Rentokil Initial Plc (RTO) gained the most in more than six months after the British pest-control company agreed to dispose of its facilities unit to boost growth and margins.
Rentokil is selling Initial Facilities to Interserve Plc (IRV), a provider of cleaning and security services, for 250 million pounds ($418 million) to focus on improving profitability and growth at its pest, hygiene and workwear businesses, the West Sussex, England-based company said in a statement today.
“The disposal makes perfect sense,” Caroline de La Soujeole, an analyst at Cantor Fitzgerald, said in a note. “We believe Rentokil now has a much stronger platform to deliver increased shareholder returns.”
Proceeds from the sale, which follows that of parcel delivery unit City Link last year, will serve “primarily” to pay down debt, and position Rentokil to focus capital and resources on its remaining businesses, Chief Executive Officer Andy Ransom said in the statement.
Rentokil’s shares rose as much as 5.4 percent, the biggest intraday gain since Aug. 14, and traded up 4.9 percent at 132.70 pence at 1:42 p.m. in London.
“Over the medium term, the company expects to deliver mid single-digit revenue growth, supported by a strong M&A pipeline, and high single-digit profit growth,” Ransom said on a conference call.
Rentokil’s services include clearing homes and businesses of pests such as rodents or bed bugs, and providing hand driers and soap dispersers to offices. Initial Facilities, which represented about 23 percent of the company’s total revenue in 2013, includes catering, cleaning and security services.
Revenue rose 3.2 percent at constant exchange rates to 2.33 billion pounds last year, driven by Rentokil’s North American pest-control business, the company said today. That was in line with the average of analyst estimates compiled by Bloomberg. Trading conditions remain difficult in Europe, the company said.
“Though we see no immediate improvement in trading conditions in Europe, particularly the Benelux, in 2014 we expect to offset ongoing margin pressure with cost efficiencies and anticipate a material improvement in free cash flow as restructuring expenses and capex are reduced,” Ransom said.
The company bought California-based Western Exterminator Co. in December 2012 to become the U.S.’s third-biggest pest control provider. Rentokil has expanded in Asia to make up for sluggish demand in its home region and sold CityLink in April last year.
Adjusted operating profit rose 4.1 percent on a constant currency basis to 262 million pounds from a year earlier.
Ransom took over last month from Alan Brown, who announced his plans to step down in August. Both Ransom and Brown joined the company from Imperial Chemical Industries Plc in 2008.
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