m, half of which will be incurred in the first 12 months post completion.
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Synergies will be achieved through operational and route density, procurement leverage, property rationalisation, reduced corporate costs and efficiencies in administrative functions and overheads. Savings can also be made in marketing and sales effectiveness and by leveraging the best of both companies’ technology and IT systems. A breakdown is given below:
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back office synergies from reduced corporate costs, and scale efficiencies in administrative functions and overheads, will represent c.50% of total synergies; and
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combining our branches and routes will drive service productivity and savings in property costs; this will represent the remaining c.50% of total synergies.
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Additional (non-operating) synergies of $11m, including costs of financing reductions.
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The Transaction values Terminix at: 19.3x 2021E consensus EBITDA pre synergies; and 13.9x 2021E consensus EBITDA pro forma for aggregate cost synergies across the Combined Group of $150m.
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The Combination is also expected to be mid-teens percent accretive to Rentokil Initial’s earnings per share in the first full financial year following completion3.
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The Combined Group’s margin profile and operating scale efficiencies are expected to enable it to reduce its costs and increase overall efficiencies, creating flexibility for it to deploy capital strategically and drive value for shareholders, including pursuing bolt-on and new-entry acquisition opportunities that will extend the Combined Group’s capabilities into new markets, segments and cities of the future.
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The Combined Group is expected to be highly cash generative. It will remain committed to Rentokil Initial’s progressive dividend policy and expects to have leverage metrics consistent with a BBB investment grade rating within two years from completion of the Combination. Net Debt to EBITDA is targeted to be 2.0x to 2.5x in the medium term.
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The Combined Group would have generated total revenues of US$5.7bn in 2020, EBITDA of $1.2bn and an EBITDA margin (excluding synergies) of 20.9%, and Free Cash Flow US$608m.
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Contacts
Rentokil Initial
Investors / Analysts:
Katharine Rycroft
Rentokil Initial plc
+44 (0)7811 270734
Media:
Malcolm Padley
Rentokil Initial plc
+44 (0)7788 978199
Richard Mountain
FTI Consulting
+44 (0)7909 684466
Terminix
Investors / Analysts: Jesse Jenkins | Terminix | +1 901-597-8259 | Jesse.Jenkins@terminix.com
Media: James Robinson | Terminix | +1 901-597-7521 | James.Robinson@terminix.com
Joele Frank, Wilkinson Brimmer Katcher | Dan Moore / Andrew Siegel | +1 212-355-4449